Cash In On Record Rent Prices With This Undervalued Firm

| About: The Blackstone (BX)


U.S. rents have reached another all-time high in 2016.

The rental model can work when done properly, but it requires a tremendous amount of capital and experience.

Blackstone's exposure to the real estate market make it an easy way to get the benefits of rising rents without the risk of high upfront costs.

By Nathan Slaughter

Next time you see your landlord ask him or her to buy you a beer.

If they're like the millions of other landlords across the country, chances are they are having another great year. U.S. rents have reached another all-time high in 2016. A recent report from Apartment List, a rental market research company, showed that national rents hit a new all-time high in August of 2016. Take a look below.

And 2% is just the national average. In many cities, the influx of new residents is outpacing the construction of new apartments. There just isn't any space to build in downtown Chicago or Boston, yet rental demand is climbing 6% to 7% annually. That leads to a shortage of available units, which inevitably exerts upward pressure on prices.

A decent unit runs about $1,500 per month in Denver and $2,200 in Washington.

Those price gains are being driven by simple economics -- rising demand and limited supply. And looking forward there doesn't appear to be any quick solution.

U.S. housing inventories are near a record low and new home buyers are struggling to save enough cash to make a down payment. Also, tightened bank lending standards have made mortgages tougher to obtain -- and rates are likely headed higher. Together these factors are creating record demand for rental units. I expect them to keep upward pressure on rent prices for at least the next three to five years.

One obvious way to profit from rising rents is to invest in a rental property. However, investing in a single family home, condo or apartment building is capital, expense, and labor intensive. A rental property requires a hefty down payment, not to mention closing costs that amount to at least 3% of the transaction value -- a burdensome tax that erodes margins.

Then you'll need to get homeowners insurance, pay for monthly maintenance, and navigate a complicated legal and regulatory environment that requires attorneys and legal fees. And if you want to sell, know you'll have to cough up another big chunk of change for more closing costs.

The rental model can work when done properly. But as you can see, it requires a tremendous amount of capital and experience to be done well.

Today, I want to share a better way to profit from rising rents.

Using my method, you'll get the perks of being a landlord -- a steady cash flow currently equal to a 6.3% yield -- while bypassing the large down payment, closing costs, insurance, maintenance and legal costs. And just like owning real-estate, you'll also have the potential for capital gains.

Blackstone Group (BX) is the largest private equity firm on Wall Street and the largest private real-estate investor in the U.S. Blackstone owns 144 million square feet of office space, 284,000 hotel keys, 116,000 multifamily units, and more than 30,000 single-family homes. Although Blackstone specializes in real estate, it also operates in distressed debt, hedge fund solutions, and financial advisory.

In 2009, during the height of the financial crisis, Blackstone made a bold prediction. While uncertainty reigned across the economy, Blackstone correctly predicted that the slumping U.S. real estate market would rebound. By the end of the year, Blackstone kicked off a real-estate buying binge, investing more than $62 billion since the financial crisis into local markets across the country.

For example, in 2015 Blackstone purchased the Stuyvesant in New York for $5.3 billion -- a cluster of 11,000 apartments in Manhattan known as a middle class haven. In total, Blackstone manages a real estate portfolio worth $102 billion as of last quarter.

That makes Blackstone a direct play on rising rents. And with rents hitting a new record high in 2016, Blackstone is cashing in.

Blackstone reported strong third-quarter results in late October. Third-quarter earnings of $0.56 beat expectations by 12%. Assets under management were up 8% from the same period last year to $361 billion, a new all-time high.

That strong performance has Blackstone on pace to grow earnings by 7% in 2016. Analysts are projecting another 40% earnings growth in 2017.

A Great Dividend And An Undervalued Stock
In an era of record-low interest rates, Blackstone is using its strong earnings growth to reward shareholders with one of the best dividends in its industry.

Blackstone has been consistently paying a dividend since going public in late 2007. The company has a variable divided policy, meaning that its distributions are impacted by its performance. With record rent prices providing strong tail winds, Blackstone has been paying fat dividends for the last two years.

In 2015 Blackstone paid out $3.8 billion in dividends to shareholders. Their third-quarter dividend payment for this year was $0.41. That gives shares a current yield of 6.3%, one of the best yields in the private equity industry and a premium of more than 200% to the S&P 500.

Despite the strong outlook, investors can buy shares at a discount. Blackstone's P/E ratio of 14 is an 8% discount to the industry average of 16 and a 25% discount to the S&P 500's 18.5.

Risks To Consider: Rising interest rates are a potential drag on Blackstone's profitability. New projects would need to be financed with higher lending costs, weighing on profitability.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.