It’s always a good idea to pay attention to what the world’s largest private-equity firm is doing with its business. That’s because it’s usually the first canary to sing the song of a new business trend. Back in November 2012, the boss of The Blackstone Group L.P. (NYSE:BX) had called the bottom in the housing market. Specifically, he said that “This is the kind of thing that happens every once in a while… and we’re loading the boat.” That’s after Blackstone had spent $1.5 billion buying 10,000 properties that year. To date, Blackstone has spent an additional $5 billion on more than 30,000 houses. It’s now the largest housing investor in the U.S. Recently, the company announced that It would slow its home purchases. But Blackstone is still bullish on housing so it’s entering a whole new segment of the market. Blackstone is now getting into lending.
The market for lending
The Blackstone Group L.P. (NYSE:BX) created B2R Finance to offer minimum loans of $10 million to landlords looking to expand their portfolios. Blackstone would loan 75% of the value of the homes for a pool of leased properties and 65% of the value without tenants. The debt would have floating interest rates between 5% and 7% for up to five years, according to Bloomberg. In simple words, Blackstone now wishes to participate in the rebounding housing market not only as a buyer, but also as a financier.
The underlying rational
Going into the market as a lender makes perfect sense for The Blackstone Group L.P. (NYSE:BX). Prior to the crash, regional banks were the primary source of loans for landlords buying properties. More than 475 banks have failed since the real estate collapse, according to the Federal Deposit Insurance Corp., while larger banks have tightened mortgage underwriting standards. Put differently, there’s a gap in the U.S market for property lending and Blackstone wishes to fill that gap. The goal of a private equity firm is to do just that – find holes in the system and bring capital in an opportunistic manner to those pain points.
It’s a win-win for The Blackstone Group L.P. (NYSE:BX). The equity firm is already highly involved in the property market in its capacity as a buyer. This means that the firm is much more knowledgeable and experienced than others in calculating the fair value of collaterals for its loans. In addition, financing other landlords also helps Blackstone’s exit strategy. It can loan money to other folks to take properties off its hands. That’s very clever.
On the valuation front, The Blackstone Group L.P. (NYSE:BX) is trading for three times annual sales, and at a cheap forward price-to-earnings of only 8.5x. That’s a fairly cheap price to pay for a company with an operating margin of 32%.
Blackstone isn’t the only player in the rebounding housing market. When you talk about the market for single family homes, you must also discuss Silver Bay Realty Trust Corp (NYSE:SBY). Silver Bay is a former spin-off of Two Harbors Investment Corp (NYSE:TWO). The $4 billion REIT decided that it wanted to dedicate a separate company to pursue the opportunities in the single family home market. That’s why Two Harbors created Silver Bay Realty Trust Corp (NYSE:SBY), and it’s currently its largest shareholder and manager.