Blackstone Just Bet On This Red Hot REIT Sector (Hint: It Centers On Apartments)
The traditional multifamily apartment business is booming in the U.S., however the nascent single-family rental business, (spawned by the slide in home prices due to the Great Recession), did not reward investors in 2014. The Blackstone Group L.P. (NYSE: BX) is a major player in both U.S. residential rental categories.
According to a December 20 Bloomberg report, Blackstone Group will be adding another $1.7 billion of assets to its existing U.S. portfolio of approximately 30,000 multifamily rentals already managed by its LivCor portfolio company based in Chicago.
What Blackstone Bought
Blackstone acquired 36 multifamily properties containing approximately 11,000 low-rise, garden-style apartment units from New York-based Praedium Group. About half of the buildings are in California, Washington, D.C. and Boston, with the rest located around the U.S., according to Bloomberg sources. However, Blackstone is a highly diversified global asset manager with approximately $84 billion of AUM, not a pure-play on U.S. apartments.
Big Multifamily Winners In 2014
The apartment REIT sector performed exceedingly well during 2014. Big winners included:
- Associated Estates Realty Corporation (NYSE: AEC)
- Essex Property Trust Inc (NYSE: ESS)
- Apartment Investment and Management Co (NYSE: AIV)
- Equity Residential (NYSE: EQR)
- AvalonBay Communities Inc (NYSE: AVB)
The Party Is Still On - So Far 2015
Single-Family Home Rentals Lagged
Blackstone owns the largest portfolio of single-family homes for rent in the U.S. Its approximately 47,000 homes are managed by Texas-based Invitation Homes, another Blackstone portfolio company.
Blackstone pioneered the issuance of bonds backed by pools of rental homes back in 2013, and also utilized approximately $3.6 billion of debt financing from Deutsche Bank to fuel acquisitions of homes – which at one point averaged $100 million per week.
However, the block and tackle business of managing that many individual roofs, HVAC systems, fences and yards is certainly far more challenging than centralized apartment communities.
Tale Of The Tape
During 2014, the single-family for rent asset class was the worst performing REIT sub-sector.
The Vanguard REIT Index Fund (NYSE: VNQ) returned just over 25 percent during 2014, a good proxy for the REIT industry as a whole.
While the net asset value (NAV) of single-family homes owned by these REITs has risen, it remains to be seen if operating large portfolios of rental homes will be a scalable, profitable long-term business model.
Oil Patch Risks In 2015?
The tremendous growth in the domestic oil and gas industry had been a huge tailwind for many rental markets during 2013 and 2014.
However, if the price of oil remains at current low levels, it could negatively impact landlords whose tenants depend upon the oil and gas industry for employment.
Notably, a significant part of Blackstone's existing LivCor portfolio is located in Texas, with a few more communities located near the Marcellus shale formation in Pennsylvania.
However, Blackstone's patient capital and access to credit markets allows them the luxury of timing market exits to coincide with peaks in real estate asset cycles.
Investors with a short time horizon may want to take a closer look at the geographic concentration of REIT residential portfolios as it relates to the oil and gas industry. Large-cap multifamily apartment REITs Essex Property and Equity Residential have almost no "oil patch" risks in their portfolio. Avalon Bay has few Texas communities, but overall appears to have minimal risk as well. However, investors should be equally aware of seismic risks imbedded in the portfolios for REITs with heavy concentrations in west coast assets, such as Essex.
However, the most crucial factor for REIT investors to consider is quality of management and if management incentives are aligned with shareholder interests.
It is also the easiest factor to overlook, especially for investors who are unfamiliar with REITs.
Image credit: Rob Young, Flickr
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