The Blackstone Housing Cash Out Begins!
One of the monumental trades of the century is about to be unwound.
According to the Wall Street Journal, The Blackstone Group (BX) has filed to sell a portion of its Invitation Homes unit in an IPO transaction.
More than eight years ago, during the height of the Financial Crisis, Blackstone began investing heavily in residential real estate. Blackstone spent billions to buy foreclosed homes from U.S. banks, paying deep discounts to own these properties.
Blackstone then renovated the homes, and began renting them out to tenants. The homes are technically held and managed by Invitation Homes, a company that is fully owned by Blackstone.
This portfolio of rented homes now generates lucrative cash flows. At the same time, a rebound in the housing market has driven real estate prices higher.
Blackstone Housing Now at Peak Valuation
As a result the Financial Crisis, many households have become wary of owning their own homes. After seeing homeowners struggle with falling house valuations and overwhelming mortgage payments, the appeal of homeownership lost its luster.
Plus, many were handcuffed when looking for new employment, because a weak housing market made it difficult to sell a home and move to a new location for work.
This demographic trend has steadily increased demand for rental units. The chart below shows how rental vacancies (the blue line) have dropped over the past five years. Meanwhile the percentage of households that are renting (instead of owning) has also increased.
With so much demand for rental property, Blackstone should receive a very attractive selling price for Invitation Homes. After all, this business is generating reliable cash flow (through its steady stream of rent payments). And at the same time, the value of homes owned by Invitation Homes continues to increase.
I Expect Bigger Distributions in 2017
The sale of Invitation Homes should lead to larger BX distributions over the next year.
As a private equity company organized as a Limited Partnership, Blackstone must pay shareholders (technically unit holders) the majority of its taxable earnings via distributions.
Over the past year, Blackstone has paid distributions of $1.66 per share. Based on Friday’s closing price of $25.86, the distributions add up to a 6.4% yield.
That yield could move sharply higher in 2017, thanks to the magnitude of the Blackstone housing investment.
Blackstone spent about $10 billion to accumulate its portfolio of 45,000 homes. That amounts to a bit less than $225,000 per home.
Keep in mind, these homes were purchased in some of the most attractive regions such as Miami, Atlanta, Chicago, Los Angeles and Seattle. And they were bought at fire-sale prices from desperate U.S. banks.
So as these top-tier markets rebound, the value of Invitation Homes IPO should increase.
Blackstone will be selling this company through the IPO transaction. Analysts expect Blackstone to receive $1.5 billion from the first IPO transaction. But this will only represent a small portion of Invitation Homes’ full company.
As Blackstone sells more shares throughout 2017, profits from its $10 billion investment should accumulate.
And that should lead to higher distributions. I also expect shares of Blackstone to trade higher as the company harvests its real estate investment.
Rather than buy shares of Invitation homes, I recommend investing in BX. The private equity company is currently trading at a discount. And the Invitation Homes IPO will likely be offered at a premium valuation.
By purchasing shares of BX, you’ll be able to participate in the success of Invitation Homes. But you won’t have to pay the premium price to invest directly into the Blackstone housing success story.