Private-equity giant Blackstone Group recently announced it would start making private loans to landlords who are looking to grow their residential housing portfolio, but are struggling to raise capital from traditional sources like banks. According to Blackstone, the minimum loan is $10 million. And the rates will float between 5% and 7% for up to five years.
Some people view this as a bullish development for the real estate market. But I (Porter) don't think the implications for the real estate market will be very large…
Fannie Mae and Freddie Mac already enable a huge amount of residential mortgage lending. The U.S. is by far the best market in the world for long-term fixed-rate real estate lending. And I'm sure that Fannie and Freddie will get back into the landlord-lending business at some point.
In the short term, Blackstone's actions will increase the amount of capital available for apartment development a little bit, which is good for our country. But I think the bigger issue is not what this does to the capital markets. I think the bigger issue is what it could mean to Blackstone shareholders...
I'd like to offer people a warning that's in contrast to Steve Sjuggerud's views... Steve believes that Blackstone's efforts to buy up single-family homes will prove to be lucrative and beneficial for shareholders of Blackstone. And to date, Steve's been right... His True Wealth subscribers are up more than 80% on Blackstone.
Shareholders could continue to be rewarded... But I'm skeptical of this model. I don't believe large-scale landlords are able to efficiently own single-family homes. It requires so much overhead to maintain an individual property that I doubt it can be done in scale.
So I see Blackstone's decision to move into apartment lending as a sign that it may be ready to unload its large amount of residential property. I always felt that experiment would end in failure unless Blackstone was willing to quickly flip the properties. I think this is an indication that Blackstone will be unloading its residential real estate much faster than people expected... The firm already announced it would accelerate its real estate sales over the next 18 months.
I believe Blackstone discovered that the overhead cost of trying to maintain a portfolio of single-family homes is too great... And I'd be surprised if they don't liquidate that portfolio quickly over the next five years. And that's wiser and much more efficient than trying to own individual homes and then getting into the business of lending to small-scale apartment owners.
– Porter Stansberry with Sean Goldsmith
What Blackstone's new real estate business really means for the market...
Private-equity firm Blackstone Group has announced it is getting into real estate lending... Some people think this is bullish for the real estate market.
In today's Digest Premium, Porter explains why he disagrees...
To continue reading, scroll down or click here.
What Blackstone's new real estate business really means for the market...
Private-equity firm Blackstone Group has announced it is getting into real estate lending... Some people think this is bullish for the real estate market.
In today's Digest Premium, Porter explains why he disagrees...
To subscribe to Digest Premium and access today's analysis, click here.
Detroit filed for bankruptcy last Thursday...
It was the largest municipal bankruptcy in U.S. history. Detroit needs to restructure $18.5 billion in debt. It has $3.5 billion in unfunded pension liabilities.
The news from Detroit didn't surprise us. We've been writing about this failed city since 2009.
The city's population has fallen from a peak of 1.8 million people in 1950 to 700,000 today.
Even with its dwindling population, Detroit's metropolitan area is a massive 139 square miles. It's as big as Manhattan, Boston, and San Francisco combined. But downtown Detroit makes up just 5% of that.
Fewer residents mean less tax revenue... Income tax receipts have fallen nearly 30% in the last decade, from $328 million in 2002 to $233 million in 2012.
The city struggles to provide basic services, like policing neighborhoods or simply keeping the street lights on.
Only adding to the problem, Detroit is plagued with political corruption... Former Mayor Kwame Kilpatrick was convicted on multiple cases of political corruption. He faces decades in prison.
Porter will share his latest thoughts on the Detroit bankruptcy in this Friday's Digest, so we'll cut our discussion short. For now, you can read Porter's 2009 analysis here. And Porter revisited the Detroit mess in this June 2012 essay.
Dr. David "Doc" Eifrig just closed another four winning positions in his Retirement Trader service. His record is now an unbelievable 127 consecutive closed winning positions. Retirement Trader subscribers can look for Doc's latest update this Friday...
Our two private-equity recommendations, Blackstone Group and Kohlberg Kravis Roberts (recommended in True Wealth and Small Stock Specialist, respectively) hit new 52-week highs yesterday.
As we've discussed several times before, private equity has soared as the Federal Reserve has manipulated interest rates downward and flooded the economy with trillions of dollars. Private-equity companies have nearly unlimited access to cheap capital, thanks to low interest rates and the increasing money supply. This allows them to finance bigger and bigger deals... and they can also unload assets at rich multiples to their purchase prices.
And as the world's central banks continue to create trillions of dollars of paper money, private-equity firms gather more and more assets. With a lack of suitable investments (e.g. bond yields are at record lows), that money is looking for a good home. Much of it will end up being invested with private-equity firms. More money under management means more fees for these businesses.
Blackstone is the world's largest publicly traded private-equity firm. A look at its second-quarter earnings shows the sector is still booming... And these companies are unloading lots of assets.
Blackstone sold $1.6 billion worth of stakes in companies it owns and dumped $2.1 billion in real estate in the second quarter. The firm said it expects favorable selling conditions to continue.
"With credit markets hot and equities strong, this was a better quarter for selling than for buying," Blackstone President Tony James said in a statement.
The firm earned $211 million in the quarter, compared with a $75 million loss a year earlier. It also added $14 billion in new investments, bringing the firm's total to $230 billion.
Blackstone's executives aren't worried about rising interest rates, either... They believe the economic growth that would spur the rise in rates would benefit its investments more than higher borrowing costs would hurt.
So far this year, Blackstone has spent $5.6 billion on real estate (mostly single-family homes), up from $4.7 billion at this point last year... It's now the largest landlord in the U.S.
We wrote about Blackstone's housing investments – and the division it formed to lend to other, smaller landlords – in-depth in the July 9 Digest.
The firm said it will accelerate its real-estate sales (either through individual sales or by selling groups of properties to the public) over the next 18 months.
Steve's readers are up 84% on Blackstone since November. Frank's readers are up 63% since last July on Kohlberg Kravis Roberts.
In today's Digest Premium, Porter offers his views on Blackstone's decision to start financing other landlords... and what it means for the larger economy.
If you'd like to read Porter's thoughts – and receive a free copy of one of the most important books we've read this year – click here to learn about a subscription to Digest Premium.
In his latest message sent out via the social media website Twitter, Bill Gross – manager of the world's largest bond fund at the investment management firm PIMCO – expressed doubt the Federal Reserve will taper its bond-buying. In comments attributed to Gross posted on PIMCO's Twitter account, the fund manager noted that nominal gross domestic product grew 3.5% over the last year. "Fed wants/needs 5%," he wrote in short-hand commonly used for Twitter messages. "So they #taper/tighten? Low odds. Buy 5's."
In other words, Gross agrees with our view that the Federal Reserve is unlikely to permanently slow or halt its bond-buying any time soon. Fed Chairman Ben Bernanke will be forced to step in with even greater easing at any sign of economic turmoil. But unlike Gross, we don't advise you to buy five-year Treasurys ("Buy 5's."). As we wrote in the July 1 Digest Premium...
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For the first time ever, our colleague Tom Dyson is putting together a free training video series showing readers how to employ an investing technique he has been working on for the past five years. This technique has proven successful 94.6% of the time... and the small group of people he's shown it to report collecting more than $300,000 with this method.
Before joining Stansberry & Associates as editor of The 12% Letter and moving on to launch The Palm Beach Letter, Tom worked for Citigroup and Salomon Bros. This is a great opportunity to learn from Tom for free. He released the first video today. You can sign up for Tom's training videos by clicking here.
New 52-week highs (as of 7/22/13): American Financial Group (AFG), Becton-Dickinson (BDX), ProShares Ultra Biotechnology Fund (BIB), BLADEX (BLX), Berkshire Hathaway (BRK), Blackstone Group (BX), Consolidated Tomoka (CTO), CVS Caremark (CVS), Chevron (CVX), Emerson Electric (EMR), Fission Uranium (FCU.V), Fidelity Select Medical Equipment & Systems Fund (FSMEX), 1st United Bancorp (FUBC), Hershey (HSY), iShares Insurance Fund (IAK), iShares Biotechnology Fund (IBB), Johnson & Johnson (JNJ), Kohlberg Kravis Roberts (KKR), ProShares Ultra KBW Regional Banking Fund (KRU), Loews (L), Ligand Pharmaceuticals (LGND), Medtronic (MDT), 3M (MMM), PowerShares Buyback Achievers Fund (PKW), RPM International (RPM), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), Cambria Shareholder Yield Fund (SYLD), Target (TGT), Walgreens (WAG), Wells Fargo (WFC), and Alleghany (Y).
Still more praise in the mailbag, though this time it's about a book... Send your thoughts to feedback@stansberryresearch.com.
"I'm a relatively new Stansberry Research Flex Alliance subscriber. Thank you SO much for the tip on being able to get Meb Faber's book, Shareholder Yield, for free today! I rushed right over to Amazon, got the e-book, and read it cover to cover. It gave me more insight than I've ever had on how to evaluate dividend paying stocks.
"I also purchased Faber's SYLD when you recommended it in May. My annualized return on price is >39% so far. The way I got the money to buy SYLD was by selling Vanguard's High Dividend Yield Index Fund (VHDYX) in May. VHDYX had returned 11.4% on price appreciation in six months, but I believe SYLD will do better over time than VHDYX, based on Meb's analysis of total shareholder yield with a value screen. I am excited about learning these things. Thank you so much!" – Paid-up subscriber Sally A DeStefano
Regards,
What Blackstone's new real estate business really means for the market...