“Sjuggerud’s “Crazy Cheap” Housing Stock

By Travis Johnson, Stock Gumshoe, November 29, 2012

Today we’re looking at something that several readers have asked me about, but that I haven’t seen pushed all that actively by a hyperactive teaser.

Don’t worry, we won’t completely avoid hyperbole … they always sneak it in somewhere. But this pitch is for a stock being recommended by Steve Sjuggerud for his True Wealth subscribers — we’ve seen it hinted at in free articles in the Growth Stock Wire this week, as well as, according to forwarded emails that folks have sent to me, in the “subscribers only” S&A Digest from Steve’s publisher.

But of course, they don’t actually name this secret stock for us — so it’s time for the Thinkolator to get fueled up and ready to go.

Here’s what they teased in that Growth Stock Wire article over the weekend:

“Steve thinks buying single-family homes is the best investment you can make today. Prices are below replacement cost, mortgage rates are at all-time lows, and prices are improving.

“But we know most folks can’t just buy a house… It requires a lot of capital. So in his latest True Wealth issue, Steve showed readers how to invest in a huge portfolio of residential real estate controlled by one of the best investors in the world.

“In the company’s 27-year history, it has generated 28% net annualized returns on realized investments in its global real-estate business. And it sold $60 billion of real-estate assets in 2005-2007.

“But since 2009, the company has invested $17.6 billion in real estate. And just this year, it has spent more than $1 billion buying houses. The company is using a “buy it, fix it, sell it” strategy with the homes it’s purchasing.

“Steve thinks his readers could make hundreds of percent buying this stock today… It’s super-cheap, trading at less than five times forward earnings. And it’s one of the best real-estate investors in the world. (Steve is confident in the company’s ability to make a fortune on its housing assets.)”

Well, it just so happens that the clues in there — started in 1985, 28% realized returns on real estate — is enough to give us a really good guess about which company this is (hint: rhymes with “shmackstone”), but let’s double check the updated info that Sjuggerud shared in that S&A Digest that was forwarded to me … just to make sure:

“… the stock is trading at a forward price-to-earnings ratio of LESS THAN FIVE. That is ridiculous!

“With earnings like that, analysts estimate the 2014 dividend will be around $1.38 a share. A $1.38 payout (based on today’s stock price of $13.50 a share) would be a 10%-plus dividend!

“If the stock earns $3 per share in 2014 and trades for 12 times earnings (as I believe it could), the share price would be around $36. Also, if the company pays out a dividend of just $1.38, the dividend yield would be 3.8%….

“These numbers seem crazy. But this company is crazy-cheap today. Triple-digit gains are more-than-possible here.”

So yes, we toss that into the Mighty, Mighty Thinkolator to get our confirmation, but the real estate pick being teased here is Blackstone (BX).

Blackstone is a publicly traded partnership, set up in a tax-advantaged way to distribute the majority of their free cash flow to unitholders (like you or I), but it’s also one of the largest private equity and investment banking firms in the world. They were indeed founded in 1985, and they claim a net realized annual return of 28% on their real estate investments to date. The forward PE ratio is not quite five if you’re using the standard average estimates for 2013, but if we’re jumping ahead to 2014 estimates then that’s probably about right (assuming the $13.50 price that Sjuggerud used in recommending this, probably a couple weeks ago, and the average analyst estimate that the earnings will continue bumping up by about 20% annually — the stock is up a bit now, in the $14.50 range today). Given the current analyst estimates for 2013 it’s trading at a forward PE of about 7 now, and with a trailing PE of a little under 10.

Though I shouldn’t say PE, actually, because those aren’t the actual reported earnings — Blackstone and most of their analysts use instead a concept called “economic net income” to represent their performance in their core segments. That’s a before tax number, incorporating Blackstone’s estimates for the increase in net asset value, and it also doesn’t take into account transactions and some amortization and the confusing mess that must ensue when they figure the different performance of their own capital and the different funds under their management. When you see Blackstone estimates for a given quarter or year they are likely to be for this economic net income — so for the last quarter, for example, when they reported what they called their best quarter since going public, they reported 55 cents per share in this net income against an estimate of 42 cents.

And yes, Blackstone is perhaps best known as an asset manager and private equity investor, with flashy leveraged buyouts to its credit, but they have focused largely on real estate in recent years … and they are planning to book some major profits on some of their high profile assets over the next couple years, including a likely IPO of Hilton Hotels and sales of a lot of the office buildings that they bought during the recession. They do have truly massive scale in the real estate space, with their big real estate investment fund being reportedly five times as large as the next biggest fund — so they can likely get access to any deal they want, and they probably see every signficant deal around the world. They have grown assets under management nicely thanks in part to this real estate expertise, and they’ve also started up new investment funds for energy and other sectors that might provide additional growth.

They have also, as Sjuggerud notes, been buying up residential real estate — Blackstone has been the biggest single buyer of single-family foreclosed homes, though I have absolutely no idea how they’re going about the very house-specific work of rehabbing and renting those houses. They’ve spent well over a billion dollars on buying houses, and they say they’re buying $100 million worth of houses a week lately. Not quite sure what will happen to this large pool of residential real estate, but they have indicated that it might be possible to spin the assets out into a REIT at some point. Do note that although they’ve bet big on foreclosed homes in the U.S., that’s still a very small portion of their overall asset portfolio — they have about $200 billion in assets under management, and something like $35 billion of “dry powder” in funds that they’re looking to invest, so $1 billion of foreclosed homes, even if they doubled in value over the year, would be expected to have a relatively small impact on Blackstone’s share price.

And yes, as a publicly traded partnership they aim to distribute their “earnings” to unitholders — they say they distribute their expected fee income in the first three quarters each year and then, in the final quarter, distribute the additional earnings from their performance fees and investment income (that larger payout comes in late Feb/Early March). They managed to go public right before things got a bit ugly (in 2007), so their share price is far below the IPO price and their distributions have fallen over the past five years … but it is indeed possible, probably even likely, that their distributions will grow considerably over the next couple years thanks to the success of their real estate investing. The current yield is in the neighborhood of 3.5%, but I do think that will probably grow from this point.

As with Master Limited Partnerships (MLPs) that you might be more familiar with, these publicly traded partnership units will also generate K-1 forms and require some additional tax recordkeeping on your part. I don’t know what the tax treatment of BX shares has been in recent years so I don’t know if they enjoy the same tax deferral benefit that most MLPs receive (paying out “return of capital” that means you get to defer much of your tax liability). It’s also worth noting that Blackstone, as one of the largest beneficiaries of the tax laws that are friendly to carried interest and other private equity income, can also be quite political sensitive — if they get hit with a larger tax bill in future years, that would certainly slow down their performance.

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They’re a big player, with a huge global business and they may indeed be, as Sjuggerud seems to believe, in a sweet spot with their real estate investments, but they’re also in a private equity business that is very competitive and volatile and they’ve certainly had bad times before. Morningstar, generally a conservative bunch, pegs their fair value at about $17 a share … but also says that the uncertainty is so high that they’d want to pay only half that.

So that’s what I can tell you — I don’t know if Blackstone will be a fabulous partnership to own shares in over the next year, but I can tell you that I’m quite sure that Steve Sjuggerud thinks so.


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