Investment Contrarians

An Alternative Way to Profit from Higher Home Prices

By for Investment Contrarians |

Profit from Higher Home PricesWith the recent data over the past few months showing home prices continuing to rise, many investors might believe they’ve missed the boat. The homebuilder stocks have seen a substantial increase in corporate earnings, resulting from higher home prices and elevated production levels; this has led to a massive increase in their share prices.

The market is a forward-looking mechanism. Investors predicted the increase in home prices that we are now witnessing and the resulting rise in corporate earnings in these homebuilder stocks.

Yet another data point just came out, finding that 87.5% of single-family homes in 152 cities had an increase in home prices during fourth quarter 2012 compared to the same quarter in 2011. The number of residences exhibiting higher home prices is increasing, as only 79.0% of metropolitan areas showed an increase in home prices for the third quarter 2012. (Source: “Fourth Quarter Metro Area Home Prices Show Strongest Performance in Seven Years,” National Association of Realtors web site, February 11, 2013.)

While housing inventories are at 12-year lows and the interest rates of mortgages remain low, home prices are set to continue rising for the near future. Firms that are leveraged to higher home prices will see significant increases in corporate earnings.

However, there are still firms that can benefit from higher home prices and that are able to continue growing their corporate earnings over the next several years. But these companies might not be the ones that come to mind for investors when they think of the real estate investment industry.

One company that I have mentioned before when it was trading much lower is The Blackstone Group L.P. (NYSE/BX). Blackstone is an extremely well run company that operates in several different divisions, including real estate, private equity, business credit, and financial advisory services.

Full-year 2012 results were extremely strong for Blackstone, with revenues exceeding $4.0 billion and a net income of $2.0 billion—the firm’s strongest results since its initial public offering (IPO). In addition to strong corporate earnings, the company has declared a quarterly dividend of $0.42 per share; if all four dividend payments are made this year, at Blackstone’s current stock price, its dividend yield will be an astonishing 9.2%! (Source: “Blackstone Reports Record Full Year Revenue, Assets Under Management, and Public Company Earnings,” The Blackstone Group L.P. web site, January 31, 2013.)

As I previously discussed, not only is Blackstone an extremely well run company, but it is also uniquely able to profit and generate corporate earnings from higher home prices. The firm generates corporate earnings from fee revenues, performance fees, and investment income. The multiple streams of revenue and corporate earnings generation help to stabilize Blackstone’s long-term profitability.

One of the advantages of investing in a company like Blackstone is its diversification in several divisions. Total assets under management for the various divisions include $51.0 billion for its private equity division, $56.7 billion in its real estate division, $46.1 billion in its hedge fund division, and $56.4 billion for its credit division.

Blackstone Group Chart

Chart courtesy of www.StockCharts.com

While real estate is just one of many divisions within Blackstone’s business, the rise in home prices will clearly boost corporate earnings for the firm over the long run. This is due to increases in both fee management and total assets value.

The stock has had a spectacular performance over the past year, in addition to having a very high dividend yield. With the relative strength index (RSI) in the chart above showing an overbought level, I would expect some consolidation.

However, with an exceptionally high forward dividend yield and a forward price-to-earnings (P/E) ratio of only 6.8, it might be difficult to accumulate the stock at lower levels. (Source: Yahoo! Finance, last accessed February 12, 2013.)

This is just one example of a company that, while it’s not an actual homebuilder stock, is still generating strong corporate earnings from higher home prices. The homebuilders have gotten extremely overextended and have priced in many of the gains over the next year or two. Because homebuilder businesses are not diversified, this could lead to problems down the road.

Companies will continue to benefit from rising home prices through higher corporate earnings. Supply remains extremely tight; and it appears that interest rates will remain quite low for some period of time. Once interest rates begin to rise, we will need to re-evaluate the situation, as the shift might trigger a negative response in home prices.

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