BlackRock’s Plans To Finance Rental-Home Investors Should Help Alternative Investment Arm

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BLK: BlackRock logo
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BlackRock

BlackRock (NYSE:BLK) appears keen to grab a share of the rapidly growing rental-home financing industry, and will reportedly venture into the industry through several lending partners over the coming months. [1] This move hardly comes as a surprise given the steady increase in the number of Wall Street firms and specialized lenders that have shown an interest in the lucrative home rental market over recent years. [2] BlackRock has been pursuing an aggressive growth strategy in the real estate and infrastructure investment space, and the latest decision could unlock considerable long-term value for the company’s alternative investment business.

We maintain a price estimate of $385 for BlackRock’s stock, which is around 30% ahead of the current market price. A bulk of this difference can be attributed to the substantial sell-off in shares across sectors over the last week on the back of weak global economic indicators.

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See our full analysis for BlackRock

BlackRock’s equity and fixed-income investments account for a majority of its total value, according to our estimates, as shown in the chart above. But the company’s alternative investment business is also an important part of its business model – contributing roughly 9% of its total value. Asset managers have a lot to gain from alternative investment offerings because of their higher revenue potential in terms of fund expense ratios as well as performance-based fees. To put things in perspective, BlackRock earns operating fees which are roughly 0.65% of the total assets managed by its alternative investment funds, in comparison to fees of under 0.2% for actively-managed fixed-income funds and a substantially lower 0.05% for passive fixed-income funds. More importantly, performance-related fees for alternative funds average 0.4% – more than 10-times higher than the 0.03% figure for actively-managed equity funds.

The higher revenue potential has driven a push in alternative investment offerings by BlackRock over recent years. In addition to launching several exchange-traded funds (ETFs) focused on real estate as well as other alternative investment strategies, the company has been focused in particular on long-term infrastructure investments in Mexico (see BlackRock Expands Mexico Infrastructure Investment Offering With Latest Acquisition). Earlier this year, BlackRock also acquired a 50% stake in a wind energy project in Texas. [3] The asset management giant is now looking to expand its alternative investment offering further by foraying into rental-home financing.

The U.S. home ownership rate is currently at the lowest level in 50 years, with tighter credit requirements imposed by banks in the wake of the economic downturn keeping people away from mortgages despite interest rates remaining extremely low. [1] This in turn has driven the demand for rental properties since late 2012 – a trend which attracted established financial institutions to finance these properties. BlackRock’s venture into the industry follows a successful entry by Cerberus Capital Management, Blackstone and Colony Capital over recent years. Notably, these companies keep the risks from this real estate financing business off their balance sheets by packaging the funds into bonds that are sold off.

We currently estimate that the size of assets managed by BlackRock’s alternative investment offerings will increase by 5-6% annually over coming years, due to a combination of organic growth as well as targeted acquisitions. You can see how a faster growth in this figure can positively impact the company’s share value by making changes to the chart below.

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Notes:
  1. BlackRock Said to Start Financing Rental-Home Investors, Bloomberg, Aug 24 2015 [] []
  2. Rent-to-Own Homes Make a Comeback, The Wall Street Journal, July 28 2015 []
  3. BlackRock Announces Infrastructure Partnership with EDF Renewable Energy and Purchase of 50% interest in 200MW Hereford Wind Project, Texas., BlackRock Press Releases, Feb 19 2015 []