Yesterday, I reviewed the Blackstone Group (BX) earnings report and conference call. During the call, CEO Steve Schwarzman flatly said that what Blackstone does to achieve higher returns cannot be replicated, and I flatly disagree with that statement. I think individuals who are willing to adopt the same mindset can achieve close to the same results as the private equity and alternative assets firm.
Schwarzman described the returns Blackstone has achieved, saying, "When our investors give us $1, we have generated $2 to $2.50 on average in our private equity and real estate funds across markets and economic cycles for 30 years."
One dollar turned into $2.50 over five years is roughly 20% a year. Turning it into $2 works out to about 15%. If it takes the longer end of the private equity holding period, then turning $1 into $2.50 is an annualized gain of about 14% a year. That's a big hurdle, but using the same techniques and approaches as Blackstone, I think we can get pretty close to it.
First, we know Blackstone owns a lot of real estate and it likes to pay bargain prices for property and hold it for a long time. As individual investors, we can load up on real estate investment trusts (REITs) at bargain prices and achieve outstanding long-term returns. We can buy things like BRT Realty (BRT), a REIT that has been slowly converting from a finance REIT to an owner of 25 multifamily properties with 7,347 units in 10 states. The REIT currently trades at 80% of book value.
We can also buy Brookfield Property (BPY) at 86% of asset value and own premier commercial properties around the world. We can add Colony Capital (CLNY) and own part of a real estate debt portfolio as well as a portfolio of single-family homes and light industrial properties for right around book value.
We know Blackstone has a big real estate lending portfolio. While it has a mortgage REIT in Blackstone Mortgage (BXMT), it is currently trading at a premium to net asset value. Instead of using that one to get mortgage exposure, we will use their competitors' REITs. Apollo Residential Mortgage (AMTG) is a mortgage REIT that trades for less than 70% of asset value and currently yields 12.8%. To get exposure to the more sophisticated approach to trade both long and short in the mortgage markets, we can get Ellington Financial (EFC), a mortgage REIT that uses a more hedge fund-like approach to these markets. Ellington Financial currently trades at 80% of asset value and yields almost 14%.
For commercial real estate loan exposure, we can buy Apollo Commercial Real Estate Finance (ARI) at 80% of book value with a yield of over 10%. Apollo invests across the commercial lending spectrum as it originates, acquires, invests in and manages commercial first mortgage loans, subordinate financings, commercial mortgage-backed securities and other commercial real estate-related debt. Its affiliation with Apollo Global allows it to see deals no competitors will ever get a glimpse of, and I think that gives them a significant advantage.
I would also add some shares of Arbor Realty (ABR). It invests across a wider spectrum of the commercial lending markets in multifamily and commercial real estate-related bridge and mezzanine loans, including junior participating interests in first mortgages, preferred and direct equity, and discounted mortgage notes and other real estate-related assets. Arbor also makes bridge and mezzanine commercial real estate-related loans. This is one of my favorite REITs. I have owned it for years and hope never to sell it. At today's price, the shares trade at 75% of book value and yield about 8.75%.
Like most alternative asset managers these days, Blackstone is heavily involved in corporate lending. It has a closed-end fund that invests in this sector. Blackstone Strategic Credit invests in a diversified portfolio of loans and other fixed-income instruments of predominantly U.S. corporate issuers, senior secured loans and high-yield corporate bonds. The fund is trading at about 87% of asset value and yields about 8%. We can mix in some shares of Apollo Investment (AINV), which is involved in direct lending to middle-market companies, to widen our exposure to the corporate lending markets. Apollo Investment yields a little over 11% and trades at 88% of net asset value.
So far, we have covered the real estate and credit-related portions of Blackstone's investment portfolio. We can recreate its strategies to a very large degree and I think that if you take the same time frame of five to seven years and even longer, you can come very close to earning similar long-term returns to those Schwarzman cited.
Tomorrow, we will take a look at creating a private equity-style stock portfolio that can provide large long-term gains.
