When Chuck Post became a leasing agent out here in the Bay Area back in 2009, the post-financial-crisis rental market was so bad that he often resorted to “discounts,” inducements like free parking, and even the first month free – just to get prospective tenants to sign on the dotted line.
That was then.
And this is now.
Thanks to a booming economic recovery, a record-breaking rebound in stocks and the emergence of entirely new sectors in tech, Bay Area landlords are now calling the shots. Prospective tenants are lining up when a new listing appears, apartments get snapped up in a week or less, and rents are skyrocketing, Jed Kolko, chief economist for housing-services player Trulia, told The San Francisco Chronicle.
“Rents are rising faster in San Francisco than almost anywhere else in the country,” Kolko said. “Rising rents are a bigger challenge than rising home prices, especially in a place like San Francisco where buying is out of reach for many middle-class and lower-middle-class people.”
This isn’t just a lot of jawboning.
In San Francisco in the third quarter, the average monthly asking rent in the bigger complexes punched up through the $3,000 barrier for the first time ever – hitting a record $3,096, says researcher RealFacts.com. That represents a year-over-year bump of 11.9%. And median asking rents for San Francisco rentals listed by apartment-leasing-service Lovely rocketed a massive 21% to hit a record $3,398 for that same time period, The Chronicle says.
And don’t expect a reprieve: San Francisco experienced the single-biggest rent increase in America in January, a 12.3% surge that jumped the monthly rent of a two-bedroom flat to $3,350 a month. Nationwide, rents increased an average of 3% – an increase that was nearly double the U.S. inflation rate of 1.7%.
Though analysts I speak with tell me that Silicon Valley rents won’t keep zooming at the current pace, the ongoing tech boom that I am forecasting essentially ensures that the rental-housing boom will continue until the decade’s end.
In short, this “rent inflation” is a very big deal.
In the Bay area, soaring rents are creating what one official referred to as a “crisis of affordability” that could short-circuit the tech boom.
And in the broader U.S. economy, zooming rent costs have joined with skyrocketing food prices (which we told you about last week) as the inflationary catalysts that are right now putting a big bite on household budgets.
As you and I both know, whenever a problem like this arises, the most-ambitious and innovative companies will seek to solve it – while making a hefty profit in the process.
By finding those companies, you get de facto “protection” from the problem itself, because you’re profiting from the solution.
And we believe the company’s stock can double over the next three years ….
A Big Gun in Real Estate’s “Big Data” Market
As someone who’s lived and worked around the Silicon Valley region for many years, I can attest firsthand to the fact that San Francisco and the surrounding area has its fair share of tech firms – as well as the well-compensated employees who can afford to live in one of the nation’s more expensive rental markets.
But it’s also important to point out that the tight rental market isn’t just about the Googles, the Twitters and the Apples of the world.
The reality is that the U.S. rental market has been a big beneficiary of the housing bust that spurred the financial crisis of 2009.
That greed-ignited blowout resulted in the sad reality that millions of families are now forced to rent – instead of owning – a home. That’s created a lot of new demand for rental housing, and has also led to a market “imbalance” – which is what the rising cost of anything actually represents.
Bring in companies that can help ease some of those imbalances, and you’ve got a company that can turn a big profit while also helping solve the underlying problem.
And that’s what we see with today’s recommendation: CoreLogic Inc. (NYSE: CLGX).
The Irvine, Calif.-based company has a broad suite of analytic tools that help landlords make better and faster decisions when it comes to screening potential renters. With better and more accurate filtering procedures, landlords reduce their risks of loss from late or unpaid rents, or even from property damage.
As those of you who’ve been in the business world know, if you can control costs, reduce “slippage” and slash waste, you can hold your prices in line, or even reduce them. And in the apartment market, the “price” of the product is the rent.
CoreLogic’s “SafeRent“ system lies at the heart of the company’s tenant-qualifying technology. It’s an advanced computer modeling platform that helps landlords screen prospective tenants based on a comprehensive database that replaces hunches and simple credit checks with statistically valid data.
The firm also has a huge repository of information it taps to perform thorough background checks about possible criminal records. As such, it provides a national search for such “red-flag records” of violence, property destruction, sex offenses or financial crimes.
As important as this service is for the national rental market, tenant screening remains a small part of what CoreLogic provides. Indeed, the company ranks as the nation’s largest Big Data play on the real estate industry.
When we talk about “Big Data,” what we’re really referring to is having a specialized computer tool sift through massive amounts of raw, uncategorized, unstructured data and ending up with an actionable analysis.
And that’s exactly what CoreLogic does.
Consider that the company operates databases that encompass more than 3.3 billion records in the United States, Australia and New Zealand. In recent years, the company also has added operations in the United Kingdom, Canada, Mexico and India, making this a great global real estate play.
But it offers even more, which makes this an intriguing growth play.
Let’s take a look …
Besides real estate, CoreLogic also has information of use for such sectors as auto sales, oil-and-gas exploration and telecommunications. In other words, CoreLogic maintains across-the-board records on almost anything dealing with property. And it also maintains the credit information used for such things as auto loans and home mortgages.
Take a look at just how far this data-mining player can reach, thanks to its vast repository of records. CoreLogic has:
- More than 147 million property records representing approximately 99.8%
- Historical data on more than 795 million real-estate transactions
- Tax-payment history on more than 128 million parcels.
- More than 99% of all U.S. county, municipal, and special-tax-jurisdiction tax records.
- Relationships with more than 650,000 real-estate agents and brokers, as well as 17 of the Top 20 multiple-listing services (MLS) and 2,500 mortgage bankers.
- And approximately 23 million active tenant / landlord records representing approximately 70% of the rental market.
And it doesn’t stop there.
CoreLogic also owns one of the most-widely watched indexes of the nation’s real estate market. In 2013, CoreLogic acquired Case-Shiller, which in particular is known for tracking home-price changes in 10 major metropolitan regions.
A Look to the Past Points to the Future
Launched in 2010, California-based CoreLogic traces its roots back 50 years. The turning point in its current history occurred in 1991 when it was combined with two other companies to create a far-flung real estate information-services firm.
In the years that followed – as a bystander and even a victim in several M&A deals – CoreLogic changed hands several times: Four years ago, it was spun off as a standalone, publicly traded firm specializing in real-estate and financial-services data. Its specialty, of course, was mortgages and consumer loans.
But thanks to its vast property records, it’s now becoming a big beneficiary of the big surge in shale gas exploration and production – which most folks refer to as the “fracking boom.”
In particular, it maintains information on leases, property tracts and mineral rights in the Marcellus Shale region, a section of Appalachia that is thought to contain 1.9 trillion cubic feet of natural gas.
The company provides comprehensive shale surface and subsurface ownership data for Pennsylvania, New York, Ohio and West Virginia for the Marcellus. It’s doing the same for the related Utica Shale deposit.
Backed by the depth and breadth of its databases – and benefitting from the analytic tools it developed – CoreLogic turned in a strong financial performance last year. For 2013, sales hit $3.3 billion, up 7.7% from the year before. Net income from continuing operations came in at $130.2 million, a one-year increase of 43.3%.
CoreLogic was recently trading at $28.50 a share, giving the company a market value of $2.6 billion. The stock currently trades at a forward Price/Earnings (P/E) ratio of 14.5 – a one-third discount to the 19.34 forward P/E of the widely watched Russell 2000 Index of small caps.
I’d like to see better profit margins, but the company recently launched a plan to cut overhead and improve operating income. We’ll have a better idea of just how good a job CoreLogic is doing when it reports its first-quarter financials a week from today.
Now then, if the company misses projections the stock will come under pressure. But that’s true for every publicly traded company in the market today.
What investors should be looking for with CoreLogic is a great long-term Big Data way to play multiple industries at once.
Over the last three years, it has grown its earnings per share (EPS) at a rate of more than 60%. Even if we cut that rate in half, per-share profits could double in less than three years.
That makes CoreLogic the kind of tech stock that can have a big impact in your portfolio.
After all, it’s about time that the surge in inflation start putting some money into your pocket – instead of always taking it away.
Check in with us again later this week.
[Editor‘s Note: What do you want to know about tech-sector investing? Michael‘s role as your resident tech-investing guru isn‘t limited top stock recommendations. Through our conversations here at the Strategic Tech Investor, Michael wants to help make you an even better investor. To that end, he‘s asking you to submit your best questions about tech-stock investing? Get those questions in to us, and we‘ll explore those queries in a sit-down Q&A session with Michael. Post them below. We want to hear from you.]
- Strategic Tech Investor: This Tech Stock Will Give Your Soaring Grocery Bill a Kick in the Teeth.