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Welcome to the Mobile Home Park Mastery Podcast where you will learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks! Your host is Frank Rolfe, the 5th largest mobile home park owner in the United State with his partner Dave Reynolds. Together, they also own and operate Mobile Home University, the leading educational website for both new and experienced mobile home park investors!
Apartment defaults right now are at an all-time record 8% of all outstanding loans. And most people credit that heavy default complex to the Class C sector. The thought is that these old apartment units are finally being crushed under the weight of lots of longstanding CapEx requirements. Things are failing, utility lines, foundations, roofs. And undercapitalized investors who bought a lot of Class C are suddenly feeling the squeeze and defaulting on their loans. But that's not entirely true. You probably recently read about the $1.3 billion apartment portfolio owned by Blackstone, called the Blackjack portfolio, which recently went into special servicing after missing its maturity date, therefore, going into what is called term default.
This is Frank Rolfe for the "Mobile Home Park Mastery Podcast." We're going to explore what happened to Blackstone and how the Blackjack portfolio has a lot of lessons learned embedded into it. Let me first say that for a company like Blackstone, one of the largest private equity groups in the United States, there's no way this default on the Blackjack portfolio is going to put them out of business. In fact, I don't even know if in their overall yield, if that speed bump will even have much of a shaking of the car. But let's start off with the history of what happened.
So back in 2021, Blackstone had a grouping of apartment complexes, all Class A properties, and they called this the Blackjack portfolio because it's kind of a catchy name, Blackstone, Blackjack. And I'm sure when they did it, they never thought there'd be any problem. And so Blackjack kind of sound like a sexy name for the portfolio. And it was a sexy portfolio. It was a lot of very high-profile markets and very high-end apartment holdings. But of course, if you made a portfolio and financed it back in 2021, you were getting in on the ground floor at the lowest point of interest rates in American history, and that's exactly what happened.
And the loan was floating rate, and it was interest only. And when they realized they were going to have trouble clearing the trees when that loan came due, they started selling off as many of the properties as they humanly can. I think it started off with about 15 properties, I think, and now it's just down to a handful. And there's about $517 million in loans left on the remaining properties. And those properties are located in some very hot markets, Seattle, Washington, San Antonio, Texas, Denver, Colorado, Bradenton, Florida, and Jonesboro, Georgia. Not really sure where Jonesboro, Georgia is or if that's an anomaly, but it's supposedly a Class A market.
And unlike the Class C defaults that we've all heard a lot about recently, these were all very high-end Class A holdings in very hot markets. So what happened? And any time a plane crashes, what's the FAA do? They try and figure out, okay, why did this plane crash? So we can learn from that so more planes don't crash. Well, the first thing when you look at the loan that you come away with is the fact that the SOFR, S-O-F-R, which stands for secured overnight rate, financing rate, was at 0.05% when the loan originated.
But the S-O-F-R, SOFR rate is now at 5.33%. That's an enormous jump. That's roughly five points up. That's got to be one of the biggest jumps in American history. So you might say, okay, well, that contributed. Well, I'm sure it did. And also the original cap rate on the valuation of this portfolio was 6.5%, but the cap rate on the portfolio today is 7.25%.
And again, that hurts. That's not good, but that's not quite as bad as the issue on the interest rates. So clearly, when this thing was appraised way back, 2021, despite that very low interest rate, it was still appraised based on a 6.5% cap rate. And that's really what the valuation differential is. It isn't a huge amount. It's not even a full point.
So then you might say, well, then what really happened? Because we can use that as an excuse, but I'm not sure that's really reflective of the whole story. So in my opinion, what really happened with this portfolio had nothing to do with the assets or really the loan or the operator. It really came down to one big problem with the entire apartment sector.
And it's in just one word, it's called overbuilding. Now, think about this. When they originated this portfolio right back in 2021, from that moment in time through today, they have built 2.45 million more Class A apartment units in the United States That's an enormous figure. You know this because you yourself have probably seen in every American city, and even in the suburbs, more apartments going up than you've ever seen in your entire life.
The largest city I live nearby is called St. Louis. St. Louis is peppered with new Class A apartments going up virtually everywhere. And for a market like St. Louis, that's kind of terrifying because that's a lot of new apartments going into a town that's not known for being the hottest and most sexy market. And really, that's the dark story, the real problem behind all of this apartment issues with their lending, the 8% default rate. It all ties back to the simple fact they're unable to raise their rents.
They're unable to grow their occupancy in apartments today because they have simply overbuilt. And why did they overbuild? Because there is no moat to building new apartments. Now, what is a moat? Well, Warren Buffett, who holds the record as the greatest American investor, probably will hold the record forever because he was able to do it for so many decades. He just recently retired as leading Berkshire Hathaway, but he led that for what, like 60 years. And for 60 straight years, that guy scored an average of 19.8% per year rate of return.
But if you read any of his investment books, and I've read all of them, you will notice that his number one obsession with any company he would invest in was that it had to be protected by a moat. He uses the term moat to mean that there's something that stops competition, something that stops and protects his investment from being overrun by too much supply.
And in the world of apartments, you don't have that. You don't have that really in any real estate sector you can name offhand. You don't have any moat on office buildings or retail centers or self-storage or hotels or apartments, but yet there is one sector that has a giant moat, and that, of course, is mobile home parks.
Now, did mobile home parks create the moat? Some businesses create their moat with a patent, for example. No, mobile home parks never were able to create a moat. What happened was society grew to hate them so much that they basically banned new ones from being built. And in every city and town across the United States, you will not find probably a single one that allows for new mobile home park construction under its current zoning.
Every year in America, there are probably 10 people who are able to obtain a variance to build a new mobile home park. But that's not hardly anything. That doesn't even create a blip on the scale of supply. So even though mobile home park owners didn't create the moat, they enjoy the moat. They're smart enough to understand the moat, to embrace the moat, and to understand that that's what makes mobile home park investing safe and profitable when the other sectors fail.
Now, people got all excited about apartments in recent times. For about the last 10 years or so, we've heard nothing but people going wild on apartments. But they didn't bother to tell probably a lot of the investors the simple fact there was no moat. There was nothing to protect their investment. And now we're seeing in the world of apartments, it's crumbling both at the high end and the low end.
Now, the cancer of oversupply has crept into the picture, impacting not only the Class C properties, but also the Class A. The bottom line to it all is if you want to succeed in investing, you have to have a moat. Just read a Warren Buffett book, watch a Warren Buffett speech on YouTube, and you'll see that the guy who's the greatest investor of all time found that at his absolutely initial corollary, there had to be a moat to protect the business.
Only mobile home parks have that moat, and that's the reason at a time when apartments are having a horrible national default rate of roughly 8%, mobile home parks have a negligible default rate. It all revolves around that one item, overbuilding. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.