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spk01: Good morning. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Residential's first quarter 2022 analyst conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. I'd now like to hand the conference over to your speaker today, Wojtek Nowak, Managing Director of Capital Markets. Thank you. Please go ahead.
spk17: Thank you, Emma. Good morning, everyone. And thank you for joining us to discuss Tricon's first quarter results for the three months ended March 31st, 2022, which were shared in the news release distributed yesterday. I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. For more information, please refer to our most recent management discussion and analysis and annual information form, which are available on CDAR, EDGAR, and our company website, as well as a quarterly supplemental package on our website. Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A. I would like to remind everyone that all figures are being quoted in U.S. dollars, unless otherwise stated, And please note that this call is available by webcast on our website, and a replay will be accessible there following the call. Lastly, please note that during the call, we'll be referring to a slide presentation that you can follow along by joining our webcast, or you can access directly through our website. You can find both the webcast registration and presentation in the Investors section of TriconResidential.com under News and Events. With that, I will turn the call over to Gary Berman, President and CEO of Tricon.
spk11: Thank you, Wojtek, and good morning, everyone. We've had a terrific start to 2022, and I'm excited to discuss our Q1 results with you. Let me share with you some of our key takeaways from the quarter on slide two. First, we continue to benefit from the strength of our Sunbelt middle market strategy with insatiable demand for a rental home showing no signs of slowing. Our business has proven to be extremely resilient throughout the pandemic, and we expect it to continue performing well into the future. Second, our growth plan is on track. We grew proportionate NOI by 23% year over year, and we're on pace to acquire 8,000-plus homes this year, with over 1,900 homes acquired this quarter. Third, our single-family rental operations are stronger than ever, with record low turnover, record high occupancy, and solid rent growth. As we expect these trends to continue, we are pleased to announce an increase in our same-home NOI guidance for the year. Next, our fee revenue increased meaningfully year-over-year, while overhead expenses remained stable from Q4 2021. And finally, we achieved all of this while maintaining a flexible balance sheet with minimal near-term maturities and ample liquidity to fund our growth plans. You can see these and other metrics reflected in the summary on slide three. Clearly, our business is booming on all fronts, and we'll dig into the details throughout the call. So let's move to slide four. The public markets are going through a volatile time right now with a lot of uncertainty surrounding inflation, interest rates, and the economy. We intentionally built our SFR business to be defensive and believe it will once again prove itself in the current environment. We think of our business as anti-fragile, after the term coined by the author Nassim Nicholas Taleb. Beyond Taleb's key tenets of resilience and robustness, we expect to thrive under difficult or more volatile conditions for a number of reasons. First, we remain focused on the hard-working middle market demographic. Our resilient resident profile has stable jobs and solid household income of $85,000 with a comfortable rent-to-income ratio of 23%. Second, in this time of hyperinflation, our efficiencies of scale allow us to benefit from the national procurement programs that enable us to save money on parts, appliances, and materials for our homes. Third, as I like to say, the cure for high prices is high prices. As an inflation hedge, we are exposed to both rising market rents as well as rising home prices on our balance sheet. Moreover, our built-in loss to lease at 20% should provide a long runway for rent growth. Likewise, a strong correlation between home prices and rent growth also allows us to consistently acquire homes at 5% to 5.5% cap rates, making our growth strategy sustainable over the longer term. And finally, what I love most about what we do is that we are able to provide essential housing in a supply-constrained housing market. The insatiable demand for a high-quality, professionally managed home speaks for itself. In any given week, we get over 13,000 leads for only 200 homes available. And as mortgage rates surpass 5%, we estimate that the monthly cost of owning a home is 10% to 30% higher than renting a Tricon home. We are not only confident in our outlook, but also believe strongly that single-family rental plays an essential role in addressing the key challenge of America's housing market, namely an acute shortage of housing supply at affordable prices. If managed properly and responsibly, we believe strongly that single-family rental is a noble business because it provides safe, quality housing for American families who either can't afford to buy a home or don't want to at an accessible price point. It also provides residents with a turnkey home and a low-maintenance lifestyle that gives them time back to focus on what's important to them. At Tricon, there is purity in our mission. We truly care about our residents and empower our frontline employees to go above and beyond so that we can provide outstanding customer service. And so as we turn to slide five, I want to provide you some insight into Tricon's decision to selectively engage with media to help spread this message and to shape a positive industry narrative. Our recent interview with 60 Minutes is a case in point. There are several misconceptions about our industry that we aim to address. First, we are not Wall Street. We are a housing provider. We are a people-first company and have many programs in place to better the lives of our residents, including our recently launched Tricon Vantage program designed to enhance the financial well-being of our residents. Our suite of services ranges from educational tools to our credit builder program and other programs to help families buy a home if they so choose. Second, woven right into our company DNA is our long-standing practice of self-governing on renewal rent increases, with annual rent increases for existing residents typically set at rates below market. We want to prioritize our residents' financial security and peace of mind while they're living in a Tricon home. And finally, we're not boxing out first-time homebuyers. Our acquisition program accounts for less than half of 1% of resale volumes in our markets, and we typically buy homes that require renovation to make them more livable. In doing so, we are upgrading the quality of the housing stock and the communities where we own homes. What's driving up housing prices is the overall lack of supply of existing and new homes. In this regard, we are committed to being part of the solution, and we're adding 3,000 new homes to the market by 2024 for our build-to-rent strategy. In short, we are being proactive about solving America's housing challenges, and we see tremendous opportunity for our business to be a platform for doing good. I would now like to pass the presentation over to Sam to discuss our financial results.
spk16: Thank you, Gary, and good morning, everyone. Q1 was another great quarter for us, and I want to thank our dedicated team who continue to execute on our rapid growth while delivering a top-notch resident experience. Despite the tough operating background, of geopolitical conflicts, rising interest rates, supply chain shortages, and record high inflation. I am proud to report we remain firmly on track to achieve our ambitious goals we set earlier this year. On slide six, we summarize our key metrics for the quarter. Core FFO was up 32% year-over-year to 43 million. Core FFO per share was 14 cents, an increase of 8% year-over-year. AFFO with $0.12 per share, which continues to provide us with ample cushion to support our quarterly dividend with an AFFO payout ratio of 43%. Let's move to slide 7 and talk about the drivers of core AFFO per share this quarter. Our single-family rental portfolio delivered 23% year-over-year growth in Tricon's proportionate NOI. This was driven by an 11.6% increase in same-home NOI and a 12% increase in proportionate rental home count. Our FFO contributions from fees increased by 103% compared to last year. This is driven by incremental assets and property management fees from newly created joint ventures this last year. In our adjacent residential businesses, a 53% decrease in FFO reflects our 80% syndication of the U.S. multifamily portfolio last year. It also reflects lower results from the U.S. residential development versus a very strong comp in the prior year. From the corporate side, we had lower interest expense as we reduced our debt significantly and benefited from lower in-place rates. This was offset by higher corporate overhead expenses as we staffed up for our growth. Of note, overhead expenses were actually down a bit sequentially from Q4, and we expect them to stay around this level. Lastly, the diluted share count this quarter was 26% higher as a result of last year's equity offering to fund growth and reduce leverage. Let's turn to slide 8 to discuss our fee revenue and operating efficiencies. Our unique strategy for managing third-party capital allows us to scale faster and run a more efficient business. The fees we earn also allow us to offset a large portion of our corporate overhead expenses. Our recurring fee streams total $19 million in the quarter, up 110% from last year. This includes asset management fees, property management fees, development fees. but excludes performance fees as they tend to be episodic. Together, these recurring fees covered about 60% of our recurring overhead costs, compared to 44% coverage in the prior year. Ultimately, we expect our fee revenue to cover the majority of our overhead expenses and allow our shareholders to benefit from strong NOI growth contributing directly to the bottom line. Let's talk about our balance sheet on slide 9. We have continued to prioritize deleveraging while remaining focused on growth. We have cut our leverage almost in half since the start of 2020, with NetData adjusted EBITDA down to 8.1 times in the current quarter and NetData assets at 36%. Much of this was achieved at our U.S. IPO prior common equity offering and preferred equity financing. Turning to our proportionate debt profile on slide 10, the key takeaway here is that we remain focused and have minimal near-term maturities. We have strong liquidity position of $558 million in available cash and credit facilities to fund our growth. Further, I really want to emphasize this. We have minimal exposure to rising rate environments with 75% of our proportionate debt at fixed rates following our latest securitization transaction which closed in April. On slide 11, I'm happy to present to you our updated guidance, which includes a 50 basis point increase to same home NOI growth in 2022. This increase is driven by strong revenue growth, which we see continuing in April, but also reflects some moderation for the balance of the year relative to our very strong Q1 print. This is partly offset by expenses tracking towards the higher end of our prior guided range as a result of higher property taxes and inflationary pressure on controllable expenses. However, we reiterate our FFO per share guidance as the strong same-home trend may be offset somewhat by higher expected rates on future debt financing this year. And our expectations of acquiring 8,000-plus homes remain unchanged. On slide 12, we reiterate our long-term targets as part of our three-year performance dashboards. The 2024 targets include growing our core FFO per share at a compounded annual rate of 15%. expanding our portfolio in the SFR space to 50,000 homes, maintaining stable leverage at 8 to 9 times net debt to EBITDA, and improving our overhead efficiency such that 90% of our recurring overhead will be covered by fee revenue. Although rising interest rates are a headwind for our FFO target, this target was set with increasing rates in mind. Moreover, the strong NOI growth we are seeing also provides us with a buffer which makes us comfortable with the outlook, And to give you more insight on the drivers of the NOI growth, I'll turn the call over to the man with the tan, our Olympic surfer, Kevin Baldrige. Good morning, everyone.
spk03: Our strong first quarter performance is without question a testament to the depth and breadth of our dedicated team, a resident first approach, and our best-in-class operations, all of which continue to fuel growth. I'm incredibly proud of what we've achieved. And I want to thank our team for going above and beyond every day. Let's start with our portfolio growth on slide 13. In the past year, we've expanded our portfolio by 32% in aggregate, or 12% on a proportionate basis. We are off to a great start this year with over 1,900 homes acquired in Q1, putting us well on track towards our target of acquiring 8,000 homes in 2022 through resale and new home channels. Q1 is typically a seasonally slower acquisition quarter, so we expect the pace to accelerate in Q2 and Q3. As home prices have increased, so have average rents, which allows us to continue buying at our targeted cap rates of 5%, 5.5% each month. The second aspect of our growth is same-home NOI, which expanded by 11.6% compared to last year. Let's dig into the components on slide 14. Same-home revenue growth of 10.4% was driven by rental revenue increasing 9.6%. This has made up a 7.2% increase in average rent, a 70 basis point uptick in occupancy, and roughly a 150 basis point decrease in bad debt to below 1%. This was partially helped by outsized government rental assistance received during the quarter. Going forward, we anticipate bad debt increase Our rent growth remains healthy, with blended rents increasing by 8.7 percent during the quarter, underpinned by an 18.7 percent increase on new move-ins and 6.3 percent increase on renewals. Our renewals reflect our policy of self-governing, which maintains rent growth below market levels for existing residents and, in turn, keeps our turnover low. As we moved into April, we saw a continuation of these strong rent growth trends. Finally, our other revenue also grew meaningfully, up almost 32% from last year, as we increased take-up rates in our ancillary services and resumed late fees after putting them on pause during the pandemic. We see a path to increasing other revenue by over 16% per home over the next couple of years as we continue to roll out current programs cleaning services. A key driver of our expected rent growth going forward is the embedded loss to lease in our portfolio, which you can see on slide 15. Our policy is self-governing on the move, coupled with long resident tenure, as resulted in an estimated loss to lease in our portfolio. We recently captured this on new leases, which have similar We expect this to provide a multi-year runway for rent growth in our portfolio. Let's now turn to slide 16 to discuss same-home expenses. The same-home expense growth of 8.1% is driven by property taxes increasing 11.5% from last year. We expect that year-over-year variance to come down a bit in future quarters as we comp against higher prior year numbers. But regardless, property taxes are up meaningfully and reflect a significant home price appreciation in our markets. Repairs and maintenance expenses were also elevated as about 13% to the cost of each work order, even with the benefit of full purchase accounts. On the other hand, turnover expense was down considerably as our turnover rate decreased by 650 basis points from last year to a record low of 14.7%, thanks to our occupancy bias and focus on our customer, along with a greater proportion of costs being capitalized given the more extensive work being done on homes with longer resident tenure. On the property management side, we've seen the benefits of scale to offset inflation as we're managing 32% more homes compared to last year, using our centralized and tech-enabled platform, which results in a lower cost per home. Lastly, other direct expenses were up due to the incremental cost of providing value-enhancing services to our residents, including smart home technology, and renters and shareholders. To put it another way, our non-controllable expenses, which include property tax, HOA, and insurance, were up 10%, whereas our controllable expenses of R&M, turnover, property management, marketing, and other direct expenses were up only 5.5%, as we concentrate on efficiencies and cost containment to counteract inflation pressures. We are focused on the things we can control to offset inflation where possible, like managing our national procurement program and driving efficiencies through technology and operational improvement, all the while keeping an emphasis on creating the best resident experience possible. Now I'll turn the call back over to Gary for closing remarks.
spk11: Thank you, Kevin. Let's conclude on slide 17. If there's one thing I can leave you with today, it's that the factors that have driven our performance and value creation over the past year continue to be in place. As we said throughout this presentation, our focus is steadfast on growth. By partnering with leading global real estate investors, Tricon has a clear path to increasing its SFR portfolio to 50,000 homes by the end of 2024. We have the balance sheet, operating platform, and third-party capital in place to achieve this target with confidence. And we believe that favorable tailwinds in our industry should drive strong operating performance for years to come. Our growing portfolio coupled with strong same-home results should also translate into meaningful NAV appreciation for shareholders. And, of course, let's not forget about our adjacent businesses, which account for about 6% of our balance sheet but represent a meaningful source of upside and potential cash flow to supercharge our SFR growth. These include our Canadian multifamily built-to-core business, a 20% interest in a high-quality multifamily portfolio located in the Sunbelt, and legacy for-sale housing assets. These businesses are all benefiting from a robust housing market, and we believe they could ultimately be worth two times our IFRS carry value and represent $1.1 billion in value for our shareholders. Should we monetize these assets over time, we would use the proceeds to pay down debt or grow our SFR portfolio and, in the process, simplify our business. That concludes our prepared remarks on our business, which are rock solid.
spk14: And because of that, we remain confident in our output.
spk11: higher Tricon team who put their heart and soul into serving our residents and communities while continuing to drive forward our ambitious growth plans. We've built an incredible platform to do good, to elevate the lives of our residents while empowering our team to be the best they can be. And in doing this, hopefully we can inspire the broader industry to do the same. I will now pass the call back to the operator, to Emma, to take questions. Sam, Kevin, and I will also be joined by John Allen-Sweig and Annie Carmody to answer questions.
spk01: At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. We ask today that you limit yourself to one question and one follow-up. We'll pause for just a moment to compile the Q&A roster. Your first question today comes from the line of Chandi Luthra with Goldman Sachs. Your line is now open.
spk00: Hi, good morning. Thank you for taking my question. Could you talk about what are you seeing in the home buying market in general now that mortgage rates have crossed five and a quarter? How has buyer behavior shifted given how precipitously rates have risen in these last couple of weeks and months? And how do you think about the ability to maintain your own cap rates in such an environment, especially given that you have a particular box size in mind?
spk11: Hi, Chani. Good to talk to you. It's Gary. I'm going to try to unpack that for you. I think, you know, when we think about buying homes, we're buying at a 5% to 5.5% cap rate, right? And so that still provides us with sufficient spread. The spread's obviously narrowed. We did our last securitization at 4.2%, 4.3%. Today that would probably be about 4.7%. But what we're continuously doing is we're reevaluating our buy box. We can make tweaks. We make tweaks daily, weekly. We can think about, for example, cutting out the lowest band of cap rates and thereby increasing our cap rate target. We could think about narrowing our market coverage and maybe moving out of some markets that have lower cap rates. Our goal ultimately is to maintain a positive spread. We're allergic to negative leverage. And so there's things we can do to keep on going. But what I will tell you is that all of the things being equal, even with this higher interest rate curve, it's more creative for us to buy more homes than less homes. With respect to the home buying environment, it's still extremely strong. But our guess is that as mortgage rates continue to move up or the market gets used to these much higher rates, we will start to see that stabilizer peter out a little bit. That's our best guess. We're not clairvoyant. If you look back at previous cycles, every single time that mortgage rates have increased by 100 basis points or more, in this case, they moved up much more significantly, certainly from where they started. We've seen home prices, existing home prices and new price, home prices stabilize or potentially even come down. Now, what's different about this environment is that we've also never seen such shortage of supply. So that's what's different. The housing market, both on the existing and new home front, is unbelievably tight. And so the number of bidders is definitely decreasing. Builders, for example, are using rate locks and other incentives to continue to drive home sales. But the demand from what we hear and what we see in our own projects is still exceptionally strong. We haven't seen any cracks yet. Our best guess, though, is that over time, at these higher rates, again, you start to see home prices stabilize. If they stabilize, it actually provides a better opportunity for us to buy homes, and it could ultimately allow us to buy homes one at a time at higher cap rates, right? Because, again, if home prices stabilize and rents continue to increase the way they are, we are going to see higher cap rates over time.
spk00: Thanks for your thoughts there, Gary. So if home price appreciation slows, you know, and I'm not just thinking 2022, but potentially out years as well and home buying moderates. And how should we think about the ability to charge higher rents? I mean, I'm thinking out years here, you know, can you really charge new leases at an elevated clip if there is no support from home price appreciation?
spk11: So what happens over time, and we've seen this, we've been in this business now for 10 years, and we've seen this through empirical studies, is that there's almost 100% correlation between home prices and rents. Now, they don't necessarily move in tandem. So what we've just seen is we've been through a period where home prices have moved extremely rapidly, faster than rents, and that's led to a slight compression in cap rates when we buy one home or two homes at a time. But what we think now with much higher mortgage rates is that those home prices are likely to stabilize. Rents will continue to catch up or increase, which will mean that we'll probably see slightly higher cap rates when we're buying homes one at a time. In terms of future rents, yeah, I mean, there's no way that if you think about our rent growth, blended rent growth of 8%, 9%. I mean, long-term, depending on what your horizon is, that's not sustainable. That will probably likely moderate too. Our forecast, if we look at it to, let's say, 2024, we're assuming NOI growth probably, let's say, in the outer years of around 6%, right? So we still see very strong growth. There's a couple of things to keep in mind. There's huge loss to lease in our portfolio, right? So 20%, maybe higher than that. And so as a result, we're going to continue to get outsized rent growth. And the other thing is that the demand for our business, again, this is where I'm a little bit more hesitant on how much will home prices moderate, how much will rents moderate. The demand, as we talked about, is just insatiable. We're getting 13,000 leasing inquiries for 200 homes available any given week. I mean, it's just astounding. And we're not sure that's going to go away. It doesn't feel like it today. The business is booming. And it's an incredible product. There are so many American families that want this experience, the low-maintenance lifestyle, and we just think that's going to continue into the future.
spk01: Thank you for that insight. Your next question comes from the line of Mario Sarek with Deutsche Bank. Your line is now open.
spk13: Hey, good morning.
spk09: My one question pertains to the recent kind of proposed transaction with Partners Group acquiring or reportedly acquired a close to a billion-dollar transaction in terms of $2,000 or so rental homes in the U.S. Can you kind of shed any color on what implications in terms of the valuation, if it does indeed trade at that range, what implications there may be for your portfolio, taking consideration, comparing grants, location, and so on and so forth?
spk05: Yeah, sure, Mario, and thanks very much. This is John Ellensweig speaking. You know, that transaction, there's actually been a handful of private market transactions that have taken place in the last six months. To unpack that, there's a number of markets there that overlap with ours, but there's also a number of them, especially more in the deep south, I believe Midwest, that don't overlap with Tricon. So this is less of a target for us, but what I would say as we see private market transactions taking place, In spite of some of the turbulence you're seeing in the public markets, they're still trading at extremely keen or strong cap rates. Over the last six months, we've seen portfolios trade, in some cases, as tight as the high twos and in the low threes on in-place rents. I think what is important to remember when you're seeing these private market transactions or even in our portfolio is there's ample loss to lease. So a transaction that might take place in the low three cap rate on in-place rents may actually be in the low to mid fours on mark-to-market rents. And so that's important to keep in mind when you're thinking about those trades, but also the valuation of our own portfolio.
spk11: Yeah, and I'll add to that. I mean, when you think about the private markets, investors are continuing to increase their allocation of real estate. And we expect that will continue to happen going forward. For every 10 basis points increase in private capital allocation, another $80 to $120 billion needs to be allocated to real estate. That's a huge amount of money. And the preponderance of that and residential, because those are the best places to get return today. And so there's a wall of capital out there.
spk14: What's happening?
spk11: I think as we speak is we're not seeing any private investors really exit the market. They're just adjusting their return expectations, which makes sense. I mean, the math changed because underlying interest rates or financing costs are higher. And so our best guess from being in the market is that on portfolios in residential, we've probably seen prices, private market pricing drop from the peak by about 10%. So if we say the peak, Mario, is let's say in February, of 2022. We think maybe private market pricing is down 10%. Private market cap rates might be up about 50 basis points, but they are far lower, as John just said, than where the public markets are at. You know, our best guess is kind of where we're trading today. Maybe we're trading at a kind of implied 5.5% cap rate. That is absurd. It's absolutely absurd. If you think about where, you know, private market valuations are today, they're probably at 3.5%, they're maybe up 50 basis points from where John talked about. They're 3.5% today. That's factoring in a much higher interest rate curve. And, again, because of that, the reason for that is because of the loss to lease. The public markets are not factoring the loss to lease in valuations, and private markets are.
spk09: Okay. And then my follow-up is – not necessarily related to my original question, but I'll throw it in there. Higher level, Gary, like when you look at the past three months, if you think back to the Q4 call, and I'm specifically thinking about stuff on the margin. So on the margin, what would you say is the one thing that, you're incrementally most positive on relative to three months ago, and then conversely, what's the one thing that stands out that you're incrementally more cautious on relative to three months ago, and how has the organization pivoted in the last couple of months to address those things?
spk11: Mark, you're talking about SFR NOI margin?
spk10: No, I'm saying overall, just overall business-wise.
spk11: Oh, business-wise. Well, I think, look, I mean, I think where we have to look at things and be monitored very carefully is certainly inflation. I mean, we're in an unbelievably inflationary environment. I mean, we've never seen this before. If you think about it, we've seen that before. We have a war between Russia and NATO. That's never happened in our lifetimes. We have zero COVID policies in China.
spk14: an inflationary environment, and that affects our entire business.
spk11: Now, at this point in time, nothing is insurmountable, and we're very fortunate that we're in a business where we continue to believe that we can drive revenues faster than expenses, but we've not seen, you know, if you look at our NOI print this quarter, we've never seen revenue and expense growth this high. I mean, they're both really high. It's driving exceptional NOI growth, which is the real positive, But the thing we're really keeping an eye on is the inflation, right? It is starting to feel like that's stabilizing a little bit. Supply chain issues feel like they're starting to stabilize a little bit. But that's where we have to continue to monitor the business.
spk09: Are you seeing any sign of stagflation within the portfolio? No.
spk11: No, I mean, in some ways it feels like we're in an economic period of stagflation in some ways. You know, certainly you could feel that with higher grocery prices and prices at the gas pump and certainly higher rents. But as far as our business is concerned, I mean, the business is booming. I mean, if you think about it, let's just talk about this high level. NOI growth in SFR up 12%, multifamily up 18% in the U.S., 24% in Canada. I mean, those numbers are unbelievable. That gives you a sense of how strong our business is on the ground, and it does not reflect what's happening in the capital markets. Okay.
spk04: Next one.
spk13: Thank you.
spk01: Your next question comes from the line of Nick Joseph with Citi. Your line is now open.
spk07: Hey, it's Michael Bellman here with Nick. Gary, you just commented that you thought the public market's valuation of single-family rental, or at least your stock, is absurd relative to the private market.
spk14: And I want to think a little bit about how public
spk07: market investors sort of, I think, are more about where the puck is going rather than where the puck is today. And there appears to be, as much as you're talking about how everything is bullish, prices are down from a home perspective, and there may be more risk in the future. So why shouldn't the public markets investors have a higher discount rate or risk profile when they may think that eventually home prices go down and rents could start turning based on that?
spk11: Well, I mean, we can't move the market. I mean, the market is what it is, and the market's having a moment. There's a huge amount of uncertainty out there. I just talked about the reasons for the uncertainty. And when the market is uncertain, it leads to very volatile movements in the stock market and much lower pricing, and that's what we're seeing today. That's the capital market. That doesn't necessarily mean that is being reflected on what's happening on the ground today on Main Street or what's going to happen in the future today. And as far as our business is concerned, the demand is rock solid. We don't see that changing. Like I said, we've got 200 homes available any given week, and we're getting 13,000 leasing inquiries or leads. We don't see that changing. People have to live somewhere. You know, if obviously the cost of debt or equity moves up, that will obviously have an impact on valuations. That's beyond our control. But what doesn't change is the underlying demand for our business. And we don't see that changing. So, you know, my best hunch is that the markets tend to overreact. And I think we're probably in that type of situation and things will probably stabilize. But it doesn't change our outlook as to where we think this business is going. This business was built to be defensive. It was built to be able to be resilient and to perform in inflationary times, which we're in today, and also in recessionary times. We think we do relatively well both in inflation and in a recession. And so we remain confident in the outlook.
spk07: You have obviously very big growth plans and you want to use a lot of other people's money to do that and you already have raised a bunch of that and obviously the equity offering that you did recently delivered the balance sheet and provided you a little bit of growth capital. I guess with the stock where it is, how does that affect your view? Arguably, you could use some of that excess capital to buy your own stock, but that effectively then just takes up leverage and cuts into the future growth that you want to have. How are you balancing where you are going to need some level of attractive equity to be able to fund your very strong external growth plans?
spk11: Yeah, no, it's a great question. I think, look, I mean, the stock market valuation is a point in time. And it's low today, but it can move up quickly. So I think what we don't want to have is an knee-jerk reaction and say, oh, our stock's low today or this week, and now we're going to just switch from buying homes to buying back our stock. We don't think that makes a lot of sense. I mean, if the stock was low forever, that might be a different situation. But as I said, it's a point in time. And the way we think about our business is we're growing NOI by 20% a year. If you think about that, that's a culmination of external growth. It's the 8,000 homes a year plus the same home growth. That's incredibly strong. We're in an environment where we can grow NOI 20% a year, FFO per share over time by, let's say, 15% a year. We think it makes sense to focus on the growth and finding efficiencies in our business rather than buying back our stock.
spk06: Thanks. It's Nick here. Sorry, one more. Just on the balance sheet, given the higher interest rates, how does that change your views on target leverage and then the 25% floating rate debt?
spk16: Yeah, I think it's what Sam. Actually, so we're looking at our balance sheet, and we've done a pretty great job over the past couple of years completely deleveraging. And more importantly, we've fixed a lot of our debt today. One, which is a term loan that matures in 2022. We're going to refinance that for – we could keep the rate exactly as is, actually, and it's got a cap on the upper end, so it doesn't really – The impact of the higher rate environment and the other two items that are floating, we're actually looking at a securitization as we speak. We're in the market today. The rate is probably going to be higher at 70% leverage. You're probably going to be closer to 4.75, maybe 4.85. But it's still a positive spread and it's still lower than what we're buying at. So we're going to try to fix for as long as we can. And we're really in a great position. And apart from that, really the next big maturity is 2024. So we have time to start thinking about options there.
spk11: Yeah, and Nick, the other thing I would chime in is possible that if we remain in a, you know, a high-rate environment, relatively high-rate environment for a longer period of time, it's possible in our joint ventures, certainly in new joint ventures, that we target lower leverage venture partners going forward.
spk14: Thank you.
spk01: Your next question comes from the line of Richard Hill with Morgan Stanley. Your line is now open.
spk08: Hey, team. It's Adam Long for Rich. I just wanted to ask a little bit about kind of the – actually, what you just mentioned, Gary, just to remind us what the – for new JVs potentially and if that timeline has changed or should be kind of executed to plan, right, and home per year, you know, kind of executing on that point.
spk14: We're actually going a little faster than we thought. One of the reasons is the home price anticipated in setting our three-year target.
spk11: And so we would expect to get to that kind of 50,000 home mark or certainly invest all the capital in the JVs by the end of 2024. And it's possible that that's going to happen sooner. And that puts us in a position then to raise new funds sooner. You know, I can't say specifically whether it's
spk14: could be meaningfully faster than what we're currently doing. The conversations we're having with our existing partners are very bullish.
spk11: They want to put out a lot. They love this sector. We perform extremely well for them. They want to put out a lot of partners. You know, how much capital can we manage? We have a lot of conversations in place to manage that growth, but the capital is there from our partners.
spk14: And so that's something that's really exciting. You know, this year is not, we're not really focused on fundraising with the existing, you know, JVT or Home Builder Directs. We're putting the capital out. But what I will tell you is that on the builder,
spk11: The rent program, we are now nearly fully committed on what we call TPAS 1, our joint venture with Arizona State Retirement System. That venture is now fully committed as our vehicle. So that's something you should be expecting later in the year.
spk08: That's really helpful. I guess just switching gears, you know, with turnover kind of seemingly lower every quarter, right, I think just a hair over 14% in April. Once it adds to that, you know, kind of your assumption is going to be you're on same store expenses. You know, if kind of given what turnover has done, if that's going to change your view on, you know, what's going to be kind of a controllable, right, or some of those operating expenses might be. I mean, going into the future, right, if turnover is going to hold at these levels, right, kind of given the tight housing market, if that maybe changes your kind of long-term view about, you know, turnover expense and those other expense lines, that may be advised.
spk11: Let Kevin maybe chime in on some of the expense line items, but I just say high level that never in a million years did I – I mean, it's mind-blowing. So maybe we could get below 25%, maybe, right?
spk14: And now we're below 50%.
spk11: We just never projected this. We never thought this would happen. It's partly a function of how much demand's out there and the fact that we're self-governing on renewals. And I think that we're teams doing such a great job on the quality of the home and the service that people just don't want to leave. It's just such a great form of housing. So I think that's got to change our expectations, but I still think that 15% changes. And I think when we look at our projections, we're typically looking, you know, maybe 20% this year, 18% to 20% this year. And if we looked at kind of a longer-term forecast, let's say at the 2024, we'd probably be projecting 25%. But 25%, I would say, this year, and 25% longer-term.
spk14: Anything else you want to add, Kevin, on that? No, I'm good.
spk03: I think that we will see turnover go up a little bit. You know, people have been hunkering down because of COVID, and that psychology now is changing, and so we're seeing people. I don't see the turnover staying this low. I think it will get back to like what Gary was saying because we're starting to see it a little bit. So, you know, we'll see turnover go up a bit. But it's still going to stay in the 18% to 20% most probably. And that's going to help mitigate our costs. You know, the other things that we're doing just so that you know to help our costs going into the future is we've increased the work orders done in-house. We're up to 70% of work orders that our team, that we get, you know, into our centralized office. 70% of that is done by our in-house techs. We also have national purchase contracts that have helped us have shield with some of the inflationary pressures. So we're seeing, in some cases, the cost of appliances, for instance, going up 30%. And we've got locked-in prices at 5%, 7%, 8%. So it's giving us a hedge on that. We're also, you know, the average age of our homes are 24 years right now. The homes we're buying these days are 14 to 15 years old. And we've seen that translate into lower cost by 20% or so. And then we've also rolled out what we call intelligent virtual assistant, IBA, in concert with a permission to enter. And so that allows us to more efficiently and quickly respond to work orders, provides better customer service. We're getting the houses faster, increasing satisfaction. And then it's also helping us push the number of homes our techs see per day and per week, which makes us more efficient. So in addition to the lower turnover that we're experiencing, we're constantly thinking from a technology standpoint and process improvement standpoint to keep our costs low.
spk08: It's really helpful, guys. Thanks again and really appreciate it.
spk14: Great. Thank you.
spk01: Your next question comes from the line of Brad Heffern with RBC. Your line is now open.
spk18: Hey, everyone. You've talked about a potential recap of the U.S. multifamily portfolio in the past. I'm curious, how's the likelihood of that change, just given all the capital markets turmoil, and how does that affect the funding picture for 2022?
spk11: We're still looking at it. It's still something we'd like to do. It certainly has become a little bit more difficult or perhaps a little bit less secretive, given the underlying rates have increased significantly, as you know, Brad. But it's something we still think makes sense. If you look at our IFRS carry value, which is about $1.7 billion, $1.7.5 billion, I mean, it's significantly above... You know, where we bought the portfolio, where we syndicated it, and is obviously much higher. We've got about $800 million of debt in place on a, let's say, $1.7, $1.7.5 billion portfolio valuation, which is conservative, quite conservative, I would say. And so there seems to be room to recap. So, again, a little bit more difficult than where we were a couple of months ago or a month ago, but something we still think makes sense and something we're going to continue to look at.
spk16: Yeah, if I could add to that as well, let's talk about this here. We talk about our commitment to buying up to 8,000 homes. If you really put that in mathematically, we're looking for another $200 million of equity that we need to fund our portion of the growth. AFFO, after dividends, provides us with another $50 million this year, so our shortfall this year is really about $150 million. um we are in a great liquidity position our credit facilities uh and uh they unrestricted cash we have about 558 million available for us so we could easily absorb all of that without having to go to the capital markets or do any of these dispositions either this is just a plus for this year okay got it thank you for that um and then i'm curious you know you mentioned several times the 13 000 um
spk18: you know, applications for 200 spots. I'm curious if you've changed credit standards at all, you know, trying to upgrade the credit quality of the portfolio just given all the macroeconomic concerns.
spk03: No, we really haven't. I mean, we're keeping with the same program that we've had. We currently think they're pretty strict. We currently turn down between 48% to 52% of applicants. So from the very beginning, we've really cared about the propensity to pay of our residents. And so we've been maniacal in our kind of underwriting process. We took that. We used to underwrite across all the different offices that we had around the country. We centralized that so we had a consistent approach and that we were living within all of our housing laws. And, you know, we've found that it's really been helpful. COVID hit and the moratoriums hit. We couldn't, you know, use all of our normal collection processes. That, you know, hurt a little bit, but we're now improving market base since we started, you know, we started going back. you know, to our normal practices, and we're going to start seeing our delinquency rate come down pretty good. But we haven't changed, you know, our practices on how we're underwriting. We've still dropped 23%.
spk13: It's been going on, and we've been really pretty happy with our resident base. Okay. Thank you.
spk01: Your next question comes from the line of Jade Romany with KV.
spk19: Thank you very much. April numbers sounded good, but has there been any moderation in demand either in number of leads, conversion ratios from number of leads, renter willingness to accept asking rent?
spk14: in some ways reflect there's such a gap between new lease rent growth versus renewal rent growth? So I'm going to answer the first question, Jade, and just say no. There's been no change.
spk11: If anything, we're going into the stronger spring leasing season, and in some ways trends remain as robust.
spk14: But the for sale housing market, the for sale markets probably never been more expensive.
spk11: If you go back to 2020, or sorry, 2000, let's say back to the millennium, it's never been more expensive if you look at housing on a, Right. For sale housing on a price to income basis has never been more expensive. Conversely, rental housing has never been more affordable on a rent-to-income basis. We just talked about, you know, being at 22%, 23% rent-to-income. It's never been more affordable going back to 2000. So we're really in a great position to continue to drive the business. There's insatiable demand. We've got pricing power. We're using that responsibly, as you know. We could be pushing our renewals much harder. We're not, so we're building on that loss to lease. And I think the turnover, in my opinion, just really reflects the fact that we are self-governing. You know, when we're giving people 6% or 6.5% renewals, they go around and look around and what else can they get in the market, and they realize they're getting a good deal, and they stay. And they like the product and they like the service. They like what we do, and there's no reason to go anywhere else. So, no, we think the low turnover is more a reflection of the way we're running the business.
spk19: Thank you. On the supply side, I see positives and negatives, and I wonder how you see it. On the existing home market, something like 80% of mortgages have a rate less than 4.5%, creating a very large disincentive to move. On the other hand, every company in the space seems to be chasing the build-to-rent model. I even know mortgage REITs that are lending money in that asset class. as well as home builders developing that asset. And yet the supply chain issues might be forestalling. So how do you think about the supply picture and is there an environment later in the year where supply chain gets relief and there's suddenly an avalanche or a big inflow of new that deliver to the market?
spk11: Well, I'm going to let Annie talk about supply of built-to-rent. But I think before that, I would just say this. On the existing home market, which obviously has a major impact on our ability to buy homes, right, because that's really what's driving our growth. If you think about the 8,000 homes that we are going to buy this year, you know, roughly seven out of eight are existing homes. That market over the last couple of years, including up until today, has never been tighter. It's never been a more difficult time to buy existing homes, maybe ever, than it has been in the last couple of years.
spk14: And we are having homes that are 5% to 5.5% cap rate. I think if anything can happen to loosen the market, I would agree with you, more people are likely to stay in place.
spk11: You know, maybe with considerably higher mortgage rates, it gives us an opportunity.
spk14: Maybe it helps loosen the market a little bit.
spk11: We'll see. I mean, the market's so tight, I don't know if it can get any tighter. It probably over time gets looser. And if it gets looser, it allows us to be more flexible with our acquisitions. It might allow us to buy at higher cap rates, especially, as I said, if rent growth starts to now outpace home prices. Filter rent is a different animal. And, Andy, why don't I turn that over to you? Because it's true. When Jay's saying there's a lot of competition to build the rent.
spk02: Certainly. You know, I would add, though, new home supplies are currently at historic lows as well, right?
spk14: There's been very significant demand on the region.
spk02: Retail sales, new home sales, as well as increasing number of groups pursuing build to rent while you have supply chain and delivery delays. So both supplies are less than a month, right? Kind of historic, you know, forever lows in terms of supply. Our sense on new home supply is that it will increase over time, but it takes a long time. Building more homes is like a large amount of time to turn or increase that supply.
spk14: We do think we'll see a little more supply come online over maybe the latter part of this year. and into the following year, but it comes on very slowly.
spk02: A few hundred homes here, a few hundred homes there, and there's still a very large amount of blocking and tackling required to acquire gain approvals for developing. sites and then work them through the development and construction timelines, that it's probably a couple of years or more before those supplies go back to normal, you know, from historic lows. We don't see them skyrocketing quickly. It just takes too long to mobilize this business.
spk04: Okay. So even if, you know, all of the appliances do show up, there's just a massive shortage of labor, you know, due to the lack of in-migrant integration. over the last several years that isn't being solved. And so in spite of, you know, think about the last several years where before the supply chain shortages, there was still a demand for new housing, but a major constraint with labor, and we don't see that problem being solved anytime soon.
spk01: Your last question today comes from the line of Stephen McLeod with BMO Capital Markets.
spk12: Your line is now open.
spk15: I just had one question for you, and it relates to something, Gary, that you mentioned with respect to the infrastructure that you have in place to support the single family business, which structure, you know, without having to add incrementally.
spk11: You know, I think we could buy with the existing platform. I mean, the platform is very scalable. It's an incredible tech-enabled operating platform. But what does need to get scaled is the people component of it, right? So remember, when you go and buy homes, you then, if you buy a lot of homes, you need more people to renovate those homes. which involves more supers to oversee the renovation, and obviously you need more tax to ultimately turn and repair those homes. So there is a real significant people component, which is why where we're continuing to hire, I would say the team and the platform require 8,000 to probably 10,000 homes a year. If we wanted to go faster on our people and go faster on the hiring front, but 8,000 to 10,000 is where we could be. I think given the capital market, And based on our guidance, we're probably much more likely to be closer to 8,000. Better capital market environment, we could probably go faster based on the platform and people. So I hope that answers your question for you. But either way, it's significant growth. And, again, we believe that it's creative for our business.
spk15: Yeah, okay. So it sounds like the real variable cost component is on the people. But with the technology support above 50,000 homes, it's more just buying, renovating.
spk14: Absolutely. Right. We don't buy sight unseen.
spk11: So as soon as we put a home on a contract, we need to send someone there to inspect the home. That requires people. Then we renovate the home to a common standard. That requires people. Then we've got to turn the home and service the home.
spk14: All of that requires the business. It's actually not the acquisition. That needs to be scaled appropriately. We're actually finding it. Last year was a much tougher time to hire.
spk11: And so we've had no issues on the hiring front. And even in this very tight supply market, no issues on the acquisitions front either.
spk15: Great. Thank you.
spk11: Thank you, Steve.
spk01: There are no further questions at this time. I'll turn the call back over to Gary Berman, President and CEO of Tricon Residential.
spk11: Thank you, Emma. I'd like to thank all of you on this call for your participation. We look forward to seeing what the markets look like when we speak with you again in August to discuss our Q2 results. Thanks, everybody.
spk01: This concludes today's conference call. You may now disconnect.
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