Tricon Residential Inc. Common Shares

My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Tricon Residential's second quarter 2022 analyst conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. I'd now like to hand the conference over to your speaker today, Wojciech Nowak, Managing Director of Capital Markets. Thank you. Please go ahead.

Thank you, David. Good morning, everyone. And thanks for joining us today to discuss Tricom's second quarter results for the three and six months ended June 30th, 2022, which were shared in the news release distributed yesterday. I'd 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 the supplementary 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 also like to remind everyone that all figures are being quoted in U.S. dollars unless otherwise stated. Please note that this call is available by webcast on our website, and a replay will be accessible there following the call. During this call, we'll be referring to a slide presentation that you can follow by joining our webcast, or you can access directly through our website. You can find both the webcast registration and the 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.

Thank you, Wojtek. Good morning, everyone, and thank you for joining us today. As we navigate through some volatile and uncertain times, I'm happy to report that our business performed well through the second quarter with strong operating fundamentals continuing into July and August. Let me share with you some of our highlights from the quarter on slide two. First, we continue to benefit from the resilience of our Sunbelt middle market strategy with exceptional demand for high-quality rental homes. Despite the uncertain macroeconomic backdrop, our business is firing on all cylinders and continues to deliver consistent results quarter after quarter. Second, our growth plan remains on track. We grew proportionate NOI by 24% year over year and had a record quarter of single-family rental acquisitions. And as home prices stabilized, we're now seeing opportunities to buy homes at higher cap rates. Third, we had another excellent operational quarter in our SFR business. with near record low turnover, record high occupancy, and strong rent growth. Next, our private funds and advisory fee revenue increased meaningfully, bolstered by strong performance fees. And finally, we achieved these results while keeping leverage at the low end of our target range with minimal near-term maturities and ample liquidity to fund our growth plans. You can see a summary of our headline results in slide three. Our SFR business is performing extremely well, and we'll delve into these metrics throughout the call. In our adjacent businesses, we also achieved two important fundraising milestones this quarter I'd like to highlight. First, we closed the successor JV with Arizona State Retirement System to extend our built-to-rent program and increase housing supply in our core sundown markets. This new $500 million JV includes $100 million or 20% co-investment from Tricon, which we expect to fund gradually over a three-year investment period. Second, we restructured our Canadian multifamily built-to-core joint venture with Canada Pension Plan Investment Board It's an all-equity capital structure, increasing the total equity commitment from 500 million Canadian to 1.5 billion, while simultaneously lowering Tricon's equity commitment from 150 million Canadian to 116 million. The restructured JV will help reduce our balance sheet exposure to development activities and maintain lower leverage metrics as we add new projects. Moving to slide four, we had another productive quarter on the ESG front. publishing our second annual ESG report, and expanding our sustainability initiatives. First, we made headway in addressing our environmental footprint. We've now completed energy-efficient upgrades to 70% of our SFR portfolio, including Energy Star appliances, efficient HVAC and hot water systems, low-flow water fixtures, and smart thermostats. We're also deploying rooftop solar in over 1,100 newly constructed homes and are piloting our first net-zero rental homes in a built-to-rent community located in Grand Central Park, at Johnson Master Plan Community in Houston. And second, we announced a market-leading down payment assistance program, which also allows qualifying long-term residents to receive $5,000 towards a down payment to buy a home of their choice. At Tricon, we are deeply committed to providing housing optionality for our residents, including the ability to either rent or own a home, as we aim to be part of the solution in addressing America's significant shortage of affordable housing options. As we move to the next few slides, we want to address some of the key questions we've been getting from investors and analysts of late, given the rapidly shifting economic environment. First on slide five, let's talk about acquisitions. Clearly, acquisition financing rates have moved up. In March, we were financing at rates just over 4%, whereas in July, we completed the JV2 securitization at close to 5.5%. While the higher financing rates will have a negative impact on the cash flow we earn from our homes, We're also seeing a moderation in home prices, which in turn has allowed us to buy homes at cap rates at a range of 5.25% to 5.5%, which is roughly a 30 basis point increase compared to where we were buying three months ago. This change to our acquisition underwriting, or the combination of higher rents and stable home prices, enabled us to buy nearly 2,500 homes in the quarter at a positive going-and-spread to current financing rates. We thought it'd be interesting to show a price to FFO multiple for a typical single-family home, given that the FFO contribution from every home includes fees we earn for managing third-party capital. We're effectively buying homes at a 12 times price to FFO multiple compared to 11 times earlier this year. Still a very creative use of capital. I would point out that securitization rates have come down recently, and we think that the same deal we did in July could be done at close to 5% today, which brings us back to an 11 times multiple. Looking at it differently through a real estate lens, we're buying homes at, again, a nominal cap rate of 5.25% to 5.5%, and when including the net fee income, a fully loaded or adjusted cap rate of 6.5% to 7%, which remains very compelling even in a much higher interest rate environment. So what's driving cap rates higher? As you can see on slide six, there are two factors at play. NOI, or the numerator, is rising while home prices or the denominator is moderating. On the one side, NOI is rising because of higher rents. Market rents are up 6% nationally compared to last year, yet even with that change, it's probably never been more affordable to rent versus own a home given how high mortgage rates have moved. On the other side, we see home prices cooling. Average MLS closing prices in our markets are down about 3.5% since April, and we find ourselves pivoting from making offers at a premium to list price to now offering below list price and still being successful in our purchases. Clearly, our acquisition opportunity is attractive, and from a cap rate perspective, should become even more attractive over the balance of the year. So how do we go about funding our growth plan? Let's turn to slide seven to see the building blocks of our cash sources and uses. On the left side, you can see we have a rapidly growing cash flow driven by strong same-home NOI growth and a growing portfolio of homes. We're also looking at opportunities to unlock the value of our U.S. multifamily portfolio and to sell a small number of non-core SFR homes, which could provide a significant amount of growth capital. And lastly, we have more than $500 million of liquidity available through our revolving credit facility and cash on hand. On the right side of the slide, you can see we have planned investments of about $300 million per year in our SFR business, including about $130 million remaining for 2022. If we think about our growth plan through 2024, we estimate having over $1 billion of cash sources when extrapolating cash flow growth over two and a half years and layering on the other cash sources from our adjacent businesses, compared to about $750 million of planned investments over the same time period. In other words, we have sufficient capital in the medium term to fund our growth plan and don't need to rely on the equity capital markets. The next big question is, how will our business fare in a recessionary environment, which we address in slide 8? We have some experience in this department during the 2015-2016 oil price crash that impacted the Houston market. When we look back, we came out largely unscathed as oil prices declined and unemployment spiked. As you can see, occupancy in our Houston portfolio remained stable and subsequently improved, while average rents grew over 4% during the same time period, illustrating the past stability of single-family rental even in a down market. And most recently, our business fared extremely well during the pandemic, another proof point for the expected resilience of our business model. Now let's move to slide nine to answer the question of what is the impact of rising interest rates on our long-term outlook? As I spoke about earlier, higher interest rates are a drag on our acquisition economics, which we are mitigating by buying at higher cap rates. From a longer-term perspective, it's actually the same home NOI growth that's a more significant driver of our results. So with higher rates factored into our long-term forecast, will need to deliver higher same-home NOI growth in order to get to the same endpoint. The nice thing is that NOI growth is indeed trending higher than expected, and we feel comfortable that our 2024 core FFO per share target of 83 to 88 cents is still achievable. In short, what we're giving up with higher financing costs, we expect to make back up with NOI growth, providing an attractive hedge in today's uncertain environment. I would now like to pass the presentation over with Sam to discuss our financial results. Thank you, Gary, and good morning, everyone.