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spk07: Good morning. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Residentials Third 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'd like to withdraw your question, press star followed by the number one on your telephone keypad. I would now like to hand the conference over to your speaker today, Vojtek Nowak, Managing Director of Capital Markets. Thank you. Please go ahead.
spk10: Thank you, Colby. Good morning, everyone. And thank you for joining us to discuss Tricon's third quarter results for the three and nine months ended September 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 MDMA. 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. Lastly, please note that during this call we will 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 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.
spk14: Thank you, Wojtek. Good morning and welcome, everyone. I hope you're all doing well. Let me start by saying that we are living through some unprecedented times with few political and financial experiments that have yet to run their course. But from where we sit today, this looks a lot more like a Wall Street recession than a Main Street recession. I would never suggest that we are immune to macroeconomic trends, but as we've seen in the past and continue to see, the demand for our high-quality, professionally managed rental homes remains incredibly strong. Our business continues to be resilient and defensive, and I'm pleased to report that we delivered another solid quarter. Let me share with you some of our highlights on slide two. We continue to see exceptional demand for our homes. And today's high mortgage rate environment is more compelling than ever to rent versus own a home. This is evident in our results as we delivered another operational quarter with single family rental same home NOI growth of 10.2%, record high NOI margin of 68.5%, occupancy remaining close to 98%, turnover remaining at a low of 18.6%, and blended rent growth consistently strong at 8.4%. And after quarter end in an environment where deal flow is ground to a halt, we sold the remaining interest in our US multifamily portfolio in a transaction that some have compared to the landing on the Hudson. With this landmark transaction, we've taken an important step towards simplifying our business and substantiating the value of our assets, while generating a significant amount of cash to reduce leverage and position our balance sheet for future growth. On that note, we grew our portfolio by almost 2,000 homes during the quarter, we plan to decelerate our acquisition pace to 850 homes in Q4 and 7,300 homes for the full year, which is still a record for Tricon. While this falls short of our previous guidance of 8,000 homes, we feel this is prudent given today's capital markets environment where financing rates apply much faster than acquisition cap rates and where the securitization market is going through a period of price discovery. We remain committed to growing our business over the long term in a strategic and responsible way. At this time, that means slowing the pace of our acquisitions until it makes sense to accelerate once more. To be clear, we are slowing down today so we can buy new and existing homes at higher cap rates in the future and to position ourselves to buy larger portfolios at discounted prices. And we do foresee such opportunities becoming available. The great part about our model is that we can scale our acquisition program up or down very quickly depending on market conditions. And we now have nearly $3 billion of dry powder including liquidity on our own balance sheet and third-party unfunded equity commitments. We will lean in and deploy that capital when the time is right. Moving to slide three, you can see some more detail regarding our US multifamily portfolio sale, which we completed in October. This was a complex multi-party transaction that would have been difficult to execute in the best of times. And I want to thank our team for their hard work and persistence in getting the sale over the finish line. We're also grateful to our U.S. multifamily team for their dedication and service to our residents and wish them well as they partner with the new ownership. With this sale, we have fully divested our U.S. multifamily portfolio and expect to complete the property management transition to the new owner by the end of this month. The transaction was an incredible round trip for Tricon, which started with us acquiring the portfolio at $1.3 billion back in 2019, syndicating 80% in 2021, and exiting the portfolio at a valuation close to $1.9 billion three years later. The transaction represents an IRR 20% plus for Tricon and over 50% for our JV partners, and is one of the most successful deals in our 35-year history. Our gross proceeds of $315 million include $215 million for the equity value of the portfolio, plus $100 million in performance fees, of which half goes into our management output pool. And so with the net proceeds of $216 million after transaction costs, we were able to pay the $180 million outstanding on our corporate credit facility with cash left over in the bank to buy back some of our own stock and to continue growing our single family rental portfolio. Overall, our liquidity now stands at $700 million. And again, when including unfunded equity capital commitments from our various JVs, we have nearly $3 billion of dry powder to deploy as we enter a new cycle. This transaction clearly demonstrates the massive divide between private and public market valuations that exist today. Let's turn to slide four. We sold the portfolio at a 4.4% implied cap rate based on Q3 NOI and an evaluation in line with our IFRS book value. This comes on the heels of a steady scheme of dispositions of non-core SFR homes that were completed throughout the year at an average 12% premium to a reported fair value. In addition, our US residential developments continue to generate cash while our Canadian multifamily portfolio is being rapidly de-risked as it progresses through construction. All of this to say that we have a lot of faith in a reported net asset value of $13.74 per share, or $18.83 in Canadian dollars, and believe the pullback in our stock is far overdone. Let's move on to slide five to talk about what we're seeing out there in the rental housing market. So far this year, market rents are up 6% nationally compared to last year, but with mortgage rates breaching 7%, it has never been more affordable to rent versus own a home. In fact, when we look at the national data, it costs about $700 more per month to own an entry-level home versus renting one. Housing affordability in the U.S. is a significant problem, and that has been amplified by higher mortgage rates and chronic underbuilding with no end to sight to the supply shortage. We take pride in knowing that providing quality rental homes at accessible price points and adding new construction to our built-to-rank program, we're helping to be part of the solution. It's no surprise then, as we turn to slide six, that demand for rental homes remains exceptionally strong. A combination of healthy leasing traffic and relatively few homes available for rent is driving our occupancy and rent growth, even as we enter a seasonally slower leasing period at year end. July and August tend to be very strong months in terms of rank growth as families settle in for the school year, followed by a dip in September and Q4 as we take more of an occupancy bias. As you can see in the chart, heading into October, we pushed occupancy back up over 98%, but rank growth decelerated slightly to 13%, reflecting some seasonality and our occupancy bias. On slide 7, we wanted to frame for you where the demand-supply balance is from a historical context. The demand for homes, as measured in leads per marketed home, is down from pandemic levels, but still double what we experienced in 2019. With that being said, we are starting to see a return to normal seasonality in new lease tradeouts in Q4 and a moderation in the overall level of rent growth. One of the factors at play could be a higher supply of rental homes that we're seeing in our markets, which might be caused by would-be home sellers opting to rent out their homes in light of the challenging mortgage environment. Supply of rental homes in our sundial markets appears to be back to where it was prior to the pandemic, and rents have softened about 3% to 5% from the peak. We wanted to flag these dynamics because COVID-19 brought about a very unique set of circumstances where single-family homes were in exceptionally high demand given the acceleration of suburban migration and work-from-home trends. With a gradual return to the office or hybrid work, we should also expect a return to more typical seasonality and rent growth. even though the numbers are still great by any standard. Turning to slide eight, let's talk about acquisitions. We successfully shifted our acquisition criteria and are now buying at cap rates of 5.75% and higher. However, the cost of debt financing has moved up much faster. When we look back to March of this year, we were financing at rates just over 4%, and buying homes at an implied price to FFO multiple of 11 times, which is very accretive. Fast forward to today, the cost of borrowing has moved up to nearly 6.5%, with the CMBS or securitization market experiencing significant dislocation. In essence, we are now buying homes at closer to a 14 times price to FFO multiple, which is at or above where our stock is trading, and it's an amber signal for us, meaning that it makes sense to slow acquisitions until we see better alignment between cap rates and financing rates. As you can see on slide nine, we are temporarily shifting our capital allocation strategy while we wait for better investment opportunities to emerge. We plan to allocate less capital to acquisitions over the near term and instead prioritize debt repayment, as we've done with the proceeds from our U.S. multifamily portfolio sale, and in the interim also buy back some stock. During the quarter, we announced the normal course issuer bid to buy back up to 2.5 million shares over the course of 12 months. I want to emphasize that we are not adverse to shutting off the acquisition spigots completely as we did during the beginning of the pandemic and are under no pressure to grow from our JV partners. Likewise, we can turn the taps on very quickly when we feel the time is right. We will be prudent with our capital allocation and are focused on maximum long-term value creation for our shareholders and private investors. Speaking of fiscal conservatism, I would now like to pass the presentation over to Wissam who is appropriately donning a three-piece suit to discuss our financial results.
spk12: Thank you, Gary, and good morning, everyone. We delivered another strong quarter of financial results. I want to thank our exceptional team for their hard work and dedication as we continue to get better at everything we do. On slide 10, we summarize our key metrics for the quarter. Net income from continued operation was up 2.5% to $179 million, which includes $107 million of fair value gains on rental properties. Core FFO was up 22% year-over-year to $46 million. Core FFO per share was $0.15, an increase of 7% year-over-year. AFFO per share was $0.11, down 8.3% year-over-year, but still providing us with ample cushion to support our quarterly dividend, with an AFFO payout ratio of 45%. Our IFRS book value stands at $13.74 U.S. or $18.83 in Canadian dollars, up almost 30% year-over-year. Let's move to slide 11 and talk about the drivers of core FFO for share. Our single-family rental portfolio delivered 26% year-over-year growth in Tricon's proportionate NOI. This was driven by a 10.2% increase in same-home NOI and 10% increase in proportionate rental home count. Our SFO contribution from fees increased by 13% compared to last year. This was driven by higher asset and property management fees from newly created SFR and multifamily joint ventures in the past year, while there was a decrease in development fees related to higher one-time commercial land sales in prior year in Johnson. In our adjacent residential businesses, The slight year-over-year decrease in FFO reflects lower results from U.S. residential developments versus a very strong comp in the prior year. On the corporate side, interest expense was up as we have a higher debt balance to support the growth of our single-family rental portfolio, along with higher average interest rates. Meanwhile, corporate overhead expenses increased from last year as we staffed up for growth and started to travel more often. This also included costs associated with our U.S. listings and our favorite SOX compliance program. Of note, we accrued 4.7 million of LTIP expenses related to future expected performance fees. And without this expense, our overhead costs would be in line with Q2 and generally holding flat for the year. Lastly, the diluted share count this quarter was 18% higher than last year. as a result of equity offerings and the US IPO we completed in 2021 to fund growth and reduce leverage. Let's turn to proportionate debt profile on slide 12. I am pleased to report that we ended the quarter at 8.3 times net debt to EBITDA, which is on the low end of the near-term target of 8.8 to 9 times. We have minimal near-term maturities, and we aim to limit our exposure to rising interest rates by having most of our debt at fixed rates. Nonetheless, we do have 31% of our debt at floating rates. And note that more than 60% of this floating rate debt is subject to caps on one month's SOFR. This floating rate debt is primarily in warehouse lines used to acquire homes. This is not a permanent part of our capital structure. And it is an exposure we actively seek to term out and roll into fixed rate instruments when we have a large enough pool of acquired homes to do so. Our debt profile remains a top priority, and we have been proactive with terming out any near-term maturities. So on slide 13, we wanted to highlight where we currently stand. You can see here that we have little to no debt maturing until 2024. The 2024 debt includes subscription lines and warehouse facilities used to fund acquisitions temporarily until they are refinanced with long-term debt. We did exactly that in October. we re-rolled some of the debt into a term loan maturing in 2027 at a floating rate plus a cap, which gives us optionality on refinancing if fixed rates become more attractive. And we've mentioned before, we repaid our 182 million floating rate credit facility upon the sale of U.S. multifamily portfolio. On slide 14, I am pleased to present our updated guidance for 2022. This includes an increase in core FFO per share by 14 cents of the midpoint due to the inclusion of net performance fees earned from U.S. multifamily portfolio. These performance fees of approximately 15 cents, roughly 46 million after taxes, are included in the full-year guidance. Aside from that, we essentially moved our guidance set beginning of the year of 60 cents to 64 cents to now 60 cents to 62 cents. driven by higher interest rate expense and slight impact of removing U.S. multifamily portfolio. We basically had a very strong year, including the negative impact of rates, but very strong same home NOI growth. This was offset by tightening up our same home revenue growth to 8 to 9% for the full year. We also lowered our same home expense growth to 4.5 to 5.5, down 275 basis points from the prior midpoint. mainly due to lower than expected repairs, maintenance, and turnover expenses, and potentially for lower than expected property taxes. We've seen the bulk of our taxes come through in the fourth quarter, and so far it looks like our tax accrual may have been on the conservative side. We're coming in lower than expected in Georgia, our biggest market, although we're still waiting to see what Florida and Texas look like. Lastly, we increased our same home NOI growth projections to 10% to 11% drawn by the lower expense growth. As Gary mentioned earlier, we've also decided to reduce our pace of acquisitions in order to preserve capital for more attractive opportunities in the future. As a result, our acquisition guidance moves from 8,000 homes down to 7,300 homes for the year. As we look ahead to the current year and beyond, We know that we have excluded our 2024 targets from this deck. We opted to withdraw these targets in light of the uncertain interest rate environment and economic outlook, as well as our intent to be flexible with acquisitions. We aim to stay within our target leverage range of eight to nine times debt to EBITDA and could potentially get an AFFO per share of 83 to 88 cents in 2024. But this is much more contingent on strong acquisition volumes lower rate environment, and launching a follow-on SFR joint venture. We will provide formal guidance for 2023 next quarter. Generally, we feel good about the direction of same home and I growth. I could see some headwinds to our FFO from lower acquisition volumes, higher interest rates, and a softer for sale housing market in the near term. We will continue to monitor these factors very closely. Conversely, as we accelerate growth into a more favorable environment, we could see an upside torque to our FFO per share. And now to give more insight into the drivers of NOI growth, I'll turn the call over to our very own ray of sunshine during this turbulent times, our Chief Operating Officer, Kevin Baldrige.
spk04: Thank you very much, Sam, as always. And good morning, everyone. I want to start out by recognizing the incredible efforts of our frontline employees. Our team did a remarkable job this quarter as they continue to deliver a superior resident experience and navigate extreme weather challenges all without missing a beat. I'm encouraged by the operating metrics we've been able to achieve, and we remain vigilant as we monitor the ever-evolving macro backdrop. Let's turn to slide 15 to talk about the drivers of our double-digit same-home NOI growth of 10.2% for the quarter. On the top line, revenue growth was driven by a 7.9% increase in average rents and 30 basis points in occupancy gains. Our rent growth remains healthy, with blended rents increasing by 8.4% during the quarter, including a 16.3% increase on new move-ins and a 6.6% increase on renewals. We continue to self-govern on renewals by keeping rent growth below market levels for existing residents. This strategic and responsible approach to rent increases helps maintain our industry-leading resident satisfaction scores while keeping our turnover low. As Gary mentioned, rent growth remains strong going into October as we continue to harvest the loss to lease of 15% to 20% that we've built up in the portfolio. We think this provides a good basis for continued rent growth going forward. Our bad debt expense, which is embedded in these revenue numbers, has been tracking around 1.5% over the past few months, and we see it reverting to pre-pandemic levels of 1% or lower later into next year. Finally, other revenue grew by almost 7% from last year. We see a path to increasing other revenue by about 14% per home over the next couple of years as we continue to roll out current programs such as smart home technology and renters insurance and introduce new services to enhance the resident experience, like telecom partnerships, solar panels, or discounted house cleaning services. Let's turn to slide 16 to discuss our same home expense growth of 2.9%. The rise in expenses was mainly driven by property taxes, which were up 15.8% from last year. reflecting significant home price appreciation in our markets. As Lisanne mentioned, it looks like we've been maybe a tad conservative on our tax accruals in key markets like Atlanta. As bills continue to roll in through the next month, we'll have a better sense of where we will land for the year. On the other hand, repairs and maintenance expenses were down this quarter, although the portfolio experienced higher work order activity as well as cost inflation post-pandemic. we had a greater proportion of work orders that qualified to be capitalized instead of expensed. Turnover expense was also down significantly as our turnover rate decreased by over 220 basis points from last year to 18.6% thanks to our focus on customer service and our occupancy bias. We also capitalized a higher proportion of turn costs given the more extensive work being done on homes with longer resident tenures and people spending more time in their homes during COVID-19. And lastly, property management expenses. We're seeing inflationary pressures in labor costs offsetting some of the efficiencies of scale that we've achieved as our portfolio has grown. Let's move to slide 17 to update you on our hurricane response and impact. To say I'm impressed with how our team came together would be an understatement. As soon as the hurricane hit, without question and without hesitation, team members from neighboring markets stepped in to help right away. All in all, we had 15 teammates from surrounding markets travel to Florida, work day and night, to make sure our residents were looked after. Our SVP of Eastern Operations, Brian Edge, said it best in that he was overwhelmed with the teamwork, the response of wanting to help from multiple departments, and of course, the can-do attitude of the entire team. Indeed, Brian, the way this team rises to every occasion to go above and beyond for our residents continues to amaze me. I'm pleased to report that our people and residents remain safe throughout the hurricane with minimal financial impact to Tricon. In total, we expect a repair bill of around $3 million with one-third covered by insurance and minimal impact to FFO. And finally, turning to slide 18, I'm happy to share with you our recently launched Resident Bill of Rights, which outlines our strong commitment to providing quality move-in ready homes with caring and reliable service. This includes some key elements of our Tricon Advantage program, such as moderating rent growth on renewals, giving our residents the opportunity to buy their rental home if we decide to sell it, and our newest program that is getting rolled out this month, offering down payment assistance to residents who wish to buy the home of their choosing. Of course, we've been doing many of these things all along, but it was important to take formal and public accountability and put pen to paper to ensure our residents were aware of how much we truly care. We don't just talk the talk, but we walk the walk. This Bill of Rights is the first of its kind for our industry, and I hope that we have led the way and opened the door for others to do the same. Now I'll turn the call back to Gary for closing remarks.
spk14: Thank you, Kevin. Our resident-centric approach continues to make us a leader in the SFR industry and is a source of inspiration for our team. To wrap up, we want to leave you with a few key takeaways in slide 19. First, the value of our company is underpinned by our SFR portfolio, which continues to perform extremely well. Next, I want to emphasize that we believe in responsible growth. We are prudent in our capital allocation and continually elevate all available options to foster long-term value creation. And finally, we have the platform, people, technology, and dry powder in place to grow when the time is right, and that growth can add significant torque to our FFO per share profile. And as I said at the beginning of this call, although we're not immune to macroeconomic pressures, we believe our business is resilient and defensive, and it was designed to perform well in good and bad times. As we look ahead, we are perfectly positioned with an inflation-protected portfolio, a strong balance sheet, and ample third-party capital ready to deploy when we move back into a risk-on environment. I will conclude my prepared remarks by saying that I'm truly privileged to work alongside such a world-class team. Their hard work, dedication, resilience, and willingness to go above and beyond for our residents is unmatched, and their can-do attitude enabled us to produce another strong quarter in the face of a difficult macroeconomic environment. I will now pass the call back to Colby to take questions. With Sam, Kevin, and I will also be joined by John Allenswide, Annie Carmody, and Andrew Joyner to answer questions.
spk07: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause just for a moment to compile the Q&A roster. Your first question comes from the line of Shadni Luthra from Goldman Sachs. Your line is open.
spk00: Hi, good morning, everyone. Thank you for taking my question. I'd like to start with the flip that you guys saw between OPEX and CAPEX as expenses moved away, as the scope of the order increased and moved into capitalizing those expenses. So by when should we expect that relationship to normalize? How should we think about these line items going forward? And until when should we expect CAPEX to be elevated, when will OPEX, you know, look more like it normally should?
spk14: Danny, good morning. That's a great question. I'm going to pass that on to Kevin to elaborate.
spk04: Thank you, Gary. Yeah, you know, I think that we'll see things normalize again into probably the middle of next year, what's happened, and I think you've seen it as we've spoken. is we've just had people living in our homes longer, not only longer, 10 years, but they've also been living in a home 24 hours a day before they were living in homes eight hours a day, for instance. And so the turns that we're getting take our larger scopes and even the work orders that we get on RNM are more involved. We're still getting people that had not been calling us for two years. They were afraid to have people in their homes, on the property. Now we're getting those waves of calls, and the work orders are just more extensive. So I think that's going to continue definitely through the rest of this year. I would say for sure the first quarter of next year, probably part of the second quarter. It's hard to totally gauge it, but I would say by mid-next year, we'll be back to where our expenses will be tracking pretty much with inflation.
spk00: Got it. And for my follow-up, I'd like to sort of focus on the long-term outlook that you've obviously removed from this deck. But you mentioned during the call that you can still get to that range of core SFO 80 to 88 cents. Pardon me if I'm misrepresenting the numbers given in the past. But what would it take for you to get there? Like how much of a normalization in lending markets would we need and you know basically transaction markets to come back versus something else that we might be missing like help us understand how should we think about you know just beyond 2023 from here yeah i'll take that so look i think and just to to clarify you're talking about our soft guidance uh for 2024 which was 83 to 88 cents and
spk14: We're removing that because we think it's at risk. We're definitely in a very difficult and unpredictable macroeconomic environment. Nobody's really clear on the trajectory of the Fed. The market is reflecting that. And so we think it's just prudent to remove it at this time. It doesn't mean we can't achieve it. And I think that to answer your question specifically, what it would take is we'd have to go back to buying 2,000 homes a quarter, so 8,000 homes a year. we would have to see a slightly positive relationship or spread between acquisition cap rates and financing rates. Now, that doesn't necessarily take a lot to happen. So, for example, if you're buying at a six cap and home prices were to decline by 5%, that's a 30 basis points increase in your acquisition cap rate. Or if rents or NOI went up by 5%, that's another 30 basis points. Or if the Fed pauses or slows down, Again, financing rates maybe come in a little bit. So it doesn't take a lot. But in order to hit that level of acquisitions, 8,000 a year, we want to see a slightly positive spread between acquisition cap rates and financing rates. We think that makes sense. The next thing we need to see is strong same-home NOI growth. I think we will probably see that decelerate a little bit next year. But I think if we get hit high single digits, 7% or 8%, I think that helps us get there. And obviously, we want to get to JV3. That's a big catalyst for fee income. And we're close to that. We'd like to get to that, hopefully, by the end of 23 or into 24. And that gives us a chance to line up for, let's say, $0.83. But what I would say this, Channing, is that if we don't get it in 24, maybe we get it in 25. All we're looking at here is a period of deferral as we slow down and just wait for better opportunities to invest our capital. But once we do, there's significant torque in our FFO for share profile.
spk08: Got it. Thank you.
spk07: Your next question comes from the line of Mario Saric from Scotiabank. Your line is open. Hey, good morning, everyone.
spk11: Good morning. Just coming back to the 24 guidance question, Gary, what was the original acquisition spread that the team built into the 83 to 88 fund?
spk14: Yeah, so the last time we updated it, we were actually pretty neutral. So we were looking to buy homes at a 5.5 cap, and we were looking to finance that at just under 5.5, so maybe 5.25. And that would have got us there. But since then, you know, financing rates have kind of blown out to about six and a half percent. So that just doesn't work. Right. So we have to get back into more of a positive spread scenario. It's actually interesting, even with a little bit of negative leverage, which we don't like, you can still generate, you know, very strong IRRs. Right. So it's something it is interesting to kind of think about it from a private market perspective, because You know, if we could buy homes, let's say, at a six cap and we can grow that NOI at five or six percent. We've been doing that over the long term, obviously much higher now. But if you can grow that at five or six percent, you can lever to 60 to 65 percent and have neutral, even slightly negative leverage. And you assume, let's say, home prices grow by three percent a year. You can still probably generate about a 15 percent gross IRR. So that's the math that's happening in the background for our private investors. and kind of why they want to go faster. But we just think right now, Mario, it makes sense for us to slow down and wait for better opportunities ahead.
spk11: Okay, so I think a longer-term positive acquisition spread seems reasonable in terms of an expectation in the broader market once things settle out. There's an abundance of opportunities to buy homes when that happens. So presumably kind of the 8,000 homes per year that you need is really kind of up to you once those parameters are identified. So when you sit back and think about kind of the factors that you identified, what are you most concerned about in terms of assumption violation? Is it the same story in wide growth at 70%? Is it uncertainty about getting SFR-JV3 off the ground, given changes in appetite on the institutional side? What is the biggest risk?
spk14: Yeah, no, we feel great. I mean, we feel great about the underlying fundamentals of the portfolio and our operations. There's really no concern about, you know, same home NOI growth. I mean, we're not anticipating a significant or difficult recession. If we did, that might change things. But kind of from where we sit today, again, as we said in our prepared remarks, we think this is really more of a Wall Street recession. The real only level of uncertainty or concern is around the trajectory of interest rates, right? That's what's really holding us back. and that's holding the debt capital markets back. And that's why we're seeing dislocation. But once that dislocation goes away, and it will, I mean, this is not permanent. You know, sometimes when we're in the public markets, we have this feeling like things are permanent, but they're not, right? We will find equilibrium again. We'll find a point where acquisition cap rates are, you know, exceed, you know, your financing rates. And that's a signal for us. That's the green light to go much faster. And we do think that, you know, we're setting ourselves up for significant opportunity because, you know, home builders at some point we think are going to want to transact. Right now, there's a bit of price discovery going on. We bought some homes, discounted homes from builders, but we think there'll be more of that. We also think that a lot of the startups in single-family rental may have trouble getting financing, and so maybe some portfolios shake loose. And we want to make sure that we're ready for that because we think we can get those at discounted prices.
spk11: Got it. Okay. And then in terms of the the organic growth, like the 7% to 8% you're talking about, still very strong. A key element of that, I suspect, would be your renewal spreads, given turnover is where it is today. During the onset of the pandemic, you kind of froze those renewal spreads in response to a generational event. How should we think about those renewal spreads in the event of a slowing economy Not necessarily a hugely deep recession. In relation to the mark-to-market you have in the portfolio today, how confident are you that you can see kind of a mid-single-digit renewal spread in 2023?
spk14: We're confident. I think the main reason we're confident is, one, we still think we're going to see some level of inflation. It's going to be moderated inflation, but we think we're going to be in an inflationary environment. Therefore, it makes sense to have higher renewals. We've moved that up, you know, as you said, from about 0% in the heart of the pandemic to nearly 7% today. So that has moved up. And I think we're comfortable with where we are today. We think it makes sense. And it makes sense in particular given the loss to lease, right? The loss to lease in our portfolio maybe came down a touch, you know, when we comped against Zillow. You know, maybe last quarter was 20%. This quarter is 18%. But we still have a lot of room there. And so we think, you know, if we're passing on renewals in the 6% range, it's still a very good deal for our residents.
spk11: Okay, my last question just on coming back to the capitalization versus expense discussion this quarter. In terms of the 2.9% growth in expenses year over year, what would that have been roughly without changes to the capitalization versus expensing mix?
spk14: Yeah, the way we would think about it is if you look at the cost to maintain, which includes everything that we're expensing and capitalizing, that's up about 21%. And about 40% of that is related to inflation, you know, whether it's labor or materials. So that's up about 8%. That's the way I would think about it. I think into next year, you know, again, I'm sticking my neck out here. My best guess is that's probably, you know, that again moderates maybe to about 5%, right, from what we're seeing. So hopefully that gives you some better indication into the expense items.
spk08: Yep, that's perfect. Okay, that's good. Thank you.
spk07: Your next question comes from the line of Brad Heffron from RBC Capital Markets. Your line is open.
spk15: Hey, everybody. Thanks. You mentioned a potential further slowing in acquisitions in the MD&A. So I'm curious if you're still putting a significant number of homes under contract today and maybe what the current quarterly run rate is.
spk14: Yeah, so the homes that are under contract today are going to hit Q4. And so of the 850 homes that we're guiding to, a significant amount of those are already under contract. We are slowing down at this point into Q1, right? So I kind of I think if we think, you know, let's say 850 for Q4, I think probably a reasonable assumption for where we end up in Q1. We want to go slower. We want to conserve capital. But, you know, as we said in our prepared remarks, if we see a change in the environment, we might go much faster and we can turn on the dime. So I would expect, you know, slow, slower in a Q4, slower in a Q1. But then maybe by the time we get to Q2, maybe it's fast. We'll see.
spk15: Okay, got it. And then can you talk about that from the standpoint of your partners? Obviously, the flexibility makes sense from your standpoint, but you sort of walk through the math on how you could still generate a solid IRR for your partners. So how long are they willing to sort of be flexible and how does, you know, waiting longer impact the decision on JB3?
spk14: Well, it's unusual for them. They're not used to, you know, managers or GPs saying, hey, you know, we want to slow down because typically private managers want to put the capital out and are incentivized to do that from a fee perspective. So I think they were maybe a little bit surprised, but I think they would agree with us that it makes sense, and they're very supportive and patient. We've got no issue getting the capital out. I think for both funds, HomeBuilder Direct and JV2, the investment period's in 2024, so we've got lots of time to put that capital out. And they're ready for us when we complete the investment period for the next fund. They've all expressed an indication to us that, They're very happy with the program. They really like SFR, and they're supportive of us re-upping and raising new funds. So this is a Tricon decision. It's not a partner decision. We want to go a little slower. We have discretion to do that. They're supportive, and we know they'll support us when we want to go a lot faster.
spk08: Okay. Thank you.
spk07: Your next question comes from the line of Nicholas Joseph from Citibank. The line is open.
spk17: Thanks. Let me just on further to capital allocation. How are you thinking about the share repurchase program and balancing that against kind of current leverage, which I recognize is within your target range, but a bit higher than what we see with many of your single family peers?
spk14: So the capital we received or the proceeds we received from selling U.S. multifamily portfolio has been really largely allocated to debt repayment. So that's the first thing we did. We think that makes a lot of sense. It obviously improves our leverage metrics, you know, subsequent to quarter end. And then we have a little bit of capital left over, and some of that capital will be for, you know, buying back our stock. We started to do that. We think it's more of a signaling effect, Nick, than anything else, the buyback. We think it makes sense. I mean, to be clear from an economic perspective, it's probably neutral. We're probably neutral between buying back our stock and acquiring homes given the fees we earn. But again, right now, we pay down the debt. We're waiting. We're going to use some money to buy back stock. And then we're going to wait for better opportunities to grow faster again.
spk17: Is there additional debt that could be easily paid down or are there prepayment penalties associated with them? I'm just trying to get a sense of kind of the cost of paying debt.
spk12: yeah yeah i'll hand that over to shannon to talk about kind of the near-term maturity uh scheduling whether this is behind you guys you could uh as you can see there's nothing maturing in 2022 or 2023 we paid back most of that in addition to that uh 8.3 times net debt to adjusted even that was it as a q3 after we sold the portfolio and used the proceeds to repay back debt our new number is 6.8 times so i think that's the number to kind of look at as well We do have the ability to pay back some of our debt that's maturing in 25 and 26, but we really think it's more prudent to save our capital, as Gary mentioned, for acquisitions and growth potential and some potential deals coming down the pipeline. And we also have, you know, we just mentioned as of October, we did refinance one of the deals to be a floating rate debt that matures in 2027. We have the ability to refinance that also with no defeasance cost, but we put a cap in place to also hinder the upside. So we think that we're in a good position on that metric as well as our net debt adjusted EBITDA. Remember, our goal that we set short term was eight to nine times, and we're going to stay within that range.
spk17: Thanks. That's helpful. And then just in terms of retained cash flow, right, you have a lower payout ratio.
spk14: um you know relative to peers obviously not a us reit um would that incremental generated free cash flow also be used for buybacks i don't think so i mean i think we've got enough cash left over now to implement um you know the ncib which was to buy two and a half million shares so we'll get through that two and a half million shares and then we'll reevaluate i think the cash that the business is throwing off you know probably will be used for acquisitions right just at a more moderate pace
spk08: Right. Got it. Thank you. Okay.
spk07: Your next question comes from the line of Adam Kramer from Morgan Stanley. Your line is open.
spk01: Hey, guys. Thanks for the question. Look, I just wanted to ask about kind of the JV, just kind of their share versus your share, right? I think it's held in fairly consistent. Your guys' kind of share of acquisitions is about 30%. Another way to continue with external growth is to scale down your proportionate share of future acquisitions. Wondering what your appetite is for that and if there's any change in your thought process around that.
spk14: It's a great question, Adam. We go back and forth on this a lot. We arrived at the 30% or one-third ratio because it generates significant NOI. And we want our shareholders to get the benefit of the NOI. And if you then look at the mix of revenue, it's about 80% NOI and 20% fees. And we kind of like keeping it in that kind of ratio. But, you know, look, if we were in an environment where, you know, where the stock price is at and, you know, it's very difficult to raise money, we might look at going with a slightly lower co-investment. I can tell you that. Our partners would have no issue with it. We're the ones who want the one-third co-investment. They're not used to seeing that. They're used to seeing much lower co-investment ratios. So it's not an issue from a capital raising perspective in the private markets. It's more of a Tricon request. So we do have flexibility to go lower there, but it probably wouldn't be our preference. You know, there's other options. For example, we could also think about contributing some of our homes in our wholly owned portfolio in lieu of cash. So that's another way to get to JV3 Quaker. We do have some flexibility if the markets aren't there, but it's something we'll continue to think about.
spk08: Got it.
spk01: That's really helpful. And just looking at kind of the October leasing metrics, look, understandably, right, kind of some seasonality here in kind of the new number. But just wondering, you know, kind of what you're seeing on the ground, you know, in terms of kind of further deceleration to the new lease growth as we get to the holidays. Recognize, you know, occupancy stabilization is important. I know you mentioned that in your remarks, Gary, but we'd love to just kind of hear what you're seeing in the new lease metric as we kind of get into November and towards your end here.
spk14: Okay, I'm going to pass it on to Kevin to give a little more detail. Okay, thanks.
spk04: Yeah, I mean, really what we're seeing right now is really back to seasonality. You know, it's something that we hadn't experienced for the last two years in the pandemic. And we're just going back to normal times. In pre-pandemic times, we would experience new lease rent growth decelerate sometimes up to 300 basis points from what it was in July and August into September, October, November. So that's what happened. We got occupancy protective in late August, September, to try to push our occupancies up so that homes wouldn't be vacant throughout the winter. And so we took our foot off the gas and we accomplished what we needed to. We were 98.2 in October for the month. We're 97.9 today. So we can be aggressive, you know, as aggressive as we can be in the winter. So, you know, I think, you know, we follow, you know, past patterns. You know, we will see a deceleration still a little bit more, you know, the coming months. And then it'll pick up again, you know, in the springtime. So it'll just follow more cyclical patterns that we've had before. You know, we're fortunate still to have that 15 to 20% loss to lease to fall back on. You know, we've been able to, our renewal growth, we've been able to hit that to the very top of our upper limit of our self-governance. And the thing to remember is, I mean, we're still, the demand side is still super strong. We have more demand than we had pre-pandemic, say 2019, by almost twice. There's still 4 million housing units short. And if you think about our industry, our average age cohort is 38 to 39 years old. That's the leading edge of the millennial generation. The bulge of that millennial generation is turning 30 to 31. So that leaves like 8 to 10 years of massive demographic strength that's coming our way. So I feel really confident with where we're going, our business. It's going to be back to some of the cyclicality, but it's staying strong. And it's a really great asset class.
spk08: Great. Thanks for the call, guys. Really appreciate it. Thanks, Adam.
spk07: Your next question comes from the line of Jade Romani. Your line is open. Thank you very much.
spk05: A projection for HPA for 2023 full year for the overall market, not necessarily TICON's portfolio.
spk14: Jay, thanks for the question. You know, I got to tell you, I'll do my best, but I think if I could truly predict HBA and interest rates probably wouldn't be sitting here, although I think we're doing okay. I'll try my best. Look, what I tell you is that it's really surprising that with mortgage rates moving up from the twos to, you know, over 7% in a matter of months, that home prices have been so stable. It truly is. And I think it, Kevin just talked about it. It's an indication of how tight the supply is in the market. There's just no supply. And in this type of environment, when mortgage rates move that fast, the market gets shocked and people stay in place. They're not going to sell their homes. Because why would they sell their home if they've got a 2% or 3% mortgage? They're not going to take on a 7% mortgage. That just doesn't make any sense. So you end up getting a lot less listings and less supply, and that keeps prices steady. And so we've probably only seen home prices drop 3%, maybe 5% from the peak in our 21 markets. That's it. And by the way, we have better data than almost anyone. I mean, virtually no one's buying as many homes as we are in the country. So we've got very good data on home prices. But again, they barely come off the peak. And, you know, into next year, you know, our team thinks maybe a little bit more softening. Maybe they come down another 5%, maybe. But we're not anticipating anything significant, right? And if they do come down 5%, by the way, that's an opportunity for us because it means like on a 6% cap rate, again, we get another 30 basis points, you know, positive on the spread, which is good. But we're expecting things to be fairly steady, maybe down a little bit next year.
spk05: Thank you very much. On the CapEx side, Tricon seems to have bucked the trend of what peers have seen with much higher R&M, much more inflation pressure, and also the accrual issue on property taxes. But yet the CapEx, even on a store basis, was up dramatically. So some might interpret that as just moving things around, capitalizing versus expensing. But are there any specific items that really triggered that shift? Can you just give a little more color on that?
spk14: Yeah, I mean, I think for sure, and we'll let Kevin answer the question on CapEx. And John, maybe you want to weigh on kind of what we're seeing with property taxes. We haven't talked about that yet, but I think, yeah, there's definitely some of this is geography, right? Because, again, if you look at the cost to maintain, it is up 21% year over year, and that did impact our AFFO. Kevin, maybe you want to kind of dive in a little bit and break that down for Jade, and then John, over to you on property tax.
spk09: Sure.
spk04: Thank you, Gary. Yeah, so as Gary was saying, our cost to maintain, which is really more of a holistic look of what we're spending, is up 21%. You know, 40% of that roughly is due to inflationary, inflation on trades and materials. About 25% or a quarter of it is due to higher volume of work orders. And again, I talked about it a little bit earlier in that we had a lot more people calling and allowing us into their homes, allowing us onto their properties now that, you know, the pandemic is in the rear view mirror. So we had, you know, a lot more work orders than we did in the previous period. And then it was the nature of the work orders because we hadn't been in the homes, you know, kind of a backlog and people not calling us. When we got into the homes, the nature of the work orders were just more expensive, which hit capitalization ratios. You know, our total cost to maintain, you know, I would say it's going to be $3,200 to $3,300 in the near term. And then once we get through this, it should then drift back down, you know, again, maybe mid-next year into the $3,000 to $3,100 cost to maintain. And that way, that encapsulates, regardless of the buckets or the geography, our total cost will drift back down as we get through some of these harder turns and some of the work orders. But things like HVAC, plumbing, deck repairs, I mean, they were all just more expensive. And on the turns, it was flooring, landscaping, interior paint. We just did a lot more of it due to people having lived in their homes 24 hours a day and staying in their homes longer. Hopefully, that's a little bit more color for you.
spk05: On the work order side, was it more work orders generated by existing tenants than on homes that were turning because the turnover ratio declined year on year?
spk04: yes it's definitely on occupied homes for the recurring capex the occupied homes um really contribute almost two-thirds of the recurring capex so it's people that are there that are calling us in to to do work in their homes okay thanks very much okay go ahead john you want to talk about the property taxes yeah sure um and i think we touched on this a little bit during the call but you know we tend to take a very conservative approach
spk03: to property tax accruals, especially in times where we've seen rapid home price appreciation. You know, thus far in our portfolio, we've seen essentially all of the property tax bills come in in Georgia, Arizona, Nevada, California, and about 60% of Florida. We're still waiting for the rest of Florida and most of Texas. But I would say for the bills that have come in so far in aggregate, we're probably a little bit on the better side of our accrual due to that conservative approach that we took at the beginning of the year. Going into Q4, we're feeling good to very good about where we stand on property taxes.
spk08: And again, that's just because of our approach. Thank you.
spk07: Your next question comes from the line of Stephen McLeod from BMO Capital Markets. Your line is open.
spk06: Great. Thanks. Good morning, guys.
spk08: Hi, Steve. How are you?
spk06: Good, thanks. How are you?
spk08: Good.
spk06: Just with respect to the securitization market, you know, Gary, you talked about just sort of it's frozen up a little bit. So just curious, how reliant are you on securitizations to create room on your facilities to fund future single-family rental acquisitions?
spk14: Yeah, great question. I'm going to have Sam answer that.
spk12: Hey, Steve, how are you? Look, the debt markets are very volatile today. I know the last securitization deal that we did was in July was up 5.41%. That same deal today would be closer to 6.5%. The AAA spreads are close to 200 to 225, so that's why we're saying we're taking a pause off securitization. However, during this time where securitization market is not available, we've seen a lot of new entrants of floating rate balance sheet loans that are available for SFR. which provide a short term bridge until less volatile markets. You saw us do that in October where we did a term loan. It was a five year term loan, extended, cleared out our warehouse facilities, moved some of that debt, even though variable to mature in five years from now, kept the flexibility to refinance at any time we want and put a cap in place. So I know it's not fixed, but it's quasi fixed in the sense that we have an upper limit. So that basically freed up some of our stuff. Then we're seeing a lot more entrance of floating rate balance sheet loans available to us now.
spk14: Yeah. And what I just expand on that to say that out of every crisis comes an opportunity. In the past, in the really good times, we were just going directly to the CMBS or securitization market. And now we've really done a great job, I think, diversifying those financing sources. and now have life codes that want to lend to us. And the last deal that Sam talked about is from Nomura, which is an Asian bank. So we're seeing a proliferation of lending sources, which just over time makes the industry better and helps it mature.
spk06: Okay, great. Thank you. And then just with respect to the SFRJV3, are there any limiting factors on the horizon that you could see that you see that could potentially limit you know, funds being raised for this fund?
spk14: No, I mean, really, the only thing is we got to get through JV2. So it's just really that it depends on the pace of our acquisitions. You know, how fast do we go in 2023? We talked about going a little slower in the first half and maybe a lot faster in the second half. So it really depends on that pace. You have to invest the capital and complete the investment period really before we can raise the next fund. Those are the limitations. But We're confident that whether we go slower or faster, this is likely going to be a later 23 or 24 event. And as I said before, our partners have expressed willingness and support to raise another fund.
spk06: Okay, great. Thanks, guys.
spk08: Appreciate it. Thank you.
spk07: Your next question comes from the line of Tal Woolley from National Bank Financial. Your line is open. Hi, good morning.
spk13: Just wanted to ask quickly about performance fees. I think if, you know, you had sort of been continuing at the same clip in terms of purchasing, you probably would have finished out JV2 early in 2023. Would there have been any performance fees recognized at that point? And do you have a rough idea of what the quantum that would be?
spk14: No, because, well, yeah, we do have a schedule in our supplemental, which goes through the performance fees. And I think that number is, what, about $280 million. Is that right, Wasemi? That's about $280 million. So that number's in there. That does include the sale of the U.S. multifamily portfolio. So the $100 million is in that $280. But you could take a look at that in the supplemental towel. But no, I would say that the U.S. multifamily sale was unusual. because typically what happens is we have to wait to the end of the term in order to generate the performance fees if we're in the money. And the terms on the funds are typically 8 to 10 years. That was the case of the U.S. multifamily portfolio as well. We just made a decision with our partners to exit earlier, and that's what triggered the performance fees. It was the actual sale or disposition. So we don't really, in terms of JV1, we don't expect any performance fees until 2026, and JV2 would be 2028.
spk08: Perfect. Thanks, gentlemen. Thank you. Your next question comes from the line of Brad Sturges from Raymond James. Your line is open. Hi, Brad? Brad? Hey, sorry. Unmute myself.
spk16: Just on the Toronto development pipeline, obviously leasing demand in Toronto has been quite robust and market rent growth has been really accelerating. Can you just talk about how you're expecting returns to look like relative to initial underwriting expectations, just given some of the cost inflation you're seeing relative to the market rent growth that's currently happening in the market?
spk14: Yeah, good question. I'm going to have Andrew join and break that down for you.
spk02: Hi, Brad, we've got a very real time test tube. We just launched the Taylor project at King and Spadina last month. And just to share how leasing is going, we're about a third leased already. We're already at our March 2023 absorption target. So demand is incredibly strong. And I think that's going to continue just given the favorable rent versus own dynamics in this higher rate environment. and Canada ramping up its immigration now to 500,000 a year each year through 2025. So we're seeing really robust growth. And returns? You're talking about yields? Yeah, you know, we're going to deliver the Taylor north of five and a half percent in terms of development yields. And, you know, I think we're going to continue to, you know, have five handles on our projects that continue to deliver in particular 2023 is Canary Landing comes online as well as the IV. We're well ahead of underwriting in terms of rental growth and clearly absorption demand has exceeded our expectations.
spk14: Yeah, I would just add, I would say that projects are taking a little bit longer than we think based on underwriting. Costs are definitely up, although we do a great job in locking in a lot of those costs up front. But revenues are also a renter above what we underwrite. So all in all, I mean, we're looking to be in really good shape, and I think we're going to have some really tremendous value creation from this portfolio. So we feel great about it.
spk16: Okay, that's great. Just to go back on the acquisition program for SFR, you walked through the dynamics of moving from yellow perhaps to green light. On the flip side, you know, what would it take or what's the trigger to go to red and maybe, you know, made me more prudently pause the program.
spk14: Yeah, I mean, red would just be, you know, the Fed going harder, even harder than where they're at. They continue to tighten faster. If they tighten faster or they go longer, you know, if the obviously the Fed funds rate is higher than what we think, then that that would be a signal for us that we've got to slow down more. Right. It's you know, it's really it's this is all predicated on the trajectory of the Fed. and ultimately where we can finance and take out the homes we're acquiring on our warehouse facilities. Those are the critical decisions. And so if that gets tougher, then we're going to have to go slower. Thanks, Sam.
spk08: I'll turn it back. Thanks, Paul. Okay.
spk07: There are no further questions at this time. I'll turn the call back over to Gary Berman, President and CEO of Tricon Residential.
spk14: Thank you, Colby. I'd like to thank all of you on this call for your participation. We look forward to speaking with you again in the new year, discuss our Q4 and year-end results.
spk08: This concludes today's conference call.
spk07: You may now disconnect.
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