Tricon Residential Inc. Common Shares

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.

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.

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.