Tricon Residential Inc. Common Shares

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Residential fourth quarter 2022 earnings 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. Thank you. Wojtek Nowak, Managing Director, Capital Markets. You may begin your conference.

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Tricom's fourth quarter results for the three and 12 months ended December 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 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 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, and good morning, everyone. 2022 marked another record-breaking year for Tricon as we adapted to a difficult macro environment to deliver on our business plan, implement bold strategic initiatives, and go above and beyond for our residents. We owe our exceptional performance to our world-class team and their unwavering commitment to our residents and the communities we serve. As a people-first organization, our goal has always been to prioritize our employees, so they in turn can provide our residents with inspired customer service. We know that when our residents are fulfilled, they rent with us longer, treat our properties like their own, and refer other customers. On slide two, I wanted to highlight that I've taken time in my 2022 annual letter to shareholders to explain how this virtuous philosophy of doing business leads to strong operations and ultimately good financial results. The letter also provides some interesting insight into project journey. or the sale of our U.S. multifamily business, our learnings from managing both U.S. multifamily and single-family rental property operations, the benefits of having one foot in the public market and one foot in the private market, how we can use technology to make our business more efficient and improve the customer experience, and our belief that a kinder form of capitalism is the best approach for managing rental housing over the long term. It makes for some decent bedtime reading. I hope you have time to review it when it's released later this week. Let's turn to slide three so I can share with you our key takeaways for today's call. First, we delivered another rock-solid operational quarter with single-family rental same-home NOI growth of 9.7%, a record-high NOI margin of 69.8%, near-record occupancy of 98%, record-low turnover of 12.2%, and consistently strong blended rent growth of 7.4%. Second, we remained disciplined on acquisitions, and grow our portfolio by selectively acquiring 815 homes during the quarter. Although we are starting to slow acquisitions into 2023, 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. Third, we are focused on cost containment during this near-term period of slower growth by driving cost savings within corporate overhead and property operating expenses. At the same time, we are encouraged by green shoots emerging in the debt markets. As dislocation in the securitization market fades and pricing improves, we may be able to accelerate growth later this year. And finally, when market conditions do improve, we are well positioned to grow with nearly $3 billion of available capital, including liquidity on our own balance sheet and third-party unfunded equity commitments. What I love about our model is that we can scale our acquisition program up or down very quickly depending on market conditions, and we will lean in and deploy that capital responsibly and when the time is right. On slide four, we reflect on the past year and our first foray into setting guidance. We are proud to report that we delivered on what we promised and largely exceeded our initial financial targets. By all accounts, 2022 was a fantastic year for Tricon, with core FFO per share of 76 cents and same home NOI growth of 10.4%. both well above the high end of our initial guidance. In a period of capital market uncertainty and lower transaction volume, we were fortunate to sell the remaining interest in our U.S. multifamily portfolio, generating $319 million of gross proceeds to Tricon and simple thing, our business in the process. We also acquired a record of more than 7,200 homes, largely one at a time, expanding our portfolio by over 23%. If our cost of capital hadn't deteriorated in the second half of 2022, this number would have been even higher. And we recently commenced lease up on our second Canadian multifamily property, the Taylor, which is tracking months ahead of schedule with over 41% of units leased at an average monthly rent of $4.42 Canadian per square foot as of December 31st, 2022. Last but not least, we continue to prioritize the well-being of our residents by introducing an industry-leading bill of rights, the first of its kind for U.S. single-family rentals, outlining our commitment to providing quality move-in ready homes with caring and reliable service. We also launched our flagship Tricon Vantage program, a suite of programs and resources available to our U.S. single-family residents to help them realize their financial goals, including the goal of homeownership if they so choose. As you can see on slide five, this year's accomplishments have added to a long track record of creating value for shareholders. Through our consistently strong operations and active acquisition program, We've grown our proportionate NOI and book value per share at a compounded annual rate of 17% and 18% respectively. It's clear that real cash flow is driving and underpinning our book value, and we think that a serious disconnect exists between our depressed stock price and the fundamental value of our underlying real estate and operation. We know that the markets can be inefficient in the short term, but over time, this value will surface and be realized for our shareholders. Let's take a look at the current state of our business fundamentals in slide six. The demand for our rental homes continues to be very strong, with leaves for available home well above pre-pandemic levels. At the same time, there is evidence of higher rental supply in our markets, partly caused by would-be home sellers opting to rent out their homes given the challenging mortgage environment and having attractive legacy mortgages locked in place at very low rates. Taken together, the combination of strong demand but higher supply of rental listings over recent months has contributed to a moderation of rent growth on new move-ins. although rent growth in our same home portfolio remains strong by historical measures and has shown signs of strengthening into 2023. We believe we have a long runway to capture industry high releasing spreads, given the 15% embedded loss to lease in our portfolio, which we've accumulated by self-governing on renewals over the past few years. And so we feel good about our revenue trends for the year ahead and believe we can grow same home revenues by six to seven and a half percent in 2023. As we turn our attention to expenses on slide seven, we remain focused on cost control, especially during this period of slower acquisitions. We see opportunities on two fronts. One is leveraging our existing corporate overhead platform, which we've expanded over time to be able to handle a much larger number of homes. This means being very prudent with hiring and G&A costs, while earning incremental property management fees as we grow and complete the investment program for our JV partners. With this, We expect to save $0.03 of core FFO per share in corporate overhead expenses this year compared to last. The second opportunity is to capture efficiencies of scale in our SFR portfolio by bringing more work orders in-house, leveraging our national procurement programming, and using technology to become more efficient, which should help us contain same-home expense growth in the range of 6% to 7.5% this year. Turning to external growth on slide 8, let's talk about what the opportunity set looks like for acquisitions. Within our target markets, home prices that meet our buy box criteria have declined by over 8% for mid-year 2022 peak, where rents are down about 5% and stabilizing into January. This is resulting in a slight expansion of acquisition cap rates. At the same time, MLS transaction volume is down materially, which is largely related to the lock-in effect caused by existing homeowners not wanting to trade out of their low mortgage rates. This makes it more difficult for us to acquire a meaningful number of homes that meet our cap rate criteria, which is currently in the 5.5% to 6% range, albeit with a preference for cap rates closer to 6%. As you can see on slide 9, staying disciplined with this criteria means that we often need to bid for homes at a meaningful discount to the asking price to make the math work. Consequently, we end up buying fewer homes today than in the past, often losing out to individual homebuyers who do not buy homes with a cap rate in mind. That being said, if we were to shift our criteria to lower target cap rates, let's say 5.25% to 5.75%, we could buy a lot more homes. And so you might be asking, what's the magic behind a 5.5% to 6% cap rate? If we step back for a moment, our general strategy is to acquire homes at cap rates that are equal to or greater than our cost of debt financing in order to generate potential low-teen gross IRRs in our JVs and potentially higher IRRs for Tricon when we factor in the fees we earn. So it's really the cost of available debt financing that dictates our acquisition parameters. With that, I'll turn it over to Wasanth to talk about where the debt markets are today.