Tricon Residential Inc. Common Shares

Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Residential's first quarter 2023 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 at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I'd now like to turn the conference over to your speaker today, Wojtek Nowak, Managing Director of Capital Markets. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Tricom's first quarter results for the three months ended March 31st, 2023, which were shared in the news release distributed yesterday. I'd like to remind you that our remarks and answers to your questions, they 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. 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 to our website. You can find both the webcast registration and the presentation in the investor section of Tricon Residential dot com under news and events. With that, I will turn the call over to Gary Berman, President and CEO of Trigon.

Thank you, Wojtek, and good morning, everyone. We've had a great start to 2023, and I'm excited to discuss our Q1 results with you. Let's turn to slide two so I can share with you our key takeaways for today's call. First, we delivered another solid quarter of operational performance with no evidence of economic weakness in our single-family rental business. We reported same home NOI growth of 6.2%, a near record NOI margin of 69.5%, high occupancy of 97.3%, low turnover of 16.8%, and consistently strong blended rent growth of 7.2%. Second, we continue to grow responsibly, acquiring 409 homes during the quarter. In response to significant demand for our homes, we plan to double our acquisitions in the second quarter as the MLS listing volume increases during the spring selling season. We remain committed to growing our business over the long term in a strategic and responsible way. Third, we are focused on process improvement and cost containment during this period of slower growth by driving cost savings in corporate overhead and property operating expenses. At the same time, we strengthened our balance sheet by refinancing over 100 million of near-term maturities on a proportionate basis and reducing our floating rate debt exposure to 26% from 29% last quarter. And finally, when market conditions do improve, we are well positioned to grow with about 55 million of annualized ASFO less dividends and 2.6 billion of available capital, including liquidity on our balance sheet and third-party unfunded equity commitments. On slide three, as we spoke about it on Investor Day in April, we continue to see a major valuation disconnect between our share price and our fundamental value drivers, such as book value for share and NOI growth. When we take a step back and look at it, our net operating income has grown at a compounded rate of 18% per year since 2019. Our book value for share has also grown by 16% per annum since 2019. Interestingly, though, our stock price is now back to 2019 levels, which doesn't make much sense when you look at the value that has been created since that time. So now let's look at the interplay between private and public market cap rates on the right-hand side of the page. What's different about single-family rental when compared to other commercial real estate sectors is it's one of the largest, most liquid asset classes in the world. There's no price discovery per se, and there's no bid-ask spread. This is because every single day there are thousands of transactions to validate pricing. That's why we feel confident about our own internal valuation of a 5% implied cap rate based on stabilized NOI and 6% when including the loss to lease in our portfolios. Green Street arises similar valuation or implied with average cap rate at 4.7% for our market coverage through the cap rate observer publication. It's true that right now we're acquiring homes close to a 6% cap rate, but that's only because we're buying in small volume. If we wanted to go back to acquiring a large volume of homes every year, or let's say eight or 10,000, we believe the cap rate would be closer to five and a quarter percent. So let's compare that with the public market. Tricon is currently trading at a 7.5% implied cap rate based on stabilized NOI. If you were to include the loss to lease in our portfolio, we're closer to 9%. This shows a massive disconnect between where the public and private markets are trading. We think that over time the public markets should catch up. There seems to be a lot of value to unlock for our shareholders, and we believe that this is a tremendous opportunity to own Tricon for those that have a longer-term investment horizon. Moving to slide four. Demand for our rental homes continues to be robust. To show this, we focused on two key indicators, monthly leads and monthly applications per available home. You can see that seasonality was more pronounced in Q4 than in prior years, with leads and applications dipping. However, the rebound in Q1 and into April has been very healthy, with leads and applications even higher than what we were seeing before the pandemic. This makes for a very supportive demand backdrop as we head into the busy spring market. Turning to slide five, you can see that the rental supply has been increasing post-pandemic. We think this is partly due to the lock-in effect of low in-place mortgage rates, which is incentivizing some homeowners to rent out their homes rather than selling them. What's interesting is the supply looks like it's starting to stabilize at levels that are slightly below what we saw pre-pandemic. Anecdotally, this finding agrees with research that was recently published by the National Rental Home Council, showing that over the past decade, the proportion of single-family rentals within the overall single-family housing market has actually shrunk by 1.4%. When taken together, the combination of rising demand for rental housing and stabilizing supply of rental homes provides a compelling backdrop for our business. On slide six, you can see how this translates into rank growth, which remains well above pre-pandemic levels that were already strong to begin with. Our rank growth in April remains resilient and is slightly ahead of Q1, featuring 11.9% growth on new leases and 6.5% on renewals for blended rank growth of 7.6%. Turning to slide seven, let's talk about the general state of the housing market and what the opportunity set looks like for acquisitions. Within our target markets, prices of homes that meet our buy box have declined roughly 4% year-over-year, while rents are actually up 3%. Together, this combination of moderated home prices and slightly higher rents has led to an expansion in cap rates of about 30 basis points. While this is directionally positive, MLS listings volume in our market has declined roughly 20% year-over-year, given homeowners' reluctance to sell and forego their attractively priced in-place mortgages, thereby reducing our buying opportunity. The good news is both prices and rent seem to have stabilized since the beginning of the year and appear to be moving back up. Moreover, listings volume has increased roughly 20% since January and should enable us to acquire homes at a faster pace as we head into the spring and summer months. As you can see on slide eight, Q1 was a relatively slow quarter for Tricon's acquisitions, but it's on target with our expectations. As we look out to Q2, we expect seasonally higher listing volume to provide the opportunity to double our acquisition page from Q1 or remain disciplined in our acquisition criteria. Recall that we are targeting cap rates of 5.5% to 6%, albeit with a preference closer to 6% to match our expected cost of debt financing and to help us generate the mid-teens IRRs we expect in our joint ventures. That being said, foreign costs come down, and we were to shift our criteria to a lower target cap rate, let's say five and a quarter to five and three quarters percent, we could buy a lot more homes. With that, I'll now turn it over to our CFO with Sam Francis to discuss our financial results.