Tricon Residential Inc. Common Shares

Good day. My name is Karen, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Tricon Residential Third 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'd 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 the pound key. I would now like to hand the conference over to your speaker today, Votek Novak, Managing Director of Capital Markets. Thank you. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us to discuss Tricon's third quarter results for the three months and nine months ended September 30th, 2023, 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 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 through our website. You can find both the webcast registration and the presentation in the investor 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. Before we start, I want to take a moment to thank our exceptional team who play a critical role in the strong results we're presenting to you today. Our team's unwavering dedication to our residents and the communities we serve is fundamental to our culture, and I believe it's one of the key reasons our company continues to perform well quarter after quarter. Let's turn to slide two so I can share with you our key takeaways for today's call. First, we delivered another great quarter of operational performance with same home NOI growth of 6%, NOI margin of 68.5%, occupancy of 97.4%, turnover of 18.8%, and consistently strong blended rank growth of 6.8%. Second, as always, we remain laser focused on driving sustainable long-term shareholder value amidst the volatile capital markets backdrop by recapturing our SFR loss to lease, driving overhead efficiency and advancing our Canadian multifamily developments. Third, we remain disciplined with acquisitions. We acquired 410 homes in the quarter, largely through our capital recycling program, where we're essentially selling at a low 4% cap rate and reinvesting the capital at six caps. I'm also happy to report that we've now substantially completed the investment programs of SFRJV2 and HomeBuilder Direct Joint Ventures and are now gearing up to launch JV3. In terms of guidance, we've maintained our full-year outlook for core FFO per share of $0.55 to $0.58, tightened our same-home NOI growth to 6% to 6.5%, and slightly lowered our full-year acquisitions guidance to 1,850 homes. And finally, we are well positioned to grow with about $60 million of annualized AFFO-less dividends, $433 million of liquidity, and most importantly, strong interest from private institutional capital to invest in SFR. Institutional investors remain enthusiastic about SFR and are increasingly viewing the sector as a core or core plus investment opportunity, which should enable us to raise strategic capital with lower leverage parameters and a higher for longer environment. Turning to slide three, I want to step back for a minute and touch on the compelling fundamentals that underpin our SFR business. While we are clearly operating in a difficult macroeconomic environment at this time, we believe SFR remains one of the most attractive real estate investment opportunities this decade. The story is very simple. Demand for housing is outstripping supply. Demand is being driven by demographics, and right now the millennial demographic cohort is in its prime years of household formation. Millennials represent a larger group than the baby boomers, and they need quality, affordable homes in good neighborhoods as they form their own families. Meanwhile, the supply of new housing is not keeping up with demand. Ever since the great financial crisis, America has been underbuilding homes, and the housing intensity, as measured by housing starts per thousands of persons, remains below prior recessionary levels. As a result of this demand-supply imbalance, homeownership has become less accessible, as shown in slide four. Over the past 20 years, the median price of a home in the U.S. has grown from 3.9 times average household income to a far less affordable 5.2 times average household income today. This increase was mitigated somewhat by ultra-low interest rates over the past few years. but now that's no longer the case as the 30-year mortgage rate has skyrocketed towards 8%. In such a distorted environment for homebuyers, the case for rental is more compelling than ever. In fact, what's astonishing is that owning a single-family starter home today costs $1,000 more per month than renting the same home. This is what makes single-family rental so compelling for many American families. So turning to slide five, it's no wonder that SFR operating fundamentals remain so solid. Some might ask, Why buy when you can rent a professionally managed home for much cheaper? What's interesting is that notwithstanding the turbulent times we are living in, SFR operating performance remains remarkably steady. Key indicators including NOI growth, occupancy, and turnover remain robust and consistent when compared to these same metrics two years ago, when we were emerging from the COVID pandemic and enjoying extremely low interest rate environment. Whereas SFR is steady as she goes, housing affordability has eroded significantly, and the capital markets backdrop has been dismal. The broader U.S. REIT index is down by over 30% in two years, while the U.S. five-year treasury yield has more than quadrupled. In this very dislocated environment, we're doing what we always do, focusing on the things we can control. First on the list is acquisitions. As you can see on slide six, we're being thoughtful with acquisitions and are focusing our efforts on our capital recycling program rather than growing the portfolio. We've been able to sell older homes in less desirable locations at very attractive cap rates near 4%, and recycle the proceeds to acquire newer vintage homes in our core markets that address the growing demand for our renters, require less capex to maintain, and are going in yields of 6%. So far this year, we have sold 533 homes with gross sale proceeds of $191 million, and have in turn acquired 546 homes for a gross investment of $170 million. And by matching dispositions with acquisitions, We expect to save $20 million in tax expenses here through a tax-efficient 1031 exchange program. We remain focused on external growth over the longer term, but won't ramp up acquisitions again until we officially launch our new SFRJV. In a period of slower acquisition growth, we've been able to focus more on the revenue and expense performance of our existing portfolio. A key opportunity in this regard is the embedded loss to lease, which we discussed on slide seven. Our policy of self-governing on renewals coupled with longer resident tenure has resulted in an estimated loss to lease of about 11% across our total proportion portfolio and around 14% in our same home portfolio. Most of that loss to lease is sitting with residents that have been in our homes for three years or more and represents an opportunity of about $40 million in annualized revenue. We haven't captured much of this loss to lease on recent lease tradeouts because these same residents are staying in our homes longer and represent only one-third of our turnover in a given quarter. Our plan to recapture this sizable mark-to-market is to push renewal rent growth, which has been trending up post-pandemic, and to responsibly raise rents above our self-imposed caps in situations where residents have significant loss to lease. We're still being thoughtful in our approach with residents, but are seeking to strike the balance when the delta between existing rent and market rent is large. But more importantly, We believe the loss-to-lease opportunity provides a multi-year runway for sustained rent growth on renewals, which is the key driver of overall revenue and NOI growth for Tricon. Looking at slide 8, I want to point out that the long-term benefits of our resident-friendly approach to revenue management. Over time, our renewals have been below those of our industry peers, but new lease growth has been stronger and turnover has been much lower, resulting in low turnover costs. These factors have combined to produce industry-leading same-home NOI growth over the longer term, which we believe is the crux of what drives sustainable long-term shareholder value. And finally, in thinking about the things we can control, I'd like to share with you on slide nine an update on our Canadian multifamily built-to-core portfolio that continues to evolve and achieve new milestones. I'm delighted to announce that the Taylor achieved stabilized occupancy of over 98% in the quarter and 100% occupancy in October, reflecting its resort quality amenities, exceptional living spaces, and sustainability leadership, among other features. I'm also thrilled to introduce our latest project, the Ivy, which will begin its initial occupancy by the end of the year. And finally, the launch of Maple House continues to be extremely successful, with 30% of the building already pre-leased since launching in Q3. Tricon now has nine projects totaling over 5,000 units in lease-up, pre-construction or active construction, as shown on slide 10. And as this portfolio stabilizes over the next few years, we estimate it will have a gross asset value close to $3.6 billion and annualized NOI of $50 million at Tricon Share, creating a lot of strategic optionality as Canada's premier multifamily portfolio with institutional scale. Moreover, the book value of our stake in this portfolio is expected to double from $0.93 to $1.87 per share upon stabilization, creating meaningful value for all of our shareholders. With that, I'll now turn it over to our CFO with Sam Francis to discuss our financial results.

Thank you, Gary, and good morning, everyone. Q3 was a solid quarter for Tricon, and I want to thank our exceptional team who continue to focus on process improvement and cost containment across our business while continuing to deliver a world-class resident experience. Let's start with a review of our key financial metrics on slide 11. Net income from continuing operation was $81 million compared to $178 million last year, which includes $73 million of fair value gains on rental properties against a strong comp of $107 million last year, as home price depreciation has moderated in recent months. Core FFO per share was $0.14, down one penny year over year. AFFO per share was $0.11, flat from last year, providing us with ample cushion to support our quarterly dividend with AFFO payout ratio of 46%. And lastly, our IFRS book value stands at $14.30. That is $19.30 in Canadian dollars, just up over 4% year-over-year.

And I will note strategic capital fee streams.

Let's move on to slide 12 and talk about the drivers that contributed to our FFO per share variance. The year-over-year decrease of one penny can be attributed to strong NOI growth from the SFR portfolio being offset by higher borrowing costs, lower performance and acquisition fees, and the absence of core FFO from U.S. multifamily portfolio, which was sold in Q4 2022. Specifically, our single-family rental portfolio contributed two cents of incremental FFO reflecting revenue growth of 10.5%. This was driven by a 2.2% increase in proportionate rental home count, 5.9% increase in average rent, and 0.5 higher occupancy. FFO from strategic capital had a 2 cents negative impact primarily driven by lower performance fees from legacy residential developments lower acquisition fees as a result of fewer SFR acquisitions, and lower property management fees following the sale of the U.S. multifamily portfolio in Q4 of last year. Our adjacent business added one cent, reflecting strong results in residential development as housing fundamentals remained robust. Interest expense set a three cent negative impact mainly due to higher average interest rates on our debt. And lastly, there was a one cent positive impact driven by lower overhead expenses compared to last year. On that note, I want to take a minute and dive into our corporate overhead expenses, turning to slide 13. At a high level, our corporate overhead expenses support a world-class operating platform that we have built over the years. This platform is a source of competitive advantage and creates a moat around our business that is difficult to replicate. It means having a strong local market presence to provide an exceptional resident experience through internal property management and maintenance capabilities. Our strong service offerings has earned us an industry-leading Google score of 4.6 stars. It means being a people-first company and fostering a purpose-driven culture so that our employees will go above and beyond to serve our residents, which in turn leads to lower turnover and strong NOI growth. It also means being a leader in innovation. In order to drive operating efficiencies, continually improve our resident experience, and scale our business efficiently and cost effectively. When we break down our corporate overhead expenses on slide 14, you can see that they support both our SFR operating platform as well as our adjacent businesses, whose overhead costs are more than offset by fee revenue earned from managing strategic capital associated with these businesses. If we just look at our SFR overhead and compare it to our largest peer, there's still a delta in terms of efficiency. Recall that we had set our goal of reaching 50,000 homes by 2024 and built a platform to support such scale. But the goal has been pushed out given the rapid increase in interest rates and the need to pull back on acquisitions for the time being. That said, we'll continue to see tremendous opportunity in SFR and we are laser focused on keeping overhead costs relatively stable so then we could reach a competitive level of overhead efficiency as we grow the portfolio towards 50,000 homes. So on slide 15, our near-term focus is to drive operating efficiency and reduce overhead expenses where possible in the current lower growth environment. Over the past year, we've made some progress, including a 4% reduction in gross overhead expenses year over year. As we look ahead into 2024, you will see three main areas that will help us drive additional efficiency by reducing overhead and growing fees. First, we anticipate launching a new SFR joint venture in early 2024 to add scale as well as strategic capital fee streams. Recognizing that the interest rate environment is still challenging, we expect the new joint venture to accommodate buying homes with lower leverage parameters. What changed over the past year or so is that our institutional investors are increasingly open to lower leverage or no leverage joint venture structures with the expectations of core or core plus returns compared to opportunistic returns expectations in the past. This goes to show how SFR has matured into an attractive and stable institutional asset class. Next, we continue to optimize our workforce to fit our current needs, which included reducing our staffing, by approximately 5% over the past several months and reallocating the operating staff from servicing vacant homes and acquisitions to servicing occupied homes. And finally, we are containing G&A costs by focusing on key growth projects and on essential activities only. Now, let's shift gears and talk about our debt profile on slide 16. We have been proactive with addressing our near-term debt maturities as we said we would. And I'm happy to report that we have repaid or extended all of our remaining 2023 maturities. As we look ahead into 2024 maturities, our 2017-2 securitization is on track for refinancing before its maturity in January. And we expect to repay or extend our wholly owned portfolio term loan before its maturity next October. From there, we could look ahead and start tackling our 2025 maturities as well. I'd like to end by discussing our 2023 guidance that we've updated on slide 17. We are reiterating our guidance range for core FFO per share of $0.55 to $0.58. We've tightened up the expected range for the same home metrics to 6% to 6.5% for revenues, expenses, and NOI. The revenue guidance reflects softer rent growth on new home move-ins as well as lower turnovers, as turnover tends to skew to residents with shorter tenure, partially offset by gradual increase in rent growth on renewals. The expense guidance is a function of elevated property tax, offset by successful reduction of controllable expenses, such as property management, repair and maintenance, and turnover expenses. Kevin will provide more insight into these items later on the call. The outlook for the same home metric is coupled with expectations for ongoing strong results in the U.S. residential development business, which gives us confidence in the overall outlook for the FFO for share. We've also taken the pace of acquisition down slightly to 1,850 homes, as investment programs for JV2 and JVHD are substantially complete, and we are buying homes purely as part of our capital recycling program. As we head into the end of the year, we remain laser-focused on cost control, balance sheet flexibility, and prudent capital allocation, while keeping an emphasis on creating the best resident experience possible. And now, to give you more insight into our same-home metrics, I'll turn the call over to our Chief Operating Officer. He's just Kevin. Anywhere else, he'd be a 10, but for us, he's an 11. Kevin Baldrige.

Thank you, Sam, and good morning, everyone. First and foremost, I want to give a big thank you to our Tricons operations and customer service teams who helped deliver this quarter's outstanding results. I continue to be so impressed with our extraordinary team and the exceptional care they provide our residents day in and day out. Let's move to slide 18 to talk about the drivers of our same home NOI growth of 6% for the quarter. On the top line, revenue growth was driven by a 6% increase in average monthly rent that was partially offset by a 20 basis point decrease in occupancy, which remains well within our targeted range of 96.5% to 97.5% as we balance rent growth versus occupancy through the seasons. Our rent growth remains healthy with blended rents increasing 6.8% during the quarter underpinned by 6.9% growth on new move-ins and 6.7% on renewals. As we moved into October, demand remained consistently strong with rent growth coming in at 6.8% on a blended basis, supported by 6.6% on new leases and 6.8% on renewals. Our bad debt expense, which is embedded in the revenue numbers, has continued to inch down, as we thought it would due to the successful collection efforts of our team in the field and is now near pre-pandemic levels of 0.9% versus 1.4% in Q3 of last year. Finally, other revenue decreased by 0.9%, down slightly from last year. This was driven by lower late fees as our collections have improved, coupled with more conservative provisioning for resident recoveries to reflect actual cash collections rather than billed amounts. This was partly offset by revenues earned from services that enhance our resident experience like smart home and renters insurance, which both saw increased adoption year over year. Let's now turn to slide 19 to discuss our same home expense growth of 7.5%. The rise in expenses was primarily driven by property taxes, which were up 10.5% from last year, reflecting meaningful home price appreciation in our markets. To date, we have received 50% of the tax bills for the same home portfolio and expect another 25% in November, 19% in December, and the balance early next year. So far, we have seen higher than expected assessed value increases in Atlanta, Texas, and the Carolinas, which account for about 60% of our tax expense. This has been partly offset by millage relief and successful appeals, but not to the extent that we would like. From where we sit today, our best guess is that taxes are up 12% year over year. which would put us near the high end of same home expense guidance. Yet, if we see favorable millage rates and appeals, we could end up at the low end of expense guidance. Moving on to the other expense lines, repairs and maintenance expense was up this quarter by 2.3%. This reflects an 8% increase in completed work orders, which was partially offset by our ongoing cost containment efforts. And our turnover expense continues to remain low, a strong testament to our policy of self-governing on renewals, and industry low turnover rate, as well as cost containment efforts. Next, homeowners association costs increased by 25%, reflecting inflation and HOA dues, as well as a heightened level of incident violations imposed by HOAs coming out of the pandemic, which drove higher penalties. And finally, other direct expenses increased primarily from the upfront costs of providing smart home technology to more residents and increased utility costs. I'm also pleased to report that we achieved a 14% reduction in cost to maintain this quarter compared to last year, which includes repair, maintenance, turnover, and recurring capex. Our team has been proactive and successful in achieving price reductions through our national procurement program, reducing turn scopes where we aim to repair versus replace where possible, and driving higher utilization of our in-house team to undertake more work orders versus using outside vendors. We now have over 77% of our available work orders completed in-house and are on track towards our goal of about 80% by the end of the year. Our in-house technicians' cost per work order is about 45% cheaper than using a vendor for similar kinds of work. As we head toward the end of the year, we remain focused on the things we can control to offset rising costs while keeping an emphasis on creating the absolute best resin experience possible. Now I'll turn the call back to Gary for closing remarks.

Thank you, Kevin. It was another great quarter for Tricon, and I want to conclude my prepared remarks by saying that I feel truly honored to work alongside such a world-class team who deliver an unmatched resident experience every single day. As we approach the end of the year and look forward to 2024, we're excited about the numerous catalysts that should drive sustainable long-term shareholder value, which we've talked about on this call and summarized on slide 20, including launching a new JV, driving overhead efficiency, continuing to deliver strong rent and NOI growth, and advancing our Canadian multifamily portfolio towards stabilization. I will now pass the call back to the operator to take questions. With Sam, Kevin, Wojtek, and I will also be joined by John-Ellen Zweig and Andrew Joyner to answer questions.

At this time, I'd like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. Please limit your questions to one and one follow-up. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Brad Heffern.

Hey, good morning, everyone. Obviously, you have an active presentation out. Can you just give your thoughts on their primary recommendations, those being quickly marking the rents to market, reducing overhead, and exiting the Canadian multifamily business?

Brad, we don't comment on any specific conversations that we have with any of our shareholders. We're always open to constructive feedback from anybody, any shareholder, but we don't comment on any kind of specific items related to strategy. The only thing I can say that at this point that we agree with is that the stock's mispriced, and there's significant opportunity for those that are going to be patient, make a lot of money, but that's all I can really comment on.

Okay, fair enough. For the next JV, presumably the partners would want an investment pace that's above what's been being executed of late. Do you think that that's correct, first of all? And then how would you think about funding your capital commitments if a faster pace is indeed needed?

Yeah, I mean, we really aren't making much in the way of acquisitions right now. Everything's largely focused on balance sheet and through our capital recycling program. And that's because, obviously, both SFR JV2 and HomeBuilder Director now essentially complete. So yeah, as we launch a new JV, let's call it JV3, hopefully early next year, that will increase the pace of acquisitions. And that is what would be expected by our investors. But keep in mind, we typically have a three-year investment period. And once they commit to a fund, there's no pressure to put that money out immediately. We can determine at what pace we want to put out and do so when we think it makes sense. So We may form a fund and take our time to put the capital out. And I think in terms of funding, you know, our share, I think one thing you can expect is that the new fund will be sized to the opportunity. Our co-investment will likely be smaller. We will use lower leverage, as we've talked about extensively on the call, and our investors seem to be fine with that. And then we should be able to fund our co-investment with any AFO less dividends, right? So we talked about that being $60 million a year. That's going to obviously ramp up as we grow our AFFO. And so we should have ample cash to fund our co-investment over the next three years.

Okay. Thank you.

And your next question comes from the line of Hendel St. Justy. Your line is open.

Hey, good morning. My first question is on the January refinancing wisdom. You talked about thinking on tracks. Maybe you could give us a little bit more color on where you think the refi costs would be, the cost of new debt, and what sources you're considering in the likely timing. Thank you.

Yeah, no problem. Thanks for the question. So, we launched a deal last night. I'm sure some of you might have seen that. And that deal is really to refinance the 2017-1, sorry, 2017-2. Right now, I can't really comment on the spread, but I could tell you we're getting indications similar to the last time, to the last deal we did. Remind of the last deal that we did, the all-in rate was 5.86%, but the spread was about 178. So we're getting similar indication in terms of spread. And the five-year mark is sitting at 460 today. So all-in, we're thinking it's going to be between 6.2 and maybe 6.4, depending on the day we price it. But so far, it's all been positive indications, and we feel very confident that this will come through over the next several weeks. Great. Appreciate that, Collar.

And I think you guys talked about, I think you'll seek to responsibly raise renewals above the self-imposed caps where the loss to lease is sizable. So can you talk a bit about what portion of the portfolio today broadly that meets this threshold and how high you're willing to go on pushing renewals for those? Thanks.

Yeah, so the way we think about the portfolio on proportionate residence is essentially 45%, and we outlined this in the presentation. 45% have been with us for one to two years, and 55% have been with us for three years plus. And we're going to continue to self-govern across the board, but we'll take two approaches to self-governing compared to the one to two years and those that are three years plus. And what I mean by self-governing is we'll continue to set rents below market, slightly below market. The idea there is obviously to keep our residents in our homes, which lowers turnover and turnover expense, and we've seen drives NOI growth, but to take a more aggressive stance on self-governing with those who've been with us more than three years, right? So that will mean we will push through our caps. I'm not going to give any detail as to how that will work, but I think what's most important is we think we've got several years tailwind with us on renewal rent growth, where we'll be able to recapture that loss to lease. So when we talked about that 40 million revenue opportunity, we think we can recapture that over a few years. And it could very well mean renewal rent increases of about, let's say, 6% or 7% per year over the next few years. So that's in the current environment. Obviously, if there's an economic recession, things could change. But we think we could have industry-leading renewal rent growth over the next few years because of the sizable loss to lease that we can recapture.

And then one quick one, sorry. You mentioned the loss to lease, but do you guys or can you provide an estimate of what the earning is for next year? Thanks.

Yeah, the earning, as of today, the earning is 3%. I think if we factor in Q4 rent growth, it's going to be about 4% heading into 2024. Thank you.

Your next question comes from the line of Stephen McLeod. Stephen, your line is open.

Great, thank you. Good morning, morning guys. Just a couple of questions here. You know, just thinking about the acquisition pacing for next year and with having, you know, Q4 coming down to that 250 range, all self-funded, you know, just wondering if you can give a sort of a starting point for how you expect acquisitions to flow through next year, given the timing of the new JB3.

Yeah, I mean, we're not going to give guidance, any kind of formal guidance today, Steve, for 2024, including on acquisitions. And obviously, the amount of acquisitions will really depend on the timing and the size of our next fund. But it's fair to say that once that fund gets formed, we will be able to ramp up acquisitions. And those acquisitions, certainly in the short term, could be funded on an all equity basis or low leverage basis. Um, so I, I wish I could give you more detail, but I just to say that you should expect acquisitions to ramp up next year.

Yeah. Okay. No, that's, uh, that's fair, Gary. Thank you. Um, and then just to, you know, when you think about, I'm sorry, underlying, um, organic acquisitions, you know, what do you need to see in the marketplace to, to, to sort of unclog, uh, or make the math work for acquisitions? Um, you know, is it rate stabilizing? Is it rates coming down? and just trying to get a sense of what goalposts you're looking for or you would need to see?

Well, I mean, the math already works, right? So it certainly works on a recycling capital program because we've been selling homes at, let's say, high three or four caps and taking that capital and reinvesting at six caps. So that works all day long. We can't do that forever, but certainly we continue to recycle out older homes with higher CapEx into newer homes. So we're going to continue to do that. You'll see more of that this quarter Q4 and a little bit into next year. And then the other factor, it's not really the size of the market. The size of the market is still huge. Even though it's 25% smaller than last year, the opportunity to buy homes is still significant. The issue is really the cost of capital in an environment where one, we don't have a fund, right? So we've now completed those funds. And two, when we do have a new fund, we need to make sure that it's a lower leverage vehicle, right? So it's really, it's just really the cost of debt. We don't like We don't like negative leverage. Our investors don't like negative leverage. But if you can buy homes at a six cap, which we're doing, and we think there'll be a significant opportunity to do that next year, and you can put on low leverage or even no leverage in some cases, and then grow your NOI at 4%, 5%, 6%, we think that's a very compelling opportunity. So the opportunity is still significant. We just need to make sure that we align the capital structure with the opportunity, and that's the evolution that's taking place right now.

Great. Thanks, Gary. I appreciate it.

Your next question comes from the line of Mario Sarek. Mario, your line is open.

Hi. Thank you, and good morning. My question is a broader one, and it just comes to slide 12 of the call deck. And just looking at FFO year-over-year growth variances, And I appreciate you're not offering 24 guidance today. Presumably we'll do that with Q4 results next year. But just conceptually, if I look at all the puts and takes on this chart, operationally things seem to be going as good as they've been in terms of NOI growth. Presumably on the performance fee, acquisition fee side, it can't get much worse on a year-over-year basis than it did this year based on some of the commentary that I'm hearing. in terms of SFRJV3, the year-over-year comp in terms of the multifamily portfolio sales gone, and we'll see what the residential development operations look like. And then when we look at the interest expense, about 80% of your debt, I think, has hit silver caps So it may come up a little bit given where rates are today, but the 3 cents was quite meaningful during Q3. And then Sam touched on kind of lower corporate overhead expenses and the implementation there through 24. So higher level, is that kind of a reasonable way to think about it? On this chart, the negatives kind of disappear. The positives are still there next year.

Yeah, I think so. I mean, I think it's a thoughtful question. I mean, there is a lot to unpack there. And we want to be careful not to give any kind of 2024 guidance. But I think, you know, Mario, what you can expect and this is what's really exciting is that our interest expense profile is stabilizing. Right. And if you think about the interest expense, it's basically doubled over six quarters. And we think as we head into 2024, that largely stabilizes per quarter. And if you're able to contain your overhead costs, which we talked about and we intend to do, than essentially any NOI growth. And we continue to think that's going to be very robust. It's going to really drop to the bottom line. So that, you know, we think is super exciting. And so we go from a year where we've kind of been running the standstill and dealing with, you know, much higher interest expense to a year where it starts to look in 2024, things start to look a lot more positive. And I think as you layer on, you know, a new fund, that obviously means, you know, obviously more acquisition fees, And I think the other thing I would say is in the same home portfolio, we should also start to see more growth in ancillary revenue, right? So overall, I think you're right. 2024 is going to be a year where the positives should outweigh the negatives.

Got it. Okay. And just my follow-up just on the overhead on slide 15 that Sam was talking about, noting the optimization has started happening over the last couple of months. How much of the expected optimization is already in your Q3 run rate numbers?

I could take that, Mario. Very few are in the Q3 run rate numbers. They're really going to start seeing them come through in Q4 and really next year. Just to give you perspective, the reduction really spanned multiple buckets, which is both NOI, CapEx, and overhead. So even though it's a 5% reduction in force, it's really not all in compensation expense. Part of it could be an NOI and overhead. So you're going to see it come through all the different buckets next year.

Got it. Okay. That's my one with the follow-up. I'll turn it back. Thank you, Mario.

Your next question comes from the line of Keegan Carl. Keegan, your line is open.

Yeah, thanks for the time, guys. Maybe first, just wonder if you could provide an update on your plans to exit markets such as California and southern Florida.

Yeah, sure. So in southeast Florida, we're nearly done. You know, we've got about 60 homes left in southeast Florida, so that should be done relatively soon. And, you know, I'm incredibly proud of the team because we've literally sold, you know, 600 homes over time, almost one by one. So it's been a great result. And then in Southern California, I'd probably take the better part of next year to dispose of the homes.

Got it. And then I guess maybe specifically on markets, I was a bit surprised to see your Las Vegas performance. It was really strong compared to what some of your peers have been saying in the quarter. I'm just curious what would have driven this.

Hey, Kevin, do you want to take that?

yeah i mean las vegas um you know has been a strong market for us we continue to see you know good in migration and you know although we we took this summer and we we felt the strength and we decided to you know really push rents so you know our lease trade outs there were you know close to nine percent um so we were able to you know harness that occupancy dropped a little bit but it's now it's come back again so it's just um You know, we have a really good revenue management team. We look at trends. We're comping every home. And then, you know, we'll put the house up on the market. We'll look at what's happening with applications, with leads. We'll adjust those rents. And so we're just really attentive to what's going on with demand, seasonality, availability. And, you know, and we do it on a home-by-home basis. So, I mean, a testament to our revenue management team. and how they're looking at the market.

Got it. Thanks for the time, guys. Thank you.

Your next question comes from the line of Eric Wolf. Eric, your line's open.

Hey, thanks. You mentioned that the interest expense should stabilize going into next year. I was assuming rates stay somewhat flat from current levels. Given that you're able to sell homes at about 4% cap rates, why wouldn't you just do more of that and pay off a significant percentage of your floating rate debt since there's like a 250 basis point spread there? I realize there's going to be some tax implications, but I assume there are also some percentage of your homes with less capital gain where it might be efficient to do that. So I'm just trying to understand why not just sell off more at the 4% caps and pay off that at 6.5%.

Yeah, I think you're going to see us do more of that, Eric. That's what we're going to do. I mean, we can't do that in perpetuity, right? You can't do that forever because we only really have that kind of 4% cap home in certain markets. It's not an all market. So you have to keep that in mind. But yeah, it absolutely makes sense to sell homes at four caps and take that capital and either pay down debt or, by the way, even potentially buy back our stock. So, uh, I, I think we've got a kind of a good, you know, uh, capital. I didn't talk about an answering kind of Mario's question. I think there's also a good capital allocation problem, a good capital allocation opportunity next year, uh, where we can continue to sell homes, you know, at relatively high prices, certainly compared to where our stocks trading and, and, uh, buy back the stock or paid on debt.

Got it. And I guess you mentioned that, uh, it's only available for some percentage of homes. Can you put that in context? Sort of which markets are you able to sell at 4%? You know, what's the difference between, I don't know, in the other markets more like in the fives or I guess even the sixes? Just trying to understand like what percent would sell at four.

Yeah, it's more the coastal markets, right? So, I mean, obviously in California, we've got low cap rates there. We've got probably some, you know, low cap rate opportunities in Nevada, certainly in Southeast Florida, although we've worked through a lot of that. So it might be, you know, I don't know, maybe another kind of 1,000 or, you know, maybe a couple thousand homes, but that's probably the extent of the opportunity.

And I would just, sorry, this is John. I would just also add, you know, the nature of the dispositions we're making are really, you know, in a lot of cases, homes we bought in 2012, 13, 14, and we might have been buying homes at 100 or 150,000, and now they've appreciated to call it $500,000 plus. So in many cases, the homes that we're selling are not exactly consistent with the type of homes we're buying today. today which are more 300 350 000 homes and so there's been a bit of a shift i would say the type of homes we're selling versus what we're buying today as well got it thank you your next question comes from the line of adam kramer adam your line is open hey guys thanks for the time um just wondering uh if you don't mind giving kind of the new lease uh

kind of monthly figures, you know, if we're going to be each month in the quarter. It'd be interesting to see how that trends over the course of the quarter. In the Q4? Q3. I know you disclosed October, obviously, in the full quarter, but just the monthly for Q3.

Hey, Kevin, do you have that available?

For each month? I don't have it right now for each month. I can get back. Yeah, we can.

Hey, Adam, we'll get it. Yeah. Yeah. Yeah, we'll get that after the call for you.

Yeah, just maybe on the guidance, you know, obviously you kept the FFO range intact, but there's kind of a modest lowering in the same-star NOI. I'm wondering if there's, you know, if there's something you could kind of comment on that's kind of the offset below the NOI line that keeps FFO, you know, keeps the FFO range intact, just kind of that offset. Yeah.

Yeah, absolutely. I mean, we are going to get some contribution from obviously SFR in the Q4 over Q3. So that's part of it. But I think the big factor is we're continuing to see real strength in our legacy for sale housing business. And we expect that to continue from Q3 into Q4. And one thing I'll say is that in our master plans, many of them are very advanced. We're seeing higher home prices, higher assessed values. And that results in more bonding capacity. You might remember, Adam, that we use infrastructure bonds in Texas. They're called MUDs to really finance and recover the infrastructure costs of these master plan communities. And when the assessed value goes up, you get more bonding capacity. And that additional bonding capacity essentially drops to the bottom line. It's just cash. So that means more cash coming back. You've seen that in Q3. You're going to see that again in Q4. And that also translates into higher performance fees.

um which you'll also see uh in q4 so that should offset um you know if you're looking at your model that's where the offset's going to come great really appreciate it thanks guys hey i've got the uh i have the numbers that you asked for so you want them you want the uh so the blended rent growth numbers for uh for july or um seven two in july six eight

in August and 6.5 in September, blended to a 6.8 for the quarter. Thanks, Kevin. Sure. Okay.

Your next question comes from the line of Jonathan Kelcher. Jonathan, your line is open.

Thanks. Just on the JV3, Do you have a targeted size for that fund and how much? You said you were going to be committing less to that one, but how much your total targeted commitment that you're thinking about?

Yeah, I can't. I wish I could tell you that, Sean. I just can't. I can't share that right now. But obviously, we have an idea of how much we're going to raise. We're just not going to share it. at this point. But I'll say this, the fund is going to be likely smaller than what we've done in the past because it's going to be sized to the current opportunity, which is also smaller. There will probably be more than one close. We're certainly going to use less leverage. We've been targeting in the past leverage as 65% plus. That could be 50% or lower. So that's going to be a big change. And I would say our co-investment, instead of being in a kind of one-third, might be closer to 20%, right, or 25%. So that's all I can tell you at this point. And hopefully we'll be in a position to release details of that at the end of the year or early next year.

Okay. And then secondly, just on the ERP system that you guys are implementing and have some costs in the quarter, what's the total cost of the project? And maybe give us some color on the benefits that you expect from it.

Yeah, thanks, John. So in the ERP implementation system, it's basically a new system that we're putting in to consolidate all of our GLs. The cost could be, again, depending on all the things that we activated, could be about $7 to $10 million full cost. You're going to see that run through in Q3 is a little higher. Again, you saw some of that come through in non-recurring GNA. You're going to start seeing that dove down probably by Q4, really getting into Q1 next year. Most of the investments has already occurred this year and including some last year. And you're going to see very little on the investment front going forward. What's going forward is really about creating efficiency and creating process improvement in the system. And you're going to see some of that process improvement occur next year as we finish the implementation and really focus on stabilization of the system. Okay, so that would be mostly in the GNA then? It could be partially, yeah, part of it would be in GNA, part of it would be really in compensation. What you're going to see is you're going to see as the company continues to grow, our overhead remains flat to stable to down. And that's where we're going to create the efficiencies that we talked about. Remember, our overhead is geared and we geared it towards 50,000 homes. And today, obviously, we're short of that target and we're going to right-size the company as the company gets bigger. you're going to see less increases through the overhead line item.

Okay, thanks.

Your next question comes from the line of Jade Romani. Jade, your line is open.

Hi, this is Jason Sapshon on for Jade. So for my first question, what proportion of your customer base is multifamily a substitute product? Or does the apartment demographic have little overlap? So, in other words, although performance has been resilient thus far, are you seeing competition from multifamily supply and slowing rent growth in the Sunbelt? No. Sean, I'll let Sean take that.

Yeah, and Jason, that's a great question. We see actually very little overlap. When we survey our residents and look at where they're coming from, some of them might be moving out from multifamily, but in many cases, you know, our residents aren't shopping Multifamily, and if you think about the nature of both unit sizes, as well as locations, you know, for the families that are moving into try console, it's not really a perfect substitute. Multifamily is often located in more, let's say, commercial oriented parts of cities or neighborhoods. And also, you know, schools tend to not be as strong as the homes that we're buying. And so when we're targeting school scores, let's say, in the five, six or seven, you can't can't find the same for multifamily with a similar rent. So our residents are really looking at only when they're shopping.

Got it. Thank you. And as a follow-up, does it make sense to wait incremental capital deployment towards self-developing communities and targeting a more opportunistic return or to continue acquisitions at a more moderate pace until economics become more attractive?

Probably the latter. I mean, I think on a capital allocation, you know, the best thing we can do, as we talked about right now, is our capital recycling program, which we're doing debt repayment, and probably buying back some stock. That's the right thing to do. On the development side, we're just not seeing the yields that make it compelling. We're buying homes off the MLS at a six cap. In order to make development, I think pencil and make it compelling, we probably need a spread to that of at least 50 to 100 bps, and we're not seeing that. Right. We're looking at a lot of built to rent deals. We just we just can't make the numbers work. So I think we're in an environment right now where, you know, development doesn't make a ton of sense. We have to be patient and acquisitions will be largely focused on existing homes when we raise the new fund and also probably buying homes from builders. Great. Thank you.

Again, if you'd like to ask a question, please hit star and then the number one on your telephone keypad. We'll wait another moment for more questions.

All right, there are no further questions at this time. I'd like to turn the call back over to Gary Berman, President and CEO of Tricon Residential.

Thank you, operator. I would like to thank all of you on this call for your participation. We look forward to seeing many of you at the fall NAE REIT conference and speaking with you again in February to discuss our Q4 and full year results.