Tricon Residential Inc

TSX:TCN

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is Lindsey and I will be your conference operator today. At this time, I'd like to welcome everyone to the First Quarter 2019 TCN Analyst Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. [Operator Instructions] Thank you.Mr. Wojtek Nowak, Managing Director, Capital Markets, you may begin your call.

[Wojtek Nowak, Managing Director of Capital Markets]

Thank you, Lindsey. Good morning everyone and thank you for joining us to discuss Tricon's results for the three months ended March 31, 2019, which we 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 SEDAR and on our company website.Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A. I'd 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 at triconcapital.com and a replay will be accessible there following the call. Lastly, please note that during this call, we'll be referring to a supplementary conference call presentation posted on our website. If you haven't already accessed it, it will be a useful tool to help you follow along during the call. You can find the presentation in the Investor Information section of triconcapital.com under Events and Presentations.With that I will turn the call over to Wissam Francis, EVP and CFO of Tricon Capital Group.

[Wissam Francis]

Thank you, Wojtek and good morning everyone. We started 2019 with a very strong quarter and a very busy quarter across all of our business verticals. Slide 3 gives you a summary of our key accomplishments this quarter, which include: First, a record result at Tricon American Homes, including same home NOI growth of 9.3%, total portfolio NOI growth of 23% and core FFO up 28% year-over-year. Second, a 35% increase in contractual fees from the prior year. Third, expansion of TLR Canada's multifamily development program to over 3,000 units in Toronto, with the acquisition of 7 Labatt. Fourth, strong leasing momentum at TLR Canada's first project, The Selby, which has 123 units leased by the end of the quarter.And subsequent to quarter end, we completed the successful sale of The McKenzie in Dallas for approximately $50 million of cash, net proceeds for Tricon. And last but not least, our recent announcement to acquire Starlight U.S. Multi-Family (No. 5) Core Fund, which owns a portfolio of 23 multifamily properties valued at over $1.4 billion. We are very excited by what our team has accomplished this quarter and we remain focused on growing our predictable income streams, fees and funds from operations.Our accounting disclosure doesn't fully capture the good quarter we've had. As you can see on Slide 4, Tricon generated net income of $24 million and diluted earnings per share of $0.16 in Q1, as compared to $99 million or $0.46 per share in Q1 2018. This negative year-over-year variance was largely driven by, first, Tricon American Homes recorded fair value gains of $30 million this quarter, compared to $76 million recorded last year. Second, TLC investment income was $3.5 million recorded last year and the vertical was subsequently sold. And third, fair value loss on derivative financial instruments of $7 million this quarter, compared to a gain of $29 million in the prior year, which is related to the swing in the stock price that affected the valuation of our convertible debentures. These three items alone account for $86 million of the variance year-to-year, meaning that all else being equal, our results would have increased by $10 million year-over-year without these items.Our non-IFRS results give you a better sense of the various factors that contributed to our results this quarter. Tricon American Homes generated $36 million of net operating income, a 15% increase compared to last year, driven by rent growth and margin expansion. Tricon Lifestyle Rentals generated $4.8 million fair value gain this quarter, mainly attributed to the sale of McKenzie in Dallas, which was completed in Q2. Contractual fees, net of minority interest also grew by 31% as a result of higher development fees at out Johnson master plan business and asset management fees from Tricon American Homes joint venture. These positive factors were offset by ongoing cost and time line pressures affecting the results of Tricon Housing Partners, as well as the absence of a large gain from manufactured housing business last year, prior to its eventual sale in Q2.Similar to our IFRS results, the adjusted EBITDA compared to last year is largely the result of a $46 million swing in Tricon American Homes fair value gains and the absence of TLC's $8 million adjusted EBITDA, which mask an otherwise solid operational quarter.Turning to Slide 5, let's take a look at our road map to deleveraging. Pro forma for the acquisition of Starlight portfolio and the sale of The McKenzie, our recourse debt to assets at the corporate level is projected to be 10%. On a look-through basis, including the non-recourse subsidiary debt and excluding our convertible debentures, the net debt to asset ratio is expected to be about 60%. Going forward, we have multiple sources of cash flow to support our deleveraging plan, where we are targeting a long-term debt to asset ratio of 50% to 55%. This includes the expected sale of The Maxwelll, the final development project within TLR U.S., as well as the potential syndication of Trinity Falls and the newly acquired Bryson project in THP.We also have ongoing cash flows from our THP funds, such as THP1 U.S. where projects are largely in harvest mode and are expected to generate meaningful cash in the coming years. Leverage is something we are focused on and we are on the same path that we've carved out for ourselves, when we bought up Silver Bay in 2017. For proposed Starlight acquisition, we are assuming in place debt that is above our target. For long term, we want to maintain a flexible balance sheet, so we remain nimble and can take advantage of opportunities as they become available.With that let me turn the call over to Gary to get into the highlights of our business verticals.

[Gary Berman, President, CEO & Director]

Thank you, Wissam. Let's turn to Slide 7. And I thought it would be helpful to step back and really talk about our strategic vision, and also the Starlight acquisition, help put that in the context of our broader strategy.So we like to think of ourselves as a residential real estate company, increasingly focused on rental housing. Pro forma for the Starlight acquisition, 85% of our assets in AUM are in single-family rental and multifamily rental, and the other 15% is in for-sale housing. We think there is a giant opportunity to provide quality, relatively affordable housing to the workforce, and in doing so, we can provide a predictable and consistent income and cash flow stream to both public and private investors.As we think down the road on the rental side of our business, we think Tricon is going to turn into a two-headed dragon with a common body; one had being single family rental, the other had been multifamily rental. These are two potentially joint platforms, each market is about $3 trillion to$4 trillion in the U.S. And again with a common body. That body is our back-office infrastructure, where we can do legal, finance, accounting, HR, procurement, our call center, our residential underwriting and technology, all in one place in Santa Ana, California. And as we add more single-family homes and more multifamily rental properties, we can amortize those additional units over a relatively fixed cost and become increasingly more efficient.And this is also a synergistic approach to attracting third-party capital. We want to bring third-party capital into all of our businesses. Having third-party capital allows us to scale our business quicker, and a larger operation to be more efficient and allows us to drive contractual fees, which boosts our return on equity. And because we are vertically integrated, we're not just going to generate asset management and performance fees, we're also going to generate development fees, and property management fees. And the Starlight acquisition provides us with a wonderful opportunity to create another platform to raise third-party capital.Let's move on to Slide 8. The problem and really the solution or opportunity for Tricon and our shareholders is that the U.S. is not producing enough new housing and in particular, not enough affordable housing. This is an issue, not only in the U.S. and in the Sunbelt, but also in Toronto and really quite frankly across the Western world. But if we come back to the U.S. and we look at this building intensity metric, this is a startling statistic. We measure building intensity as residential permits per 1,000 population. So this is putting supply on an apples-to-apples basis over time. And 10 years post the Great Financial Crisis, 10 years after the Great Recession, the building intensity in the U.S. is still lower than where it was in 1991 and 1982, two of the worst real estate and residential recessions on record in the U.S. In an environment where the economy is so strong, and there's not enough new supply, the opportunity is obviously to own existing stock, both the single-family rental stock and the multifamily rental stock. And in our for-sale housing business it is to continue to pivot to provide smaller lots, so builders in turn can provide more affordable homes to consumers.Let's move on to Slide 9. In many ways, we're gearing up our business to take advantage of the surge in the Millennials. A lot of people don't realize that the Millennial cohort at 92 million is actually larger than the Baby Boomer cohort with 80 million. And the Millennials as we know have been delaying major life events. They're getting married later, forming families and having kids later. Today, the older Millennials are just starting to do those -- to [indiscernible] those events. The more affluent ones are going to continue to buy homes, but the workforce is going to have a higher propensity to rent, and you can see that in the home ownership rate. Today the home ownership rate of Millennials is much, much lower than the boomers, but even if we put it on an apples-to-apples basis and we compare baby boomers in the early '80s when they were at a similar age as the Millennials today, their home ownership rate was about 10% or about 1,000 basis points higher than where Millennials are today. So again the Millennials have a higher propensity rent for different reasons, and that is why we're shifting our business, our investment strategy to increasingly take advantage of rentals.Let's move on to Slide 10. Our investment strategy is largely focused on providing high quality, affordable housing to the middle-market households in the U.S. Sunbelt. This is a region that is experiencing robust population and job growth. Think about it this way, 40% of the U.S. population lives in the Sunbelt. They're getting 60%, by some accounts maybe 70% of the growth going forward. Americans are moving from north to south in search of jobs, lower taxes in the red states and obviously better weather. And you can see where we own our Tricon American Homes portfolio all across the Sunbelt.What really excited us about the Starlight portfolio is how complementary it is from a geographic perspective, you can see the Starlight portfolio in the light blue circles. Those are right on top of our Tricon American Home markets. And just like Silver Bay, they're not only in the same markets. they are also in the same sub-markets and neighborhoods which makes this business very efficient for us to run from both an asset management and potentially a property management perspective.The other thing that excited us about the Starlight portfolio is again it's middle-market focused, very similar to Tricon American Homes. We define the middle-market in the U.S. Sunbelt as those households that are earning between $60,000 and $100,000 per year and who can pay $1,000 to $1,600 a month for rent. And you can see both portfolios, our Tricon American Homes and the Starlight portfolio have average monthly rent of roughly $1,250 to $1,350 per month. This is right in the middle of the middle-market. And most importantly, the rental household income is only about 20% or this is 5 times coverage, 5 times income to rent, much lower than where you would see typical mortgage underwriting. And so what we really like about this is there's lots of cushion, and we think this is a very defensive strategy that both in single-family rental and multifamily middle-market will perform very well over a full economic cycle.Let's move on to Slide 11. We're going to approach multifamily rental and the Starlight portfolio with the same playbook that made single family rental and for-sale housing business a success for us. And that is to buy with scale, then internalize and ultimately attract third-party capital. We go back to our for-sale housing business, we acquired a majority interest in the Johnson Company in 2014, creating an integrated development company and then soon after we were able to raise hundreds of millions of dollars of capital from institutions to buy master plans like Cross Creek Ranch and Viridian, which have been incredibly successful for us.In single-family rental, through Tricon American Homes, we entered the market in 2012, [ bought up ] with the acquisition of Silver Bay in 2017, we really only internalized property management in 2015 through 2017. And with the internalization of both asset management and property management, we were able to attract two of the largest global institutional investors in the world to form a $2 billion joint venture in 2018 that's allowing us to buy upwards of 10,000 single family rental homes. And now we plan to do the same thing in multifamily rental with Starlight, but we're going to do it faster. The Starlight portfolio allows us to enter U.S. middle-market multifamily with both scale and quality. Within roughly a year, we'll be able to internalize asset Management, and that will then position us to attract third-party capital to this business.Let's move on to Slide 12. In many ways, our business philosophy has always been to go where the capital is, and if you do that on a relative basis, that's how you're going to make higher returns. We did that in our for-sale housing business, being a major buyer of land. After the financial crisis, we were one of the first institutional investors to go into single family rental in 2012. And now we see a very large opportunity in garden-style middle-market multifamily in the Sunbelt.The preponderance of institutional capital going into multi-family in the U.S. actually goes into the coastal or gateway cities. If you look at the top REITs, public REITs in the U.S., their top 10 markets are in the gateway markets, San Francisco, LA, Orange County on the East Coast, Boston, New York, DC, that's where the preponderance of capital is going.If you look at the Starlight portfolio, the light blue circles, those are in the Tier 2 and Tier 3 cities. They're not getting the same amount of institutional capital, but in many ways they have better fundamentals; higher population growth, higher job growth and higher rent growth over the last five years. And we think that trend is going to continue. It's not to say we're the only ones going into the Sunbelt. There are other smart investors doing this as well. Starwood, Lone Star, Cortland back by GIC and CPP are also buying Class B, Class A-minus properties in the Sunbelt. The advantage we think we have over time is that we have permanent capital and we have a willingness to build a best-in-class property management platform that will allow us to take care of our customers better drive economics and ultimately attract more and more third-party capital.Let's move on to Slide 13. And we can see the merits of this Sunbelt middle-market strategy playing out at Tricon American Homes where we had record seem home results for Q1. If we look at revenues, those were up 6% on higher occupancy of roughly 80 basis points to a record of nearly 98% in-place occupancy, blended rent growth of 5.7%, 4.7% renewal growth, 7.6% new move-in growth. And remember we talked about in the last quarter, we are self governing on renewals. If we weren't, this blended rent growth would be even higher given how strong the demand we're seeing.And the story continues to be on the expense side, containment. We've seen a big gain year-over-year with repairs and maintenance. That's because of record low turnover and our internalization efforts where we continue to become more and more efficient at R&M. That's down 15% year-over-year. Expenses on a whole are down 70 basis points year-over-year and that translates the same-store NOI growth of an industry leading 9.3% in Q1 and an NOI margin of 65%, which is up more than 200 basis points and is a record for us. And Starlight also, No. 5 Fund, also produced very good results in Q1. And again, it speaks to the fundamentals in the Sunbelt. Their same store NOI was up 7.5%. Their occupancy up 250 basis points and the NOI margin on a same store basis all up nearly 1% to 58.3%. All in all, a very good quarter for both Tricon American Homes and Starlight No. 5 Fund.Let's flip to Page or Slide 14. On the acquisition front at Tricon American Homes, we remain on plan. Again, we're trying to acquire roughly 800 homes per quarter, 3,000 homes over the course of the year, that's going to ebb and flow. Q1 and Q4 are going to be a little slower as less people list homes. That's what we saw in Q1, with 730 homes acquired. But Q2 and Q3 are going to be more robust from a volume perspective. Already in Q2 we've closed on 650 homes in the joint venture and we expect to be at 900 or 900 plus in the quarter. You can see that again we will be more acquisitive in Q2 and Q3.Let's move on to Slide 15 and shift gears and talk about TLR Canada, our build-to-core multi development strategy focused on Toronto. The Selby, our first project is off to a very strong start. You can see after five months, and this is in a very tough winter months, we're already at 155 leases. We underwrote $2.90 a foot. We're already at in-place rent of $3.60 on the lower floors, and as we move to the upper floors that rent will move up to $3,70 to $3.80. And we're looking at a development yield of probably about 6% here and the ability to lock in long-term financing at or below 3%. When you can have a development yield of 6% and long-term financing at 3%, you are printing money and this is going to be nothing short of a home run for us and it bodes extremely well for the other six projects and 2,500 units that are under development.And then shifting on Slide 16 to the U.S. where we're selling our non-core Class A development project. We had a very successful sale post quarter end of The McKenzie, which is adjacent to Highland Park. You can see how luxurious this project is by looking at the pictures. This is a Class A or A plus building that's sold at roughly $650,000 per unit, which I believe is a record, or close to a record price in the Dallas market. And for Tricon again a very successful result. $50 million back that will be used to pay down debt, an 18% IRR and 1.6 times multiple, very good results.Again, the reason that we're exiting U.S. multifamily development is because we are concerned about the go-forward returns, not the existing returns on the current portfolio, but the go forward returns, where we think those returns are dropping down to 10%, maybe 15%. We're not getting paid for the risk. So that is why we're pivoting to core-core plus portfolio in Starlight where we think we're getting a better risk adjusted return and focusing on the middle-market.Let's move over to Slide 17 and talk about Tricon Housing Partners, our for-sale business. Now this business admittedly has remained challenged over the last year or two. And we think that's going to continue this year, but it is a core strategy. It's a business where we have a lot of expertise and knowledge and we plan to grow it, but we really want to reduce our balance sheet exposure and grow it with more third-party capital. The big opportunity we have here is now two significant warehoused assets in Trinity Falls and a new [indiscernible] community, which is in the fast growing Northwest quarter of Austin, those are warehouses, but we essentially plan to syndicate those and create a new Tricon sponsored investment vehicle around them. By selling those, we're syndicating those investments to third-party investors, we can take that cash, pay down debt, we can reduce our balance sheet exposure to THP and increase our third party AUM, which allows us to generate more contractual fees.You can see our contractual fees were up 30% year-over-year. 70% of that actually coming from THP and Johnson, and by doing this, reducing our balance sheet exposure, we will be able to continue to grow our fee stream.On Slide 18, I'd like to summarize with our priorities for 2019 and beyond. And the first is -- is again, increasing recurring FFO or rental income. We have some major opportunities. Beginning with the proposed acquisition of the Starlight portfolio, which on an annualized run rate basis, provides us with $68 million of NOI and about $29 million of FFO. The Selby should be stabilized at this time next year, it will add about $9 million of NOI, and the entire portfolio should contribute about $60 million to $70 million of NOI. Tricon has a 30% interest in that. And remember, we continue to acquire 3,000 homes per year in the Tricon American Homes joint venture. We have a 34% interest in that portfolio. So all of this is continuing to add very valuable recurring rental income.Our second objective is to continue to grow contractual fees. Expect us to raise third-party capital this year in for-sale housing. To further our Johnson master-planned community business, we may also even look at build to rent communities, developing build to rent communities and also expect this to raise more third-party capital for TLR Canada, our build-to-core multifamily development business in Toronto, where we see great opportunities to grow. There will be more development fees in both -- as a result in both TLR Canada and Johnson. And I should remind you that Johnson has about 80,000 lots in their 18 active master planned communities and only half of those are developed. So we have a long-term pipeline with which to generate development fees.Lastly, some of our earlier investment vehicles are now in their harvest mode and should generate more performance fees later this year and into next year. And finally, as we've discussed, we plan to continue to delever with the sale of our non-core multifamily projects. First, The McKenzie, which was just completed, and The Maxwell later this year, and the syndication at Trinity Falls and Bryson hopefully later this year too. We're going to generate meaningful amount of cash to continue to delever.In the end, we are working to simplify our story by turning Tricon into a residential rental company that generates predictable fees and FFO. So that it is easy to understand and value by investors. Starlight is a major catalyst in this regard, as it will significantly increase our rental income and position us to build another platform with which to attract third-party capital, making Tricon even more attractive to both public and private investors.With that, I will pass the call back to Lindsey to take questions and we'll be joined by other members of our senior management team, including Jon Ellenzweig, Andy Carmody, Andrew Joyner and Kevin Baldridge.

[Operator]

[Operator Instructions] Our first question comes from the line of Geoff Kwan with RBC Capital Markets.

[Geoffrey Kwan, Analyst]

Just I had one question. On the TAH side, when I take a look at the R&M as a percentage of the rental revenues, I think it was roughly about 7-ish-percent in the quarter, which puts you, I guess, roughly in line with where AMH was, [indiscernible] came down actually a little bit more this quarter versus last quarter. I know that you've talked about stuff that you're working on to try and get more improvement in efficiencies there. Just wondering how we should be thinking about how much more you can do, how much does their scale versus yours play into where you think you can ultimately get?

[Gary Berman, President, CEO & Director]

Kevin, do you want to answer that question for Geoff?

[Kevin Baldridge]

Sure, thanks. Hi, Geoff. This is Kevin Baldridge. The increase or the better results you saw this quarter really is due to two or three main things. One is, as we pointed out, there was lower amount of move-outs that happened in the quarter, we had 10% less move-outs in the same home portfolio, 8% less in our consolidated portfolio. So that drove the actual turn costs down. But R&M as well. We've really been working to internalize our maintenance. We started talking about it last year, and we're seeing the fruit from that labor really come to fruition this year, where we've -- in Q1, we addressed 63% of work orders with our in-house maintenance crews versus Q1 of ' 18, it was 48%. And we're finding that when we do things in-house, when we address our work orders in-house, it costs us about $270 to complete a work order in-house, that's fully loaded. That's the costs of payroll, loan, car -- the trucks that we have, fuel, everything -- parts, and that compares to work orders that are vended out, which is -- they cost us on average $340. So it's a 20% savings every time we address a work order in-house. We're currently at 63%. We'd love to get to 70% to 75%. And the largest benefit is going to come from HVAC. To-date, we're still addressing only 30% of our HVAC work orders, are being done with in-house techs and we'd like to get that up to 65%, which I think that's going to give us kind of -- some of the greatest upside. We've also implemented our route optimization. We now centrally dispatch all work orders and we have a route optimization platform that allows our techs to see more houses, they're just more efficiently routed. And we can see the technology we have now, we can see where our techs are. So for instance, are they going to Home Depot twice a day or once a day, and we can try to figure out how do we best provision them, so they're not -- they're not spending as much time driving, minimizing windshield time. And so, given the technology that we've implemented, we can see where people are spending their time. We have this product efficiency ratio that we see how many work order hours per day are they spending, so how much time are they spending in the home versus driving around. And we can follow that by tech and by region. And so as we learn more, we can get more efficient to route people better. We've also been working on centralized procurement program to where we started buying all of our appliances, water heaters, HVAC units, direct from the manufacturers. And so that as we continue to roll that out, we will see further upside, so that the benefits you've seen this quarter will continue and should improve further.

[Operator]

Our question comes from the line of Mark Rothschild with Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

Gary you went through in detail the strategy as far as TAH and TLR and how you're going to delever. To what extent have you considered just exiting the THP business over the next few years? I realize that there's a lot of value you guys create there and kind of some good returns and you are planning at syndicating out some of the businesses. But as far as the goal of simplifying the business, have you considered that maybe just having a third area of focus is too broad or does it still fit into what you're trying to do?

[Gary Berman, President, CEO & Director]

No, I mean we still view it as a core competency. But what we're trying to do is really deemphasize the balance sheet investment. And a lot of that just has to do with the fact, and I think you're kind of getting to this is that the income tends to be episodic, it becomes -- and as a result, it becomes difficult for the market to really understand it and value it, but it is a core competency. It's a business that will over time allow us to raise more and more third-party capital. We've got some -- I think, some exciting plans this year to raise more third-party capital around this business. Interestingly, pension plans are more attracted to this business when it is challenged, where they see the business starve for capital, like it is today. That's when we can raise more third-party capital. So in some ways it's got a bit of a counter-cyclical bend to it. But we're just going to continue to further the business with additional third-party capital and less balance sheet investment. The other thing I would say where there's meaningful synergies is that -- one, I mean I think to really understand the overall housing market, you do need to understand both for-sale and rental. So there is definitely an informational advantage. The other thing is, is though our THP business over time might become also more of a rental business. So, for example, in our Johnson master planned communities, we could allocate lots to do build to rent communities and again, sort of selling homes to consumers or selling lots to builders. We can partner with builders and create communities that are for rent and then manage those through Tricon American Homes. So that synergies you can see between THP and TAH and we're in the early days of exploring that. But you should look to see us pursue it probably later this year, or early next year.

[Mark Rothschild, MD & Real Estate Analyst]

Okay, great. And maybe just one more question. Clearly, you guys are making a big bet on the rental apartment market in the U.S. How do you guys look at the difference in the outlook for rent for apartments versus housing and how should we think about that when we're looking at Tricon? Do you see them continuing to converge as the single-family housing rental business grows?

[Gary Berman, President, CEO & Director]

Yeah, I mean over the long term, I mean they should converge, right, because you have essentially the same fundamentals driving, especially if you are in the same market, they should converge. At this point in time, and we all know that single-family rental is growing faster. Right. And part of that is because of the efficiencies we're putting in the business, we've really moved from just trying to get heads in beds to think about revenue optimization. There are some loss to lease, I think in the portfolios, which is allowing us to drive rent. And so we're really catching up in many ways to multi-family. But long term, the rental growth rates should ultimately converge. And the two products are not mutually exclusive. Again, we see synergies. If you have both products within your system, younger residents who might be looking to rent apartments. As they mature, as they form families and have kids, would then potentially move into the single-family rental home. So again, having all of that within one system and an ability to properly manage that we think creates a lot of efficiencies.

[Operator]

Our next question comes from the line of Lorne Kalmar with TD Securities.

[Lorne Kalmar, Associate]

First on the [ SP ] NOI margins, at Tricon American Homes they are up a good amount in the quarter year-over-year. Is there anything one-time in there, other than I guess kind of the improvements in R&M or is this sort of a good run rate going forward?

[Gary Berman, President, CEO & Director]

There is nothing one-off in the same-store number, but I would never say that 9% for same-store -- 9% growth is run rate. I mean that's just long-term not sustainable. We felt that 5% would be a very good number. Even if we could grow at 5% that would translate to being able to increase our margin by 75 basis to 1% per year and really drive the stock by about $1 per share in value per year. So 5% is very good, 9% is off the charts, but that high number is again, as Kevin mentioned earlier, is partly being driven by record low turnover. And so what we should expect to see in Q2 and Q3 as we get into the summer months, we should expect to see -- spring and summer months, we should expect that turnover to move up a little bit, which will have an impact on the same-store numbers.

[Lorne Kalmar, Associate]

Okay. And then just quickly on the Bryson, the $25 million, is that big enough to syndicate out, like is there an appetite for an investment of that size?

[Gary Berman, President, CEO & Director]

Andy?

[Andrew Carmody, Managing Director]

Yes, this is Andy Carmody. Certainly. That may be a little bit on the modest size compared to some of our other large Texas investments. But Austin is a market where project sizes are smaller but values are terrific. And we've seen great interest from investors we've talked to so far on that. So we have no concern on that front.

[Operator]

Our next question comes from Himanshu Gupta with GMP.

[Himanshu Gupta, VP & Equity Research Analyst]

So on the stabilized occupancy of 97.4%, obviously, strong and high, despite strong rental growth. Is this like an optimal level, kind of a fine balance between the rental growth and occupancy standpoint, or do you think you can push the rental rates even further higher than 5% given the tight vacancy?

[Gary Berman, President, CEO & Director]

Kevin, you want to answer that question?

[Kevin Baldridge]

Yeah. Sure thing. Yeah, we try to keep our occupancy, physical occupancy between 95% and 96%, 96.5%. So as we get into the 97s, it clearly means we have excessive demand and there is certainly room to push rents further. So -- and in fact we have been. In April, our rent growth is even higher than what we had in the first quarter. In the first quarter, rents were stronger than we believed and we've surpassed that in April. But you're exactly right. It is a balance and our revenue management team works on this. We have weekly facing calls with all of our markets. Now, we're looking at availability, the number of homes that are going to be vacant in the future. We look at the seasonality. We look at expirations and we set rents to try to reach that balance. There's insatiable demand right now for those products and we've gotten up to the higher end of that range. So there is room to push rents.

[Gary Berman, President, CEO & Director]

Yeah, Himanshu, the only thing I would add is that really our rent growth would be higher. We're just self-governing on renewals, as we talked about. If we weren't, the insatiable demand would push that rent growth even higher than what you're seeing in Q1.

[Himanshu Gupta, VP & Equity Research Analyst]

Yes, I think that makes sense. And then on the -- I mean if I look at the spread between the stabilized occupancy and overall occupancy, and I know it is influenced by the pace of recent acquisitions. In general how many days are you taking on an average to renovate and lease up the home and is it getting any better, any faster considering that you are buying some of the homes with newer vintage in the JV portfolio now?

[Gary Berman, President, CEO & Director]

Jon, do you want to answer that?

[Jonathan Ellenzweig, Managing Director]

Yeah, sure. So in terms of new acquisitions, we typically target 90 days. And what we found is we've been coming in meaningfully inside of that closer to 70 days from acquisition to cash flow. So we have been operational improvements and really that has to do with the maturation and advancements of our team, the fact that we actually do some of the renovation work ourselves versus vending all that out. So we are seeing improvements on that front, Himanshu.

[Himanshu Gupta, VP & Equity Research Analyst]

Sure. That's helpful. And getting back to your point about the strength of demand, just an observation that the home price appreciation. HP was slightly down at 4% versus like 6% run late last year. Does that change the rent growth expectations going forward or do you think there is meaningful loss to lease, or call it mark to market opportunity in the portfolio where we will continue to see the rent growth outperforming the rate of HPA?

[Gary Berman, President, CEO & Director]

Yes. We see -- we definitely see a meaningful loss to lease in our portfolio and that continues to be reflected quarter-in, quarter-out, and at the same time, there's obviously insatiable demand and a really strong economy. So altogether, that's really allowing us to drive -- to drive rent. I would anticipate rent growth to be exceeding our home price appreciation, and that's been a change in what we've seen over the last few years. So if anything, we might start to see higher cap rates in the business rather than compressing cap rates. So that's certainly an opportunity on the acquisition side. And with respect to home price appreciation, obviously we don't have a crystal ball, we are not clairvoyants, but I think 4% this year is very, very healthy. We're not -- again, to go at 6% or 7% is not sustainable. Remember, over 50 years, including the Great Financial Crisis where home prices dropped 50% in many markets, we've still been doing 3% per annum. And so I think you could probably expect to see 4% this year, which is very healthy. And the other thing I would say is, remember that in providing that number, we are first deducting CapEx. So if we weren't deducting the CapEx, the actual HP would be higher than the 3.94%.

[Himanshu Gupta, VP & Equity Research Analyst]

Right, that's good. And maybe on the customer service perspective, how are the satisfaction ratios trending over time? How are your Google reviews? Which areas are you ranking higher and where is the opportunity for improvement?

[Gary Berman, President, CEO & Director]

Kevin, do you want to talk about consumer feedback?

[Kevin Baldridge]

Yeah, sure. So, our Google reviews, last time I checked, I think we're at 4.2 stars, we're one of those leaders I think in most or all the rental industry, both single family and apartment, rental industry. So they continue to trend up. Our BBB ratings are still in A plus, we respond to all the inquiries. We have issues, we try to resolve them, we have a system that if it's not addressed at the site, it kind of layers up and we get involved, our VP of Operations and myself, if we need to. So we try to be really responsive. We're sending out surveys to residents five times during their life cycle with us. And if there is an issue, then we have -- we respond immediately. And so it's something that -- we have various feedback loops that tell us how we're doing. And I think it's -- we try to make this our calling card, having genuine service to really lift the lives of our residents and the proof is in the pudding. So we get responses on these surveys every day. I look at them weekly or monthly. And then the Google reviews, they get posted daily as well. And so we're attentive to those and we'll get our field teams and local teams involved, so that they're attentive to our residents. And our goal is to be the preferred residential address in the country.

[Gary Berman, President, CEO & Director]

Himanshu, I just want to add to that. I mean, Kevin has done a terrific job driving the culture in. The philosophy is always to take care of our own team first. Only until you have employee satisfaction, can you then take care of our residents. And that's what we've been doing. We've got one of the highest Glassdoor ratings in the industry, that's employee satisfaction. And as Kevin mentioned, our Google ratings, I think are not only the highest in the single-family rental industry, but the multifamily rental industry as well. And that is a key driver of our results. It is not just the Sunbelt middle-market strategy, which is a major factor, it is also the customer service and their willingness to want to take care of our residents.

[Himanshu Gupta, VP & Equity Research Analyst]

Awesome. Thank you. And maybe one just last question on The McKenzie sale announced. What development deal did you achieve and what exit cap rate will it imply on a stabilized basis? And is there like a read across on where these stabilized new multifamily Class A are trending -- are trading at and what does that mean for Class B properties?

[Gary Berman, President, CEO & Director]

Yeah, Himanshu, unfortunately I'm not permitted. We just have a nondisclosure agreement. So we are not permitted to answer those questions, but I can just talk about overall -- I mean capital coming into multi-family is still strong. But it's not as competitive as what one would think, particularly in more core, core-plus properties. And we've typically seen, when we've been putting up these properties for sale [ at our ] U.S. portfolio, we've been -- we probably had a handful of bidders, not 10 or 20 bidders that you would -- you might expect. And so there's enough capital to drive cap rates, but there is also great opportunity for us to go in, in the future continue to acquire. So, the Starlight portfolio cap rates, when we went and we comped that we were seeing cap rates of high 4s across the Sunbelt for, I would say, kind of A minus, B plus, A minus portfolio. And then I think if you were to look at Class A or Class A plus, obviously it could be inside of that.

[Himanshu Gupta, VP & Equity Research Analyst]

Right. I think that's fair enough. Thank you so much. And I'll jump back in the queue.

[Kevin Baldridge]

Hey, Gary, I'm sorry, I misspoke. Just wanted to add. We actually have 4.3 stars on Google review. So we just went up recently.

[Gary Berman, President, CEO & Director]

Yeah, Himanshu that went up while we were speaking. So we just wanted to give you live update.

[Operator]

Our next question comes from the line of Mario Saric with Scotiabank.

[Mario Saric, Analyst]

I just wanted to get back to the TAH [indiscernible] it was quite impressive, above the Q4 [indiscernible] greater than the long term or the last 12-month average. I think it was the first quarter where Silver Bay was included in the same-store numbers. So can you give us a sense in terms of the relative [indiscernible] Silver Bay versus let's say the legacy TAH portfolio during the quarter and was that perhaps one of the reasons why it ticked up the way it did?

[Gary Berman, President, CEO & Director]

Yeah, the short answer is yes. The reason it was even better than Q4 was because the inclusion of Silver Bay. I can't break it down specifically for you Mario. But we did see repeatedly in previous quarters that our same-store growth would have been better if we included Silver Bay in 2018, because there was loss to lease in the portfolio and that will continue to be the case we think over the course of the year.

[Mario Saric, Analyst]

Okay. And appreciate your comment on 5% being a very good number in terms of potential same-store growth this year. When you look at the demand, it sounds insatiable and the 5% presumably means turnover is coming up throughout the year. But you're also self governing on renewals. So how do you kind of balance the turnover moving up with self-governing rental on renewals and perhaps maybe even achieving a number that's greater than 5% this year?

[Gary Berman, President, CEO & Director]

Okay. So I was talking about same-store NOI growth, not revenue growth. If we talk first about revenue growth, we think -- I mean we are not providing specific guidance, but we had felt, I think last quarter, that 4% to 5% would be healthy, just given that we are self-governing on renewals. The demand is so strong and the economy is so strong that it ended up being considerably higher in Q1, and as Kevin said, April was even higher than Q1. So maybe that's just too conservative, but we just -- we don't want to give specific guidance, but it looks like we'll probably do better than we thought, and that the renewal rates will stay -- or the blended rent growth will stay above 5%, which is very healthy. On the turnover, which is another kind of key component driving the margin -- NOI margin, we had record low number in Q1. We're going to see a higher number in Q2 and Q3. April numbers already trended up to kind of high 20s Mario. And so, I think over the course of the year we will probably be between 25% and 30%, but in the spring and summer months we might push closer to 30%. That's the way we'd think about it. And you obviously have to look at the various components of the margin, including property taxes, which seem to be stabilizing. I think we had guided or -- kind of underwritten growth of 7% to 8%, and this quarter came in at 6%. So little better than we thought. But when you kind of -- altogether, you look at all the various components, we feel confident that we'll be able to do 5% plus on NOI.

[Mario Saric, Analyst]

Okay. And on the renewals, when you indicated that you're self-governing, are you self-governing on all renewals, or is it a certain percentage of the portfolio?

[Gary Berman, President, CEO & Director]

No, all renewals.

[Mario Saric, Analyst]

Okay. So outside -- if you weren't self- governing on renewals, then the rent growth would have been higher pretty much across all the renewals in the --

[Gary Berman, President, CEO & Director]

Yeah, I mean the rent growth could have been -- the rent growth could have been 100 basis points higher.

[Mario Saric, Analyst]

Got it. Okay. I noted that the TAH corporate overhead came up a little bit during the quarter at $6 million. Is that a good run rate to use going forward? I'm cognizant that there are some kind of infrastructure costs built into that with respect to the creation of the institutional JV, but I'm just looking for where that number may evolve to over the next several quarters.

[Gary Berman, President, CEO & Director]

Yeah, I think $6 million is a good run rate. I mean hopefully we'll do better than that, but I think for modeling purposes, I would assume $6 million. And we did ramp up -- we thought we were going to ramp up the hiring in Q4 for the JV. It ended up being in Q1. So that's one of the reasons you saw a bump in the overhead Q1 over Q4. So I will continue to model $6 million, but we are hopeful that as we move into 2020 that as we get the benefit and the efficiencies of a much larger portfolio that overhead starts to come down.

[Mario Saric, Analyst]

Okay. Just maybe switching gears to the financing environment. I think your TAH warehouse facility is sitting above [ $125 million ] outstanding, which is close to $150 million max. Can you talk about the securitization environment today as you see and potential pricing for 5 and 10 year issuance, given the [ U.S. Treasury ] is down about 20 basis points year-to-date?Jon, do you want to answer that?

[Jonathan Ellenzweig, Managing Director]

Yes, sure. Not a problem. So regarding the SFR finance environment, there has been very few offerings really over the last 12 months. And as a result, there is actually quite strong demand building in the markets. Some of our team, including Kevin and some of those operations group were actually at a conference recently in Las Vegas for securitization and I'll tell you like the use the word insatiable, the number of meetings-- I think they had 22 one on one meetings over the course of relatively 24 or 36 hour time frame. And so we see very strong demand. In terms of pricing, we've been looking at a variety of options, both fixed rate and floating rate loans and we're seeing pricing in that kind of call it 120 to 140 over-range, so that would be the spread to the swap rate. So we are seeing quite tight and strong pricing. And to give you another indicator, the A tranche, which is typically among the largest tranches and the lowest pricing, that's pricing in the kind of 85, 95 over-range. So we are seeing really strong pricing, not in comparable with some of our more recent securitizations.

[Mario Saric, Analyst]

Got it, okay. My last question just pertains to the proposed U.S. multifamily expansion. Kevin, you have a longstanding track record on the multifamily side. When you look at the portfolio that's been acquired, can you talk about potential kind of operational efficiencies there you can see play out or things that you can bring into the multifamily space from the SFR space that you've learned in the last couple of years that can differentiate yourself in terms of being an operator?

[Kevin Baldridge]

Sure. I think that first and foremost, our customer is the same person, so residents-- the residents that's living and trying to find housing and needs to be serviced and what we've done with our culture of genuine service at TAH, we're going to bring that over to the apartment side as well and get the same Google reviews and CPP ratings that we've had at TAH, just from like a customer service standpoint. But I think one of the things, as I came over to single-family, there are similarities to dichotomies. On one side, leasing is a bit easier on the single-family side, just because there's not as much competition from -- really our competition is mom and pops. Where on the multifamily side, that's a little bit harder, is to fill those units. And there's a lot of resources. The hard side -- hard part for us is on the back side, because we all know the homes are disbursed throughout, and we've really turned into -- TAH has turned into a -- really a hospitality and a logistics company. And we have broken down all the pieces of the flows, the workflows that has to happen when someone moves in and moves out, and we have to address the work order when we're renovating. We've broken down every single activity to make us more efficient. So we're going to take that same platform and all those learnings and apply it to multi-family. So that we can turn homes even faster and we can make our renovations even more complementary and consistent, when we go onto a renovation. So we've solved a lot of hard issues through technology, we're going to bring some of those to multifamily. [ Lock boxes ], we wouldn't use lock boxes for self-showings on towers, because residents aren't going to want people walking around, but on some garden style communities we may put lock boxes on units that are outward facing and use that as a way to show apartments. We're finding that 86% of our tours today happen through lock boxes versus through in-person tours. So I have to believe, given the demographic of the apartment world being younger that there is going to be at least that many people that want to tour apartments on their own. So we can bring that. The same with -- just the different scanners that we're using to inventory what's inside the homes, we can use that in the apartments. We're using another technology, it takes a picture of the apartment to document exactly our homes, to document exactly what's the state of the home when someone moves in, and then we take another picture that's a surround, almost like a 360 degree view when they leave, so they can document what happens with the security deposit. So as you can tell, I am pretty animated about this. I could go on for hours, but there are just a lot of learnings that we can bring. We're on both sides of the equation. I think that we can use some of the learnings and the marketing acumen on the apartment side and bring that over to single family. So there is going be a lot of learnings and synergies.

[Gary Berman, President, CEO & Director]

And Mario, just to add, just very quickly. We are so well positioned to do this, because our executive team at TAH, Kevin and many of his key executives come from a multi-family background, there was no single family rental. We had to create that business and learn it on around. The other thing is our backbone infrastructure, our GL, our property management software is Yardi. Right. We've just co-opted that we customize it for single-family rental, but essentially we have a multi-family team and a multifamily backbone infrastructure operating single family and so we're going to be able to take these learnings and just make multifamily even more efficient.

[Mario Saric, Analyst]

Okay. And then maybe my last question, just sticking to the multifamily expansion on the third-party capital side, clearly one of the primary goals here is to show a bit of a gap in your product offering on the residential side to third parties with U.S. multifamily rental. Outside of internalization, which you indicated that would happen within 12 months or so, what do you see as being the obstacles or the things that you have to overcome in order to procure meaningful third-party capital in this vertical over time?

[Gary Berman, President, CEO & Director]

I mean, we really don't see any obstacles. I think you indicated that it's obviously extremely difficult to raise third-party capital when another party in this case, Starlight is the asset manager. So we have to wait roughly a year to be able to take it over ourselves and only then can we go and raise third party capital. That turned to be part of the deal, and it does make sense in the short term for transition. But short of that we were very confident that we can raise third-party capital in this business and that's what our investors are telling us. The inbounds we've been receiving that everyone receives is that, look again, land development, single family rental, we've done extremely well raising third-party capital flows, but they're really niche strategies and ultimately the large private pension plans, institutions really want exposure to multi-family and not that many of them have exposure to multi-family through a Sunbelt middle-market strategy and that's really our opportunity. And as we build out the asset management and property management, we will become even better and more competitive. And so we're confident that there is really nothing that stands in our way to raise the capital, it is just time.

[Mario Saric, Analyst]

And then I know LP investors typically for integrated models, which you have as well, I guess, it may be too early to answer this question, but at your last Investor Day you highlighted a five-year AUM target of $10 billion. How should we think about the introduction of U.S. multifamily to target over time and is that something that you can maybe update, not certainly now, but perhaps at your next Investor Day or just how should we think about the quantum of opportunity?

[Gary Berman, President, CEO & Director]

Yeah, I don't want to put out a target right now without kind of really thinking about it. But what I would say is that the $10 billion target is in the bag. Right. I mean if we just put our pens down and finish investing the TAH joint venture and complete our TLR Canada build-to-core strategy, we're basically at $9 billion, $10 billion just with that. So that is relatively achievable. And Starlight will pull us over the -- will put us over the line when we bring third-party capital into that. I don't want to give a target, Mario, but once you get to $10 billion, then you got to probably start thinking about $15 billion or $20 billion, but lot to give us more thought.

[Operator]

[Operator Instructions] Your next question comes from the line of Stephen MacLeod from BMO Capital Markets.

[Stephen MacLeod, Analyst]

So, Gary, lots of color covered in the call, appreciate it. I just want to follow up on one thing that you touched on, Gary, specifically around third-party capital in the THP business. And I just wanted -- was hoping to get a little bit more color around how you attract third-party capital to the THP business given some of its recent challenges, as well as what you would expect for the return expectations as we roll through 2019.

[Gary Berman, President, CEO & Director]

Sure. Well, let me just say, within our THP portfolio we've certainly had some projects that are challenged, where -- and those performances have been under pressure, but not all the projects in THP are challenged. I mean there are some that are doing exceptionally well, particularly those in Texas. Texas has been a much stronger environment to invest in, and California right now is an example. So, again, you have to dig deeper, you can't just take a broad brush approach to for-sale housing in the U.S. There are certain pockets where there is more opportunity than others, but we think that if you can underwrite on a go-forward basis and capture more realistically what you think revenue and your cost growth is going to be, then that becomes an opportunity again by vintage to enjoy better returns going forward. The other thing I would say is that investors that we're talking to right now for for-sale housing are being more realistic about what the return opportunities are. They are no longer saying, oh, we need 20% or 30% returns, they might not be more comfortable at 15% or 15% to 20%. And so as those return expectations come down and become more realistic, again, it becomes easier for us to go out and raise capital. And the other thing I said on the call, there's tremendous shortage of capital, right, there is virtually no private capital coming into the industry and so there is a handful of very sophisticated global institutions right now that see that as an opportunity and they can be sharpshooters and look for the very best opportunity. So when we've been talking to institutions, we've been talking about a very targeted approach of looking at some very selective master plan communities with Johnson, obviously potentially syndicating Trinity Falls and Bryson, which are two excellent well performing master plans in Texas. We've also been talking to them about build to rent communities. This is a new trend that people are getting excited about. American Homes for rent is also pursuing this, but we think there could be an opportunity, particularly in our Johnson communities to carve out some lots and partner with third-party builders. We do not want to be a builder, but we could partner with third-party builders and potentially develop those to yields that are higher, meaningfully higher than what we are buying the homes. And so that could be another great opportunity that we can pursue with third-party capital within THP. And then ultimately that could be managed by Kevin and his team through TAH. So those are the synergies between the two businesses.

[Operator]

And we have no further questions at this time, I will turn the call back over to Gary Berman for closing comments.

[Gary Berman, President, CEO & Director]

Thank you, Lindsey. I would like to thank all of you on this call for your participation. We look forward to speaking to you in June at our Annual General Meeting and then again in August for Q2. Thanks very much.

[Operator]

This concludes today's conference call. Thank you for your participation and you may now disconnect. Have a great day.