Tricon Residential Inc

TSX:TCN

Earnings Call Transcript 2023-Q1

[Operator]

Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Residentials First Quarter 2023 Analyst Conference Call. [Operator Instructions] Thank you.

I'd now like to turn the conference over to your speaker today, Wojtek Nowak, Managing Director of Capital Markets. Thank you. Please go ahead.

[Wojtek Nowak, Managing Director, Capital Markets]

Thank you, operator, good morning everyone, and thank you for joining us to discuss Tricon first quarter results for the three months ended March 31, 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's discussion and analysis and Annual Information Form which are available on SEDAR, 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 Investors section of triconresidential.com under News and Events.

With that, I will turn the call over to Gary Berman, President and CEO of Tricon.

[Gary Berman, President and Chief Executive Officer]

Thank you, Wojtek, and good morning everyone. We've had a great start to 2023, and I'm excited to discuss our Q1 results with you. Let's turn a Slide 2, so I can share with you our key takeaways for today's call.

First, we delivered another solid quarter of operational performance with no evidence of economic weakness in our single family rental business. We reported same home NOI growth is 6.2%, a near record NOI margin of 69.5%, high occupancy of 97.3%, low turnover of 16.8%, and consistently strong blended rank growth of 7.2%.

Second, we continue to grow responsibly, acquiring 409 homes during the quarter. In response to significant demand for our homes, we plan to double our acquisitions in the second quarter as the MLS listing volume increases during the spring selling season. We remain committed to growing our business over the long term in a strategic and responsible way.

Third, we are focused on process improvement and cost containment during this period of slower growth by driving cost savings and corporate overhead and property operating expenses. At the same time, we strengthened our balance sheet by refinancing over $100 million of near-term maturities on a proportionate basis and reducing our floating rate debt exposure to 26% from 29% last quarter.

And finally, when market conditions do improve, we are well-positioned to grow with about $55 million of annualized AFFO less dividends and $2.6 billion of available capital, including liquidity in our balance sheet and third party unfunded equity commitments.

On Slide 3, as we spoke about our Investor Day in April, we continue to see a major valuation disconnect between our share price and our fundamental value drivers such as book value per share and NOI growth. When we take a step back and look at it, our net operating income has grown at a compounded rate of 18% per year since 2019. Our book value per share has also grown by 16% since 2019. Interestingly though, our stock price is now back to 2019 levels, which doesn't make much sense when you look at the value that's been created since that time.

So now let's look at the interplay between private and public market cap rates on the right hand side of the page. What's different about single family rental when compared to other commercial real estate sectors is, this one of the largest most liquid asset classes in the world. There is no price discovery per say. And there is no bid-ask spread. This is because every single day there are thousands of transactions to validate pricing. That's why we feel confident about our own internal valuation of 5% flat cap rate based on stabilized NOI and 6% when including the loss to lease in our portfolio.

Green Street derives the similar valuation or an implied weighted average cap rate of 4.7% for our market coverage through the cap rate observer publication. It's true that right now we are acquiring homes close to a 6% cap rate, but that's only because we are buying small volume. If we wanted to go back to acquiring a large volume of homes every year, let's say, 8000 or 10000, we believe the cap rate will be closer to 5.25%. So let's compare that with the public market.

Tricon is currently trading at a 7.5% cap rate based on stabilized NOI. If you include the loss to lease in our portfolio, we are closer to 9%. This shows a massive disconnect between where the public and private markets are trading. We think that overtime the public market should catch-up. There seems to be a lot of value to unlock for our shareholders, and we believe that this is a tremendous opportunity to own Tricon for those that have a longer-term investment horizon.

Moving to Slide 4. Demand for our rental homes continues to be robust. To show this, we focused on two key indicators, monthly leads and monthly applications per available home. You can see that seasonality was more pronounced in Q4 than in prior years with leads and applications dipping. However, the rebound in Q1 into April has been very healthy with leads and applications even higher than what we were seeing before the pandemic. This makes for a very supportive demand backdrop, as we head into the busy spring market.

Turning to Slide 5. You can see that the rental supply has been increasing post-pandemic. We think this is partly due to the lock in effect of low in place mortgage rates, which is incentivizing some homeowners to rent out their homes rather than selling them. What's interesting is the supply looks like it's starting to stabilize at levels that are slightly below, what we saw pre pandemic.

Anecdotally, this finding brief of research that was recently published by the National Rental Home Council showing that over the past decade, the proportion of single family rentals within the overall single family housing market has actually shrunk by 1.4%. When taken together, the combination of rising demand for rental housing and stabilizing supply of rental homes provides a compelling backdrop for our business.

On Slide 6, you can see how this translates into rent growth, which remains well above pre pandemic levels that were already strong to begin with. Our rank growth in April remains resilient and is slightly ahead of Q1, featuring 11.9% growth on new leases and 6.5% on renewals for blended rank growth is 7.6%.

Turning to Slide 7. Let's talk about the general state of the housing market and what the opportunity set looks like for acquisitions. Within our target markets, prices of homes that meet our buy box have declined roughly 4% year-over-year. Our rents are actually up 3%. Together, this combination of moderated home prices and slightly higher rents has led to an expansion and cap rates of about 30 basis points.

While this is directionally positive, MLS listings volume in our market has declined roughly 20% year-over-year, given homeowners reluctance to sell and forego their proactively priced in place mortgages, thereby reducing our buying opportunity.

The good news is both prices and rent seem to stabilize since the beginning of the year and appear to be moving back up. Moreover, listings volume has increased roughly 20% since January and should enable us to acquire homes at a faster pace as we head into the spring and summer months.

As you can see on Slide 8, Q1 was a relatively slow quarter for Tricon’s acquisitions, but it's on target with our expectations. As we look at the Q2, we expect seasonally higher listing volume to provide the opportunity to double our acquisition page from Q1 or remaining discipline in our acquisition criteria.

Recall that we are targeting cap rates of 5.5% to 6%, albeit with a preference close to 6% to match our expected cost of debt financing and to help us generate the mid-teens IRRs we expect in our joint ventures. That being said, foreign costs come down and we were to shift our criteria to a lower target cap rate, let's say, 5.25% to 5.75% we could buy a lot more homes.

With that, I'll now turn it over to our CFO, Wissam Francis to discuss our financial results.

[Wissam Francis]

Thank you, Gary, and good morning, everyone. We delivered another solid quarter of financial results, and I want to thank our exceptional team for their hard work and dedication, as we focus on process improvement and cost containment across our business.

Let's turn the Slide 9 to review our key financial metrics for the first quarter. Net income from continued operation was $29 million compared to $150 million last year, which includes $12 million of fair value gains on rental properties against a very strong comp of almost 300 million last year as home price depreciation has moderated in recent months.

For FFO per share was $0.14, which is consistent year-over-year, and AFFO per share was $0.11, also consistent with last year, providing us with cushion of support our quarterly dividend with an AFFO payout ratio of 48%. Lastly, our IFRS book value sends a $13.96 or $18.89 in Canadian dollars of almost 19% year-over-year, and will also note that our book value does not factor in the value of our fee streams.

Let's move on to Slide 10 and talk about the drivers of core AFFO per share. Our signal family rental portfolio delivered 18% year-over-year growth in Tricon proportion NOI. This figure reflects 17.2% revenue growth, which was driven by 5.6% increase in proportion rental home count, 1.1% of higher occupancy, and 8.7% increase in average rent. Our same home NOI also increased by a solid 6.2% this quarter.

FFO firm fees increased by 3%, primarily driven by higher Johnson development fees, including 3.5 million earn from large bulk sale of commercial lands. This was partially offset by a lower property management fee following the sale of the U.S. multi-family rental portfolio in October.

In our adjacent residential businesses, the year over year decrease of 6% in FFO reflected strong results in residential development driven by healthy for sale housing demand offset by lower FFO following the sale of the U.S. multi-family portfolio. I want to highlight that both of our US residential business and our Johnson business are a great read through into the overall housing market, and from what we can see today, housing demand is holding up exceptionally well.

On the corporate side, interest expense was up as we have a higher debt balance to support the growth of our single family rental portfolio, along with higher average interest rates. Meanwhile, corporate overhead expenses decreased from last year because of lower AIP LTIP and performance fee expense, which was partially offset by higher G&A and stable salary expense.

As we mentioned last quarter, we are laser focused on cost containment in this period of slower growth, and as we see, we are delivering on this commitment. Lastly, the diluted share count this quarter was 0.5% lower than last year due to the impact of our share repurchase program, where we have repurchased over 1.7 million shares so far.

Let's now turn to our proportion debt profile on Slide 11. We have been proactive with addressing our near term debt maturities and floating rate debt exposure, as we said, we would. In Q1, we repaid or refinanced over 140 million of near term maturities with plans in place to refinance or repay all of our remaining 2023 maturities in the coming months. These near term maturities include two JV subscription lines that are used to fund acquisitions, which will be fully repaid this year by calling on JV capital commitments or we'll be refinancing into longer term debt.

We also have a bank term loan with an extension option and we have already exercised their option to extend this loan by another year. During the quarter, we also refinanced 101 million of floating rate warehouse loans maturing in 2025, and fixed rate loans maturing in 2028. This has helped bring down our floating rate exposure from 29% of total debt last quarter to 26% of this quarter. As a reminder, we use floating rate warehouse lines to find acquisitions in the short term.

This is not a permanent part of our capital structure and is an exposure we seek to actively term out and roll into fixed rate instruments. Over time, as we continue to grow, our percentage of floating rate debt will also continue to go down. I also want to highlight that more than 74% of our floating rate debt is subject to caps, which is explained on Slide 12.

Rising interest rates have been a headwind for our floating rate debt as well as new fixed rate debt used to grow the business, but we mitigate some of these higher debt costs with interest rate caps that are now in the money. As you can see on the bottom right hand chart, our interest rate caps saved us approximately 1.4 million of interest rate costs in Q1. If we sensitize the sofa rate for an increase of 25 or 50 basis points, you'll see that our hedging program effectively cushions two third of that increase.

I'll finish off with Slide 13. To note, that our guidance for 2023 remains unchanged from the initial guidance that we issued last quarter. We believe we are on track towards our guided range for the full year. As Gary mentioned, our acquisitions are on target so far with the expectation of seasonal acceleration in the summer months. FFO per share and same-home NOI growth are also on-track, even though the components of same-home revenue growth and expense growth were both light, this quarter against the prior year comps. We expect this to normalize in the year ahead.

And now to give more insight into our same home metrics, I'll turn the call over to the wind beneath my wings, our Chief Operating Officer, Kevin Baldridge.

[Kevin Baldridge, Chief Operating Officer]

Thank you, Wissam, and good morning everyone. Our strong first quarter performance is very much a testament to the dedication of our amazing team, our people first approach and our best-in-class operations. We've had a great start to the year and we're only getting started.

Let's move to Slide 14 to talk about the drivers of our same-home NOI growth of 6.2% for the quarter. On the top-line, revenue growth was driven by a 7.4% increase in average in place rents that were partially offset by a 60 basis point decrease in occupancy, as we shifted slightly to our rent growth bias going into the spring months.

Our rent growth remains healthy with blended rent growth of 7.2% during the quarter underpinned by 10.3% growth on new move in and 6.5% on renewals. Our renewals reflect our policy of self governing, which maintains rent growth below market levels for existing residents, helping them to stay in their homes longer and as a byproduct keeps our turnover low.

As we moved into April, we saw demand continuing to strengthen with rent growth coming in at a healthy 11.9% on new leases, 6.5% on renewals and 7.6% on a blended basis. Our bad debt expense, which is embedded in the revenue numbers, has been tracking around 1.2% compared to 0.5% in the first quarter of the prior year, when we benefited from the significant government rental assistance payments.

I should note that, our bad debt has improved significantly from a pandemic high of 2.9%. And looking ahead, we continue to target bad debt of 1% of revenues by the end of this year. Finally, other revenue decreased by 13% 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 collections rather than build amounts.

This was partially offset by revenues earned from services that enhance our resin experience like smart home and renters insurance, which saw increased adoption year-over-year. Overtime, we do see a path to increasing other revenue, as we continue to focus on rolling out additional services that add value to our residents.

Let's now turn to Slide 15 to discuss our same-home expense growth of 2%. The slight rise in expenses was driven by property taxes, which were up 10% from last year, reflecting meaningful home price appreciation in our markets. We still expect property tax to be up around 8% for the full year, but are comping against a relatively low accrual in Q1 of last year.

On the other hand, repairs and maintenance expenses were down this quarter by 20.5%. Although we experienced higher work orders as well as cost inflation, we were able to offset this by cost containment initiatives, refining our work scope and undertaking more work orders in house. We now have about 75% of our available work orders completed in-house and are on track towards our goal of 80% by the end of the year.

We also benefited from higher refunds in the order through our vendor rebate program, which helped to bring down R&M expense. Turnover expenses were also meaningfully down as our turnover remained low at 16.8%, thanks to our focus on superior customer service, along with a greater proportion of cost being capitalized, given more extensive work being done on homes with longer resident tenures.

Likewise, we've put in place process improvements and cost containment initiatives that have brought down to combined expensed and capitalized turnover costs by 14% compared to last year. Next, homeowners’ association's costs increased by 14.5%, reflecting about 5% inflation in HOA dues as well as a heightened level of violations imposed by HOAs coming out of the pandemic, which drove higher penalties.

And finally, other direct expenses increased from having a higher penetration of smart homes in our portfolio and increased utility costs. We remain focused on the things that we can control to offset rising costs, while keeping an emphasis on creating the best resonant experience possible. With this, I wanted to walk through our proactive approach to managing our costs to maintain on Slide 16.

I'm pleased to report we reduce the cost of maintained by 3% year-over-year. We really think of three main areas of savings. First, our national procurement program, we're focused on negotiating price reductions on materials to help offset inflationary pressures; next, our scope management where we actively refine and manage work scopes; and finally, our internalization efforts where we use our in-house team to undertake a higher number of work orders versus using outside vendors.

Our in-house technicians cost per work order is about $400 cheaper than using a vendor for similar work. We are also seeing a stabilization in the mix between capitalized and expensed items. Recall that over the last few quarters, we have seen a higher mix of CapEx compared to the prior year, given the more extensive work required to turn and maintain our homes.

This was partially driven by longer resident tenure, which is almost a year longer than it was at this time last year, and it's also a function of people spending 24 hours a day in their homes during the pandemic, which created more wear and tear. We are starting to lap those coms, and so the mix of CapEx versus OpEx should be less of a driver of expense variants going forward.

Turning to Slide 17, I'm thrilled to introduce to you our proprietary resident app, which some of you saw at a recent investor day. We're super excited about this app as it provides a one stop shop for our residents where they can control their smart home devices, pay their rent, submit maintenance requests, and track their work order progress, all in a single sign-on app. They can even monitor our maintenance technicians, while they transit to their home in an Uber style function, which we think is really cool and adds an elevated level of convenience and transparency to our resident experience.

Our goal is to investment in technology that improves the lives of our residents, and we're happy to see this app going live in nine markets so far, and serving over 5,000 residents and counting. We have plans to roll out to all markets within the next year. We're not only innovating in our operations and resident experience, but also in our pursuit of our ESG objectives, as shown on Slide 18. We recently released our third annual ESG report. One of the highlights in this report is the progress we've made on addressing our environmental footprint.

We developed an industry first energy consumption model to estimate the baseline environmental footprint in our SFR portfolio and attract future improvements as we make our homes more sustainable. Given that the utilities in our homes are controlled by our residents, we don't directly control the energy use in each of our single family homes. However, with our consumption model, we can now measure and meaningfully improve the energy usage and emissions of our homes through the choices we make on our systems and components we install when we build and renovate.

Secondly, we officially launch our down payment assistance program and made our first down payment contribution to our Atlanta Resident Kelsey. This program provides $5,000 to qualified Tricon residents who want to purchase a home of their choice. We could not be happier for Kelsey in our new chapter as a homeowner, and we wish are all the best.

And since then, I'm also pleased to report that we have had another five residents benefit from this program and another one who is currently in escrow. At Tricon, we are deeply committed to providing housing optionality for our residents, including the ability to either rent or own a home as we aim to be part of the solution in addressing America's significant shortage of housing options.

Now, I'll turn a call back over to Gary for closing remarks.

[Gary Berman, President and Chief Executive Officer]

Thank you, Kevin. Before we close things off I did want to highlight the incredible multi-family portfolio that we're quietly building in Toronto as showcased on Slide 19. The portfolio is advancing quickly with close to 1,300 units delivering this year and the majority of projects are already under construction.

Our latest project with Taylor is currently three months ahead of schedule, achieving 64% lease up by the end of March with average monthly rents of CAD4.55 for square foot. As this portfolio is stabilized over the next few years, we estimate it we'll have a gross asset value close to $3.2 billion, creating a lot of strategic optionality for Tricon. Moreover, the book value for share of our stake in this portfolio is expected to double from $0.89 to $1.74 per share upon stabilization, creating meaningful value for our shareholders.

To finish off on Slide 20, as we look ahead to another exciting year, we want to emphasize the following messages for you. First, the value of our company's underpinned by our SFR portfolio, which continues to perform extremely well and is reflected in our book value for share that is well above our share price; next, we believe in responsible growth. We are prudent in our capital allocation discipline with our cap rate criteria and laser focused on cost containment during this period of slower growth. And finally, we have the platform, people, technology and available capital to grow much faster when the time is right.

I will now pass the call back to the operator to take questions. Wissam, Kevin, and I will also be joined by Jon Ellenzweig, Andy Carmody, and Andrew Joyner to answer questions.

[Operator]

[Operator Instructions] Your first question is from the line of Mario Saric with Scotia Bank. Your line is open.

[Mario Saric, Scotia Bank]

A quick question on the guidance. It was maintained and I may be reading too much into this, but the reiteration of the guidance seemed to be caveated with an early day's reference. Does that reference pertain to the uncertainty over potential U.S. economic weakness, which you haven't seen thus far or a possible acceleration in acquisitions, which could be a key towards you hitting the upper end of your guidance range?

[Gary Berman, President and Chief Executive Officer]

Yes. It's a ladder. It's a ladder. I mean, we don't see any weakness in our fundamentals at all. On the ground, the economy and the fundamentals of rental housing are extremely strong. They have moderated obviously a little bit since the pandemic, which is really an anomaly. But as we explained in our presentation, they are stronger than where we were in 2018 and 2019, which we would characterize back then as very strong.

So we feel great about the fundamentals. But really I would say to hit the upper end of the guidance on FFO per share in Mario, it really does depend on us going faster, being able to buy more homes and obviously having the cost of capital to do that. So that's really where the early days caveat lies. But from everything we can see today, things are heading in the right direction, right?

And as we have been clear, we feel very confident about our ability to double acquisitions in Q2. And if we can continue that, let's say, 800 per quarter into Q3 and Q4, essentially sets us up to launch JV-3 and really complete the investment program for JV-2 and Home Builder Direct over the course of the year. So we feel really good about that. The housing market is clearly stabilizing cost of debt for us seems to be coming in. We have talked about green shoots, appearing we see that today. So, we feel really good about being able to go a little faster over the course of the year.

[Mario Saric, Scotia Bank]

Perfect. That's great. Thanks for the clarification. And then just on the cost of that, what's your sense of where it is today on five to kind of seven year term?

[Wissam Francis]

Yes. Hi, Mario, it's Wissam. When we look at securitization market, it is open but for lower LTVs. Right now, if you're looking at a 60% to 65% LTV, it ranges from 5.5% to almost 6%. So that's kind of the range of the cost of debt today. And we are seeing it more closer to like depending on the day yesterday had we priced yesterday a deal, it would have been around 5.56% or something like that.

[Mario Saric, Scotia Bank]

Got it. And then can you remind us of where those -- where the 5.5% to 6% would have been three months ago or so. I suspect it would have been a bit higher.

[Gary Berman, President and Chief Executive Officer]

Yes. Mario, I would say probably around, I mean it easily could have been upwards of 6.5%. So that's significant movement I mean, if you look at the five year treasury today, I think it's about 3.5%. Spreads look like its 60% LTV at about 200 points, so you are looking at 5.5%. That's a big movement in three to six months.

And again, you know, that's reflects my earlier comments, which starts to set us up for the ability to go faster because we are buying cap rates really high fives, if we can borrow it at 5.5%. We're really into money, we get that spread and it allows us to go faster. So now we will say, look, the debt to capital markets incredibly volatile. And they have an oscillating from week-to-week. But from where we sit today, we definitely see green shoots.

[Mario Saric, Scotia Bank]

Perfect. Okay. And then maybe a question for Kevin just on the bad debt expense 1.2% of revenue this quarter, still targeting 1% by the end of the year, what factors do you foresee driving that ratio down a bit relative to Q1? And what would be expected kind of rent to income ratio be embedded within the 1% target?

[Kevin Baldridge, Chief Operating Officer]

Hi, Mario. Yes, we are still expected to get to 1% by the end of this year. The difference between this quarter and quarter last year really is for Q1 of last year, we had a lot of government rental assistance ready came in. It was 3.5x what we got this quarter. In addition to that, we also received last year a lot of past due balances, we received that quarter and we also had a number of payment plans we're paying. So, we had like a trifecta that came in last a quarter of last year.

That said, we're still continuing to improve. During the middle of the pandemic, we were at 2.9% bad debt. So at 1.2 we're improving. Last quarter in Q4 we were 1.3. So even in Q1 like this past quarter, we had half the government rental assistance that came in that we got last quarter, and yet our bad debt improved. So, we continue to see it improving. I think, some of the headwinds are -- we still see some of the ports that are backed up a little bit right now, and then with the government rental assistance, really coming to an end, that's going to also keep us from like getting there faster.

On a rent to income rate, I mean we we're still really at 23%. Interestingly, over the periods, as rents of clients still have the incomes of our residents and we're now in 12 months. We've been 95,000 to 100,000 has been the average household income for our residents. So it's increased and it's kept the rent to income the same really. So our resident profile has strengthened over -- the FICO scores have also improved. So we see ourselves getting back down to1% towards the end of the year. Recall prior to the pandemic, we were at 0.88% for 25 months in a row. So we hope ultimately to get there someday, but we're hoping to get to 1% by the end of year.

[Mario Saric, Scotia Bank]

Got it. Okay. The last one for me just on the same store expenses where the growth came in much lower than peers. You have identified cost container as a key focus for you. You did also mention that the R&M benefited from a vendor rebate program, higher refund on that. Can you quantify what the year-over-year change was for that? Maybe give us a bit more color on the drivers?

[Wissam Francis]

I mean, yes. So I mean, if you think about -- if you think about the vendor rebate program, which is kind of an ongoing thing. I mean, if we were to isolate that and we would remove the impact of the vendor rebate program. The R&M would've been savings essentially compared to last year would've been cut in half. So the way we would think about it, Mario, is instead of expenses growing 2%, again, if we remove the impact of the rebate expenses would've grown by 4%. So that gives you and again, that's a little bit closer to where our guidance is and we see that kind of normalizing over the course of the year.

Kevin also talked about the impact of, of bad debt, right? We also had a bit of an anomaly given that in the previous period, bad debt was much lower. So if we isolate that for that, our revenues would've grown closer to 6%. And overall same home NOI would've grown at 7.5%. So again, there's a little bit of noise in those Q1 numbers, but we do think they stabilize over the course of the year and we feel really good about where the guidance is.

[Kevin Baldridge, Chief Operating Officer]

Mario, if I can add just a little bit of color, just on the vendor rebates, we have several relationships like that with a lot of our national vendors. And they come in throughout the year. This one just happened to be a little bit bigger than ones in the past, but it's essentially, it's based on what we buy from our vendors the year prior and they calculate what that was. And then we start getting rebates as a percentage of purchases Q1, Q2.

[Mario Saric, Scotia Bank]

Okay. And then in terms of those rebates the expected rebates for '23, what percentage of that would've been achieved in Q1 of this year? How much of it have are you recognized?

[Gary Berman, President and Chief Executive Officer]

Probably 50%, yes, this one is the biggest one that we will get.

[Operator]

Your next question comes from the line of Brad Heffern with RBC Capital Markets.

[Brad Heffern, RBC Capital Markets]

Continuing on the expense front, I think most people are surprised at hello the figures are this quarter, but also low they've been for several quarters now. So I'm curious, how much of that do you attribute to these streamlining and cost containment initiatives? And how much incremental room is there for additional savings from those programs?

[Wissam Francis]

So, I mean, I'd say the great majority of what you're seeing is due to the cost containment programs, we've worked really hard to get our expenses down. I mean, these are -- this is one of the things that we can really control, right? So, we have programs where both on the R&M and the turnover, we are using more internal labor than we did before.

And we're finding that on the, like for like work order, we're saving about $400 per work order. When we do something in-house, we're now up to 75% of our work orders are in-house done by in-house labor. And up to 15% of the work that's done on terms are now done by in-house labor, where last year it was zero. So we're really placing a pickup there.

We've also worked hard with our vendors. We have a price book that we use throughout the country that's consistent so that we're all using the same type of pricing and we've been able to get savings on over 670 line items that's going to save about 1.3 million for the year. And then in addition, we're working to just to work with our vendors and improve.

And then we've also been working on our scope refinement. So we have a delegation of authority that we've compressed. So we're looking at all scopes in addition to just working to repair more than we replace. So we'll repair an HVAC unit more than we would replace. So we're looking to have them work out longer. Also, we'll do like touchups versus painting a whole wall or painting a whole house to help that.

It'll still live really well. It's clean and functional. And the same as we'll look at like carpet replacements, where before we might have replaced carpet throughout the whole downstairs and now it just needs one or two rooms. So the scope refinement that we've been working on as well as the price book and then integrating our more people to do in in-house has really brought the cost down.

[Brad Heffern, RBC Capital Markets]

Gary, I think you mentioned JV-3 in your prepared comments. I guess is there any update on how those conversations have been going with your partners? And is there still the potential that that could include a lower leverage target?

[Gary Berman, President and Chief Executive Officer]

Yes, we've had very good conversations. Obviously, we're in touch with our partners all the time on the existing programs. JV-2 and Home Builder Direct are happy with how that's going. I think they're optimistic about us launching another fund later in the year. So, very positive conversations, our investors love the asset class. They like how we're performing. They've got capital to do more. So, it's really just a question of us being able to get through the existing investment program and staying disciplined on our cap rate criteria, which is important. So, that's all -- I would say everything's going well.

What was your second question again there, Brad?

[Brad Heffern, RBC Capital Markets]

Lower leverage.

[Gary Berman, President and Chief Executive Officer]

Yes, I would say, yes, we will likely -- when we get to JV-3, we will likely look at lower leverage targets. The leverage targets in Home Builder direct and JV-2 have been really in that 65% range. And I would expect for JV-3s we get closer to that later in the year that leverage will probably come down about 5%. So we might be need 55%, 60%.

[Brad Heffern, RBC Capital Markets]

Okay, got it. And then last one for me, just on lack of REIT status, I know in the past you talked about how sort of the subsidiaries are generating sufficient losses that you wouldn't anticipate paying taxes anytime soon. I'm curious if that's still the case and just any broader thoughts about the need to potentially convert at some point?

[Wissam Francis]

Yes. I think that's still the case. We are not a taxpayer. We are not a cash taxpayer at any significant level right now. So if that becomes more of a headwind, then that's a reason to convert. But we don't see that at this point in time. And we don't really think that, rather being a corporate REIT is really an impediment, let's say, from index inclusion. So it's not really an IR factor either. It's really about really optimizing cash flow. And at this point, I think refine -- obviously, as a core, we get the benefit of being able to reinvest more capital. So I think we are finding the core at this point in time. The question down the road in the future is, if you were to re-domicile, that's a different question, where if you did, then it might make more sense to be REIT.

[Operator]

Your next question is from the line of Handel St. Juste with Mizuho. Your line is open.

[Handel St. Juste, Mizuho]

Thanks for taking my questions. First one, I guess, on the leverage here, ticked up I think by about a turn 8.2%. Is that -- it seems like some of that might have been tied to the loss of the JV EBITDA, but can you talk overall about leverage, how you think about leveraging this current environment? What the target leverage that you'd like to solve to and when do you think you will be able to get there? Thanks.

[Wissam Francis]

Great. Thank you. When we look at leverage -- really look at our long term target, which we have mentioned publicly, 8x to 9x net debt-to-EBITDA. So we will get there the ideas to get there over a period of time and also during this period of growth. If I look at what's outstanding today and I look at our near-term maturities, over the next 12 months, we have one maturity, which is a term loan that we mentioned that we have extended. We submitted our extension notice extent at our option by one more year.

The other two would be one of them would be refinanced and looking at doing some sort of refinancing around June or July timeframe and one subscription line will also be paid off. Next year, we have one securitization that's maturing 2017-2. So we have got two plants there. One is doing a refinancing probably later on year and do another securitization deal. If the market happens to be closed, we have a backup financing already in place to extend it by another two years. Obviously, it's not extending the securitization. You pay it off and you do a term loan for another two years and then you see what the right time is.

[Gary Berman, President and Chief Executive Officer]

What we're focused on is really reducing the percentage of our short-term debt and also reducing the percentage of our floating rate debt exposure. Obviously, we have caps in place already and some of those comps mature ended this year, but it's also those exact same deals that we are looking to refinance at the long-term fixed rate debt. Ideal target again is 8x to 9x. We're going to have them flow. We're going to be in the higher end or lower end of that range on a quarterly basis by on a full year basis, ideally, we'd like to be between 8x to 9x for now as we continue to grow. If at any point, we decided that we are going to halt growth completely, we could use our AFFO proceeds after dividends and delever over a period of time as well.

[Handel St. Juste, Mizuho]

That's great color. Appreciate that. And not to be a pick, but maybe a follow-up on the decision to pay-off the warehouse credit facility versus subscription line, which I think had a far higher effective interest rate. Was that just to maintain more financial flexibility, maybe some color on that decision? Thanks.

[Wissam Francis]

Yes, part of it is the maintain flexibility. The other part of it is just sizing as well. So some deal -- the one deal that's larger, that's why I refinanced it even though it matures in 2025, but it's better to extend that by another do a fixed rate deal for five years. The subscription lines we have to pay off because they're in lieu of equity. Just a reminder, we use subscription lines instead of calling on equity from our JV partners. We use them as a tool to allow us to just call in the cash and control the cash. So subscription line always has to be repaid first, warehouse lines, the idea is extend that into longer term fixed rate debts.

[Operator]

Your next question is from the line of Eric Wolfe with Citi. Your line is open.

[Eric Wolfe, Citi]

You talked about your stock trading around the nine implied cap rate and you're buying homes and the sort of high 5% range. I know the AFFO yield is higher when you include the fees, but maybe help us understand how you're thinking through your capital allocation choices and what would cause you to pull back on acquisitions, if anything.

[Wissam Francis]

Yes, for sure. Well then nine includes the lost the lease. So, I'm not sure really that's a fair comparison. I think, the comparison is more probably an implied cap rate closer to 7, 7.5 versus where we're buying homes at closer to a 6. And then I would say if you add in the fee income which is -- which can be substantial over time, that gets us to about 7, 7.5. So it's basically neutral. And then the other way we look at it is if we look at a single home, we showed this model before where are we acquiring on an FFO multiple basis? And at the current time we're acquiring in an FFO multiple to about 12 and we're trading at 14. So we think that's accretive to continue to allocate capital to growth.

So that's the way we think about it. We do have, um, you know, a, a small buyback program in place, but in order to do substantially more than that, we'd have to use leverage. And we don't think that makes sense. We don't think this is an environment where we should be levering up the buyback or stock. Again, to the previous point, we run the math on that and it's not accretive, given where we borrowed today. And so, we think the best course of action is again, to grow but grow at a more moderate pace, complete the investment programs for JV-2 and home builder direct, which our investors are very happy with, and then prepare ourselves for JV-3.

[Eric Wolfe, Citi]

Got it. And, and I think we're about halfway through the quarter at this point. Would you say that you've already bought or under contract for the vast majority of the late under owns that you're guiding to for this quarter effectively? And if you could maybe share the cap rate for those on a pre and post CapEx basis?

[Gary Berman, President and Chief Executive Officer]

Yes, Jon, you want to take that?

[Jon Ellenzweig]

Yes, sure. We are tracking well to that kind of 800 plus target, as you've seen it, as we talked about in our materials as well, we've seen listing volume tick up this quarter sequentially versus Q1, which certainly is helping also from a rent perspective, we're seeing much more stabilization or actually modest growth sequentially month over month from a rent perspective, which certainly is helping our cap rates. In terms of where we're buying on a nominal basis, it's really targeting that high 5s and low 6 at this point in time. And so, again, if we were, as Gary mentioned earlier, if we were to target call it 10,000 homes a year, we'd buying closer to 5 in that 5.25 to 5.50 range. But given our targets this year in our guidance range, we're much closer to 6% right now.

[Operator]

Your next question is from the line of Keegan Carl with Wolfe Research.

[Keegan Carl, Wolfe Research]

Maybe first on turnover, it obviously remains incredibly low, so I'm just kind of curious, is it simply just lower renewal rates that are driving this or is there something more, what's your expectation throughout ‘23 on your total turnover rate?

[Wissam Francis]

Yes, well, certainly I think that, we self-govern on our renewals and I think that has an effect. But we also have -- we pride ourselves in having superior customer service mean we really take care of our residents. We're when somebody calls, we are immediately we're trying to get to people within 24 to 72 hours and we try to exceed expectations.

So, we've talked about being a people first company and we have a lot of different programs that we're helping them with. And so, we think that really has a stickiness factor. We also have seen the number of families that are in our portfolio grow and that creates a stickiness factor.

Having said that we're also still have somewhat remnants of the pandemic, I think as we come into this next -- the leasing season and the summer season, we'll see that turnover will kind of move up a little bit into the 20 low, 20% and where we've been now, but that's still really low compared to multi-family or where the industry has been in the past.

[Keegan Carl, Wolfe Research]

And then on the topic of rental rates, your April spreads looked really impressive especially in the new lease growth. Just curious what you guys sent out from May and June as far as both new and renewal lease rates?

[Kevin Baldridge, Chief Operating Officer]

Yes, so on the renewals, we've sending them out at really at our cap, 72%, 75% of the renewals go out at the cap rate or at our cap. And just depending on where people are on a lost lease. So, we're really, it -- yes, they're going out like in the mid to high single digits, which is where our renewal cap rate is. Unless somebody is right at is at market, then we're a little bit more into the low single digits.

[Wissam Francis]

Yes. So just, I mean, let me just clarify that the renewals are going out at 6.5% plus okay. And then, the new leases are in the high single digits. And that's really where we would guide really for the rest of the year. So if you look at that, if you assume, as Kevin just said, turnover of about 20% that gets you to blended rent growth in the low sevens, right? So, we're a little bit ahead of that in April and so far in May. But I think we feel comfortable with guiding really to low sevens on blended rent growth, which is very, very strong.

[Operator]

Your next question is from the line of Adam Kramer with Morgan Stanley. Your line is open.

[Adam Kramer, Morgan Stanley]

Maybe just a clarification question on your prior comments there, Gary. Just on the renewal, let me just remind us where the cap is? And then kind of are there exceptions or if a home is well under market because some tenant's been there for a long time, are there exceptions to the cap? And maybe how you're thinking about the renewal cap going forward, could it move around or is it pretty stable where it's?

[Gary Berman, President and Chief Executive Officer]

Yes, we don't have exceptions, but we have moved the renewal cap up over time, given the significant loss to lease in the portfolios. We are taking that into account, but we don't go home by home or market by market. But we've essentially moved the renewal cap up to roughly 7%. So that is moving up and that provides you with a little bit more clarity why the renewal spreads are also taking up and why we think that instead of being at 6.5, they might be a little bit higher over the course of the year. So hopefully that provides you with a little more clarity

[Adam Kramer, Morgan Stanley]

That's super helpful. Maybe just on the new lease side, and look similar to a prior question, but if I just look at kind of April, new lease versus where kind of February, March were implied based on your prior January disclosure. It looks like a pretty, pretty significant acceleration in April versus February and March. Was that just kind of what the market is allowed to do? Was more of a conscious decision to maybe push new lease, maybe at the expense of occupancy is the wrong way to phrase it but kind of push, I mean, to optimize for new lease not occupancy. Maybe just walk us through that. And if you could just remind us what the loss of leases as well that would be really helpful.

[Kevin Baldridge, Chief Operating Officer]

This is Kevin. The loss of lease currently is about 15% and regarding to the occupancy and the increases, we set ranges depending on where we are in the supply demand or economic conditions. And so we'll set an occupancy rate and to the extent we get at the higher end of that occupancy range, we feel comfortable and we start pushing rents. And that's where we were really we have been. And if we get into that lower end of the occupancy range, then we back off on rent growth. And so you'll see from quarter-to-quarter we'll try to stay, right now, we're trying to stay kind of like in a 97& occupancy range plus or minus and so that we get to the top of that, right? Then we will push rents harder and we start getting below that, but then we will fall back on rents a bit. And so you'll see that overtime.

[Wissam Francis]

And Adam, the only thing I would add to that is, the thing you have to remember is, it really depends on which leases or tenants are rolling over. And what's the tenure of that lease, right? And so where you're seeing a bit of the variation from month-to-month and new lease growth really depends on the tenor of the leases that are rolling over, right? And so, if we have more shorter term tenure tenor leases rolling over, you'll see lower new lease rent growth. If we have higher tenure leases rolling over, you'll see a higher new lease rent growth if that makes sense. So that's why in January, we had significantly higher new lease growth because of the mix in in February and March and moderated. And now back in April, it's accelerated again, again partly because of the mix of what's rolling over. But the key thing to remember overtime is the loss of lease, which is 15%. So we should recover that. We should recoup that overtime.

[Operator]

Your next question comes from the line of Stephen MacLeod with BMO Capital Markets. Your line is open.

[Stephen MacLeod, BMO Capital Markets]

Great. Thanks, guys. Couple of questions here, lots of great colors so thank you. Just wanted to clarify the Q2 acquisition pace more than doubling, is that largely due to just seasonality or is a portion of it also due to better acquisition math? I think you sort of alluded to both in the Q and A. So I just wanted to confirm.

[Gary Berman, President and Chief Executive Officer]

Yes. It's largely because of seasonality. We have seen a pretty significant increase in listings. Obviously, they are down meaningfully year-over-year, but if you think about where the listings are from January, they have increased about 20%. So that basically allows us to -- if that hits our buy box and allows us to go fast faster, so that I would say is a key reason as to why we go faster from, let's say, 400 to 800 in Q2.

The biggest governor overall though is the cost of capital is the cost of debt, right? And so, as we get confident that we can borrow at 5.5 or lower then we can acquire at lower cap rates, which allows us to go faster and faster. So again, I think things are heading in the right direction. But the Q2 guidance to 800 is largely predicated on increased listings. And then to go faster than that, it means we need a lower cost of capital.

[Stephen MacLeod, BMO Capital Markets]

Okay, great. That's clear. Thanks, Gary. And then just could you give a little bit of color around NOI margin in the SFR business just how you see that evolving through the year?

[Gary Berman, President and Chief Executive Officer]

Yes. I mean the NOI margin I think we feel pretty -- look it, I mean we never thought, I don't think we ever thought Kevin, right, that it would get up to 69.5% or close to 70%, I mean, never in a million years. So it's far exceeded our expectations. The initiatives that Kevin's talked about in terms of cost prevention and, and some of the really exciting things we're doing on the controllable expense side are really driving that.

But I think I would just say over the course of the year, we probably feel stable, right in that kind of high 69% or 69% range in order for us to ultimately have a seven handle on the margin, which I think is clearly possible, it does mean that revenues have to grow faster than expenses. And I would say on our guidance, obviously, for this year, we're assuming that revenue over expenses is roughly the same, which would mean that you're not really going to be able to drive margin expansion this year. But over time I think we're hopeful that we can't.

[Operator]

[Operator Instructions] Your next question is from Jade Rahmani with KBW. Your line is open.

[Jason Sabshon, KBW]

This is Jason Sabshon on for Jade. So what are the implications if rates continue to stay high due to sticky employment and inflation? Would you consider either reaccelerating acquisitions, but focusing on higher cap rate assets or considering raising third-party capital and investing unlevered?

[Gary Berman, President and Chief Executive Officer]

Well, we're not going to buy -- we're not going to chase yield. That's not something we're going to do. We're very disciplined on the quality of home that we buy. It's extremely consistent. And the market ultimately dictates what the cap rates are. But we're not going to go out there and try to buy 6.5% or 7% cap rates in order to make the math work and buy an inferior quality home with lower household income. We're just not going to do that. So, we are somewhat beholden to where the market's at.

Could we ultimately, look at a model where we go unlevered, it's possible, but I think as Wissam talked about, we're probably just better off just to use less leverage rather than go unleveraged. So then rather than go to 65%, maybe we're just better to go to 55% and 60%. And from what we see today, we are seeing positive spreads again, if that could change, but from what we see today, we are able to hit that positive spread. So, we feel great about that and we're just going to monitor it kind of week to week, month to month.

[Operator]

There are no further questions at this time. I'll turn the call back over to Gary Berman, President and CEO of Tricon Residential.

[Gary Berman, President and Chief Executive Officer]

Thank you, Brent. I'd like to thank all of you on this call for your participation. We look forward to seeing many of you in June at the Nareit Conference and speaking with all of you again in August to discuss our Q2 results.

[Operator]

This concludes today's conference call. You may now disconnect.