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Tricon Residential Inc
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Good morning. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Capital Second Quarter Analyst Call. [Operator Instructions]Thank you. Mr. Wojtek Nowak, Director of Corporate Finance and Investor Relations, you may begin your conference.
Thank you, Lindsey, good morning everyone, and thank you for joining us to discuss Tricon's results for the 3 months ended June 30, 2018, which were shared in the news release distributed yesterday. I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. For more information, please refer to our most recent management discussion and analysis and Annual Information Form, which are available on SEDAR, and our company 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 at triconcapital.com, and a replay will be accessible there following the call.Lastly, please note that during this call we will 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, CFO of Tricon Capital Group.
Thank you, Wojtek, and good morning everyone. Q2 was a great quarter for Tricon with solid operational results, as well as several milestone actions achieved. These include the landmark joint venture of our single-family rental vertical, the very successful disposition of our manufactured housing portfolio, addition of 2 new multi-family development projects in our Tricon Lifestyle Rentals vertical.Let's begin with our financial results on Slide 4 of the presentation. Our diluted earnings per share for Q2 2018 was $0.29 for the quarter compared to a loss of $0.17 for the same period last year, where we incurred transaction costs of $28 million related to the Silver Bay acquisition. On an adjusted basis, after removing the change in the fair value of the derivative related to our convertible debentures and other non-recurring and non-cash items, we reported adjusted diluted earnings per share of $0.39 cents, a 129% increase compared to $0.17 last year.We also reported adjusted EBITDA of $93 million, a 95% increase compared to $48 million reported last year.Here are the key factors that contributed to the year-over-year growth in our adjusted results. First, Tricon American Homes generated adjusted EBITDA of $68 million compared to $42 million in the prior year. The 61% increase was driven by strong rental growth and operational efficiencies, as well as a full quarter's inclusion of Silver Bay results. In addition, this quarter included a fair value gain of $37 million, reflecting strong home price appreciation of 1.7% in the quarter. This compares to a fair value gain of $20 million in the prior period, where home price depreciation was 1.2%.Second, Tricon Lifestyle Communities generated adjusted EBITDA of $23 million, arising from the sale of our manufactured housing portfolio, well above its carrying value. The sale also generated $85 million of net cash proceeds for Tricon. Third, our Tricon Lifestyle Rentals multi-family vertical had healthy fair value gains as the U.S. project advance towards completion. And fourth, our Private Funds and Advisory fees grew by 18%, as a result of higher performance fees. Higher income from Johnson, as well as increased development fees as we expanded the portfolio of active TLR projects.These positive results were offset by year-over-year decline in Tricon Housing Partners adjusted EBITDA related to ongoing budget update to reflect the extended development timelines and escalating construction costs, as well as declining investment balances of legacy vehicles. We expect these pressures to continue over the next couple of quarters.On the expense side, interest expense increased in line with overall growth of the company, including a full quarter's impact of Silver Bay transaction.I will now turn to Slide 5 to discuss our liquidity position. We maintain a flexible balance sheet with over $170 million available on our revolving credit facility, and over $21 million of cash on hand. During the quarter, we generated a significant amount of cash for Tricon, including $85 million of net proceeds from the sale of manufactured housing portfolio and $25 million of cash repatriated from TAH's securitization transaction in April. We also generated $11.3 million of Core FFO from TAH and $7.5 million of fee revenue from our private funds and advisory business.These cash inflows were used to fund ongoing investments across all of our verticals and reduce our debt. Over the past year, we were able to reduce our look through leveraged from approximately 63% to 60%, excluding convertible debentures. I will also note that approximately 70% of our look through debt is locked in at fixed rates, which greatly reduces our interest rate exposure. For example at TAH, the blended cost of debt only went up 16 basis points year-over-year in an environment where LIBOR rates went up 90 basis points.Going forward, we have strong visibility into numerous sources of cash flow across our businesses. These include the expected sale of TLR US multifamily assets in 2019. Cash flows from THP which we expect to surpass $600 million over the next 8 to 10 years as well as highly predictable operating cash flows from Tricon American Homes and our contractual fee streams. Starting later this year, we also expect to see initial cash flows from our first multi-family development in Toronto, followed by contributions from other buildings as they come on stream in the years ahead.Using these internally generated cash flows, we believe we are well positioned to execute on our current growth initiatives, including the TAH joint venture that we recently announced. With that, I'll now turn the call over to Gary to provide additional insight into the performance of our various business verticals.
Thank you, Wissam. The past 15 months have been a transformative period for our company beginning with the Silver Bay acquisition and followed by several strategic and operational achievements coming to fruition in the second quarter of 2018.Let's start back for a minute to talk about where we are in Tricon's evolution as a company. At the time of our IPO 8 years ago, Tricon was effectively a pure-play asset manager that managed commingled funds and invest in land and home building projects. Soon after the IPO, we realized in order to become a bigger and better asset manager, we would need to add product lines, including single family rental and to prove them out by incubating them on our balance sheet. We call this period of balance sheet driven product development Tricon 2.0.With the recent announcement of the TAH joint venture, we're now entering what we call Tricon 3.0, which is an extension of original asset management model, but with more product lines to offer third-party investors. Tricon 3.0 or the return to asset management, is more efficient from a balance sheet perspective and should allow us to scale faster, generate new sources of recurring fee streams and driving even stronger return on equity for our shareholders.And so I think it was only fitting that we start my commentary with a look at our private funds and advisory business on Slide 7. In the second quarter 2018, Tricon reported total fee revenue of $7.5 million, an increase of 18% year-over-year. A new addition was the asset management fees earned from the TAH joint venture which were de minimis this quarter given that the JV only commence on June 27, but we'll ramp up in the coming quarters.The fees earned for managing third-party capital within THP were relatively consistent year-over-year, in keeping with a stable base of AUM while fees from our Johnson land development subsidiary increased as a result of higher land sales and associate development fees or commissions earned on those sales.In TLR, our fee revenues continue to accelerate as we added new multi-family development projects in Canada. In this vertical, we are an asset management and development fees from third-party capital, and expect those fees to grow as we advance to build out of our pipeline.Lastly, we earned over $800,000 of performance fees this quarter from fund THP1 Canada and expect to receive $66 million of performance fees in the next 8 to 10 years as legacy vehicles move towards completion.In summary, we are seeing strong growth in the fee revenues and expect this trend to continue going forward.Turning to Tricon American Homes, our biggest vertical, I'd like to touch upon 3 aspects of the business, namely this quarter's operating results, the recently announced joint venture and the expanded acquisition program.Let's start with the operating highlights on Slide 8. This quarter's results reflect a similar number of homes to last year, to recall that we completed the Silver Bay acquisition in May 2017 resulting in only a partial contribution from the acquired homes in the prior period. The more relevant metric is the increase in NOI margin from 60.8% to 62% over the span of 1 year. A key driver has been strong rent growth, which average 5.1% over the past 12 months and accelerated further in Q2.In the second quarter, TAH posted a record 6.4% rent growth including 4.8% growth on renewals and 9.4% growth on new leases. TAH's benefited from a centralized approach to revenue management and a revenue optimization program, which is helping the team make better decisions in the trade-off between occupancy and rent, result in our overall revenues. It's remarkable at this stage in the housing cycle that TAH is able to drive 6% plus funded rent growth which obviously speaks the TAH's successful revenue management initiatives and the strong demand for institutionally managed single family rental product.On the cost side, notwithstanding the property taxes have been rising in line with strong home price appreciation we've become more efficient in our operations enabling us to contain costs in an inflationary environment. This quarter we saw a 40 basis point reduction repair maintenance and turnover expense as a percent of revenue from the internalization of these functions enhance scale.TAH's increased skills also providing more buying power in items such as insurance which also decrease as a percent of revenue year-over-year. These factors, along with overhead cost synergies led to 56% increase in core FFO from $7.3 million last year to $11.3 million in the current period. The Same Home Portfolio Metrics in Slide 9 paint a similar picture of operational improvement for subset of 6,600 homes, that TAH own prior to the Silver Bay acquisition.This portfolio also experienced strong blended average rent growth of 6.3% during the quarter, in line with the consolidated portfolio metrics, again with much credit going to the enhanced revenue management efforts.Year-over-year revenue growth of 4% was accompanied by expense growth of only 2.2% resulting in NOI margin expansion of 60 basis points to 61.1%, as a result Same Home NOI grew by 5.1% year-over-year. The margin expansion for the Same Home portfolio was positive overall, but somewhat tempered by higher turnover costs as a result of longer tenant residents turning over during the quarter, which resulted in more rents here in the homes than unusual.The higher turnover expenses masking the benefits we are seeing from internalizing the maintenance function. The property taxes were down slightly as a percent of revenue due to reduction in property tax accruals for a specific geographic markets, has a more prominent impact on the Same Home results, in particular tax assessments in Houston came in lower than we had expected.With metrics like these, it's no surprise that single-family rental remains one of the most compelling investments in the broader real estate landscape. In fact, Same Home NOI growth in single-family rental exceeded all other REIT sectors in 2017. And Evercore leading independent research company believes that we will grow by 4.7% through 2020 as compared to 2.5% for apartments and non-residential real estate sectors.We continue to expect strong results from TAH driven by very healthy demand for rental homes, tangible results from revenue management initiatives, as well as ongoing cost containment and the benefits that come from added scale.By far, the most significant accomplishment of TAH this quarter was the closing of the joint venture with 2 leading institutional investors, to acquire and manage a portfolio of 10,000 to 12,000 single family rental homes. The investors include one of the world's largest Sovereign Wealth Funds and one of the largest state pension plans in the US.The JV is not only a validation of TAH's Asset Management platform, but also an endorsement of single-family rental, a multi-trillion dollar real estate asset class, which should see substantially more participation from large institutions in the years to come.Slide 10 provides a summary of the JV structure. The $750 million equity commitment will be funded on an equal basis by 3 investors including Tricon. The funding is expected to be deployed over a 3-year investment period, followed by a 5-year hold period during which TAH will manage the homes.The total value of the portfolio is expected to be approximately $2 billion when including associated leverage of up to 65% loan to value. Throughout the JVs terms, Tricon and its investors will earn a proportionate share of net cash flow from the properties and Tricon will earn asset management fees and potentially performance fees.In addition, TAH's operating platform will earn property management fees and other fees to offset the operating costs associated with managing, acquiring and renovating the homes.To be clear, this joint venture solely relates to TAH's go-for-acquisition and does not impact any TAH homes acquired in Q1 2018 earlier or TAH's internalized operating platform.As a way to see the portfolio, we've agreed in principle to sell all homes acquired in Q2 to the JV at cost. In addition, TAH expects to acquire 750 homes to 800 homes in Q3 largely through the MLS and supplemented by iBuyers small portfolio and build-to-rent acquisition channels.It's important to highlight that there continues to be a vast opportunity to acquire homes within TAH's target markets, at cap rates ranging between high 5% and low 6% as shown on Slide 11. TAH's refined and automated the acquisition process with its proprietary TriAD acquisition platform, which creates the MLS every 10 minutes and filters listings based on specific acquisition criteria.From these filters, the team underwrites all the homes that hit our buy box. And the second quarter specifically, there are over 180,000 new MLS listings in TAH's active markets of which 7,900 fit our acquisition criteria. TAH made offers on 1,800 of these homes and ultimately purchased 505 homes. With the buying power, the JV coming online, TAH can easily step up to the pace of acquisitions towards 700 homes to 900 homes in a typical quarter.Let's now turn to Tricon Housing Partners or THP, our for-sale housing vertical on Slide 12. During the quarter, THP generated adjusted EBITDA of $3.6 million, representing a 5.7% annualized net return on invested capital. This is below our expectation of a 9% to 11% return on capital, which is a function of [ several ] issues we discussed last quarter, including cost pressures in length and cycle times across the home building industry, which are negatively affecting project budgets and fair value adjustments.In fact, the lack of available labor was recently highlighted in the Wall Street Journal and is resulting in ongoing shortfall of new home starts vis-a-vis household formation. We expect THP's results to remain below our target for the next couple of quarters as we continue to implement budget updates on our remaining investments. Although we believe the results are stabilizing, as you can see by the bar graph on the slide.The demand side of THP's business remains very strong. As shown by the adjacent charts which cast the results of 2 important sales channels for our business. The first is Johnson, our integrated land development platform, which is one of the largest developers and master-planned communities in the U.S. and the only one to have 6 MPC's ranked in the top 50 according to RCLCO.Home builders of Johnson's communities reported a 29% year-over-year increase in home sales to end customers across all projects in Q2, and 18% year-over-year growth for the first half of 2018.The second chart presents home sales at THP's active-adult communities, which are generally performing below our original underwriting, that which have nonetheless posted a 19% increase year-over-year, again pointing to a stabilization results from these projects.Let's move on to Tricon Lifestyle Rentals or TLR, our multifamily development in rental vertical. TLR had an active quarter adding 2 new investments in Toronto. The first is the West Don Lands profiled in Slide 13. This project consists of 2 exceptional sites totaling 9 acres, which currently make up the parking lots surrounding Toronto's historic Distillery District just East of Downtown core. We are excited to be building at a large scale master plan in this vibrant neighborhood, which should see an influx of approximately 50,000 new jobs at Google Sidewalk Labs, First Gulf East Harbor developments and The Globe and Mail Centre in the immediate vicinity over the coming years. We expect the West Don Lands project to ultimately consist of 1,500 plus rental units, as well as ancillary retail and potential office space.The project exemplifies 2 unique aspects of our Canadian multi-family build-to-core strategy. The first is our ability to secure sites that are specifically intended for rental development. And this case is part of the infrastructure Ontario Housing Plan, which allows us to avoid head-to-head competition with condo developers.The second is our ability to build the scale portfolio with a very efficient use of our balance sheet. In this case, TLR partnered with Dream and Kilmer, in a 3-way agreement to share the development costs and together entered into a 99-year land lease with the Ontario Government, which minimize the upfront land cost.TLR's second investment in this quarter also demonstrated accretive approach to securing attractive development sites in a competitive land market. As profiled on Slide 14, the project at 6 Gloucester Street is a fully entitled site, located steps away from Yonge and Bloor Streets in Toronto. TLR partnered with the owner of a legacy land position who is attracted to long-term stable cash flows or rental project, but lacked a development expertise which TLR was able to provide.As a result, TLR avoided an open-market bidding situation and secured a prime zone development site in an attractive land basis, acquiring a 47% ownership stake and serving as a developer, and operator of the building.We expect the building to have approximately 34 stories and 200 units upon completion. With the closing of these 2 projects, TLR has a clear path to building the leading Class A multi-family portfolio in Canada.If you flip to Slide 15, you can see the TLR tenants active development pipeline now totals approximately 2,700 units and CAD 1 billion of total cost upon full build-out CAD 1.3 billion, with TLR owning approximately 30% at the aggregate project equity.We expect the ultimate market value of these projects to be considerably higher than what you see on our balance sheet. And so we continue to push towards stabilization on a number of our early investments to service real-life case studies for the investment community. The first is The Selby at Sherbourne Streets in Toronto, where our marketing and operations teams are scheduling building towards for Q3, with leasing for the first 15 floors to begin in Q4 2018.McKenzie and Maxwell are 2 U.S. projects are also nearing completion on lease up, with expected disposition in 2019, at which time we intend to apply the proceeds towards corporate debt reduction.In terms of other updates, TLR Canada's second project the, 57 Spadina has started construction with 30% of all trade contract secured on budget. And Scrivener Square reach a significant milestone subsequent to quarter-end in the Toronto City Council voted unanimously to approve a 21-story building.Turning to Slide 16, one of the major accomplishments for the quarter was the completion of the sale of Tricon Lifestyle Communities or TLC, our manufactured housing investment vertical. On June 29, Tricon completed the sale of this 14 park portfolio to an institutional asset manager for gross proceeds of $172.5 million resulting in $85 million of net proceeds to Tricon after the repayment of debt, transaction cost, and performance fees to our operating partner Cobblestone.The transaction resulted in a net annualized return or IRR of 25% over 4-year investment period, making this an excellent addition to our investment track record and a key step in our quest to simplify the business.I would like to conclude with the summary of what all our recent accomplishments mean to Tricon from a valuation perspective. Let's first take a step back and revisit the progress we've made in growing our book value per share over time, as shown on Slide 17. Over the last 5.5 years, Tricon has increased its book value per share by an average of 22% per annum in Canadian dollars for a current level of CAD 10.23. We view this as a clear indication of value created for shareholders, which will ultimately reflect in our share price.Looking forward, if we were to simply operate our existing assets and finish the developments we've started, Slides 18 and 19 give you a sense, the kind of incremental value that we can potentially create. TAH on Slide 18 for example, where we currently have a run rate NOI of $146 million. Assuming same home NOI growth by let's say 5% per year, and assuming an illustrative valuation cap rate of around 5% to 5.25%. We can generate incremental book value of more than $1 per share per year. This is before even considering the value of reinvesting cash flow into new homes as part of the TAH JV.In TLR on Slide 19, we're currently underwriting development yields of 5.25%, 5.75% and approximately $1.2 billion of construction costs. If we assume current market cap rates of 3.75% to 4.75%, we can double the value of this business to more than $2 a book value per share.And in THP, we're projecting approximately $600 million net distributions to Tricon over 8 to 10 years, translating to $5.90 a book value per share upon completion.Taken together, our existing investments enable us to meaningfully grow book value per share, providing us with confidence in our prospects and our ability to create value for both public and private investors, and we look forward to reaching our goal of $10 billion in the AUM in 5 years and delivering on the promise of Tricon 3.0, our renewed focus in asset management.With that, I will pass the call back to Lindsay 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 Baldrige.
[Operator Instructions] Our first question comes from the line of Geoff Kwan with RBC Capital Markets.
First question was just on the rent growth at TAH, obviously you can sustain these levels over the long term. But any thoughts in terms of how much higher it could possibly go or at least stay at these elevated levels?
Hi, Geoff. Actually our numbers in July are even better than Q2, which is just outstanding. It's really surprised us, how strong these numbers are and it showing how our revenue optimization efforts are really showing themselves and it's -- I think we can continue this -- these levels probably for a few quarters, but to say that we can do this forever is obviously not sustainable.
On Trinity Falls, is there an opportunity or is it something that you guys might have thought about to syndicate down your investment and that's maybe pick up some more management fees and then use the proceeds to pay down debt, more than you have already?
Yes, it's a good thought. It's something we are thinking about -- the first thing we wanted to do is obviously to stabilize the asset onto, we had to perfect entitlements, if you remember; we had in applying another 300 acres, we're expanding our building program and putting in new amenities and we think with all of that, the asset will show better. It's been a bit of a turnaround and so I think we're now in a better position to think about syndicating it. So it's something we will look at in the future and it very much would be, in keeping with our effort to lighten the balance sheet and grow the asset management business.
And just if I could sneak in one last question. With the various kind of investors that help with the various investments in your various verticals. Do you have any exposure to any Saudi entities and if so, are there any implications to think about on current future funding ability?
Answer to that is no. We don't have any exposure to Saudi investors.
Our next question comes from the line of Mark Rothschild with Canaccord Genuity.
Just following up on the TAH. Is there any way to quantify or no, how much of the rent growth is outperforming the market and you talked quite a bit at your Investor Day. And then again on the call about the technology that you guys are using and how you really feel it's improving your ability to maximize revenue? Is there any way to know what that actually translating into?
Yes, we think our best guess is just adding about 200 basis points of rent growth which is -- which is pretty phenomenal. I mean we were at 6.4% for the whole portfolio, we think without the revenue optimization efforts, we probably be around 4.5%, so it's pretty -- it's pretty substantial.
And then you referenced a broker that forecasting 4.4% growth for the best of our business, I assume that mean same-store NOI, if you're saying that you can do a 200 basis points better and you reference that, I assume you think it's a good number, does that mean that owing that a couple of years, do you think you could do 6% plus?
Yes, I mean that metric from Evercore same-store NOI growth, we're seeing it will be just under 5% through 2020. We think we can continue to do about 5% I'm not sure if your question is related to rent or revenues or related to NOI. On the revenue side, as I said in the previous line of questions, we think we can do 5% to 6% for a few more quarters. We certainly can't do that forever. I mean it that's off the charts rent growth and I think for NOI growth, we're pretty confident that we can continue to maintain around 5%. So that obviously bodes really well for our ability to continue to grow enough.
Next question comes from the line of Jonathan Kelcher with TD Securities.
Just sticking with the TAH, the same-property occupancy was down 90 basis points this year, I guess, overall occupancy was down close to that. Is that a function of the revenue optimization?
Yes. It absolutely is. And it's also a function of new acquisitions, so that the stabilized occupancy really hasn't changed much at all. But in-place occupancy has come down as you said almost 5% on largely because of the revenue optimization efforts where we make a trade-off between occupancy days and market and driving rent and obviously, the decision has been to more occupancy a little bit in order to ultimately achieve higher revenues, which is what we're doing, but it's also a bit of a function of new acquisitions. We acquired 500 homes in Q2, and remember those homes were vacant when we acquired them.
And then I guess just sticking with that -- would -- like on a stabilized basis, I'm guessing, there'd be a range of occupancy that you'd like to stay at, to trade off between pushing and pushing rents and keeping and not having too many empty homes. What level, are you targeting there?
Well, I think in this environment where we see really, really strong demand. I mean obviously very strong economic backdrop. We'd like to keep in place occupancy probably above 95%, but it obviously is a function of acquisitions. So, I see that really in relation to more of a stabilized portfolio. If we were to really ramp-up acquisitions that obviously would impact the in-place occupancy.
Okay and then just, just lastly. Not sure if you saw this, but the HavenBrook portfolio was announced this morning with the front-yard residential, is that something you guys looked at all?
Yes, we looked at it. We looked at it a while back, melted. It was a decent portfolio. But maybe only half the homes really fit our buy box, so we didn't really pursue it too aggressively, but we think it's probably a good move for [ resi ] and helps them clean up their own story.
Any thoughts on the pricing that they announced this morning?
We don't, we just, we just saw Jon, I think our best guess and it's just a guess, it's probably a high 5% cap rate, but we don't really know. We'll have to go back and look at the numbers, I don't think they announced the cap rate. I don't even think they provided the NOI. So it's really just a guess.
Next question comes from the line of Stephen MacLeod with BMO Capital Markets.
Just 2 questions here, I just wanted to get a little bit of a sense as to what you're seeing in the early days of your -- of your new significant JV in Tricon American Homes. I mean you touched a little bit on it, in your slides, but I'm just curious if you can get a little bit of color around, like what you are seeing, what's the market response has been and how you're seeing the home acquisition new plan working?
Well, as we talked about, we are going to contribute on the 500 homes we acquired in Q2 to the JV at cost in Q3. And then in addition to that, we expect to buy about 750 homes to 800 homes for the JV in Q3. So in total, about 1250 homes to 1300 homes in Q3, right in line with underwriting in terms of where we're targeting the cap rates high 5%, low 6% and right in line in terms of acquisition volume. So we're feeling great about our ability to hit the acquisition volume, which is obviously a key thing that's going to drive the JV going forward. And obviously the overall market sentiment to the JV has been extremely positive. It obviously allows us to scale faster, you're not going to see this for probably a couple of quarters, but over time, it's going to be, we think, substantially creative to us from an operating perspective as well and that it makes our operations, certainly more efficient.
And then when you look at the THP business, can you just talk a little bit about your confidence level in the returns, returning to that 9% to 11% range, just given what we're seeing in the market right now?
Yes, I think we're going to have another couple of quarters where we are revisiting all the business plans, updating all the models of our some 50 projects. And so we expect that the EBITDA to be, for Q3 and Q4, generally be in line with Q1 and Q2. So really under where we would like it to be. In 2019, we're relatively confident that we'll be able to get back to our targets, but I stress relatively because it is an environment where costs are remain and they're just difficult to control and are somewhat out of our control. That being said, the offset is demands, demand is very, very strong as we talked about in terms of Johnson sales, even our Active Adult sales are, sharply up year-over-year. So I think we are relatively confident, Steve, that we'll be able to do quite a bit better in 2019.
Our next question comes from the line of Mario Saric with Scotiabank.
Just coming back to TAH and maybe a couple of clarification points, Gary, when you mentioned the internal forecast for Same-Store or Same-Home NOI of 5%, is that through 2019 or is that through the 2020 period that references to the Evercore estimate?
No, I would say, I mean we are not looking all the way up to 2020. I know Evercore's meet those projections, I mean I would say, we're probably looking more at 2018, 2019.
And then on the rent growth, clearly very strong, the 6.4% year-over-year is very likely higher than the year-over-year kind of household disposable income growth within the portfolio. So, that ratio is inching up a little bit. I guess over time, how do you think about going from the low 20s through the high 20s in terms of that ratio, so rent to disposable income. And then secondly within the revenue management system, how -- are there any factors embedded within the system that allocate value to what they "goodwill" to maybe not necessarily increasing rent, the pace that you can in order to kind of retain tenant and perhaps even kind of thinking about regulatory implications given what you are seeing in California in terms of cost of [indiscernible]?
Yes. Interesting, interesting set of questions, really talking about I think risk to being able to raise rents at these levels, certainly political risk, headline risk and adjustability for people to pay. Like I said before, these are not sustainable rent increases. We've -- the business started really is one where we just literally tried to get heads in beds and now we professionalize it and we continue to institutionalize and now with revenue optimization techniques and that's allowing us to get [ apart ], but to say that we can grow rents 6% forever that's absurd, we just can't.On the other hand, wages are increasing, not increasing at 6%, they may be increasing at 4%. So, yes, if you look at rental disposable income, and that ratio is going to tick higher, but not a lot higher. So we still think we have a lot of room, and that's why I said, I think we can continue to raise rents at this 5% to 6% level, at least for a few quarters. We've got that visibility, but we don't -- we certainly don't think we can do it forever. And we do have internal guidelines about how much we can raise rent. We would never raise rent, for example, on the renewal more than 9%, because we just don't want to attract that headline. It's more related, the impact is really related more to new leases, we got to be much more careful on renewals and will still always have an occupancy bias even though we've dropped the occupancy a little bit. We will, on the whole, retain an occupancy bias.
And within the revenue management system, is there a specific rent disposable income ratio that is targeted in -- is there a level where the system starts to show a meaningful point in occupancy?
Hi, Mario, this is Jon Ellenzweig. We don't have a specific target ratio, but as you know, we are in the low '20s, don't expect it to tick up meaningfully over the near-term and in our model, what we're really focused on doing is balancing occupancy turnover and rent growth for all of our renewals and we're going to continue to do that. As Gary mentioned, we do have a cap on what our maximum renewal is. If you look at this quarter, on same home or total portfolio, there is a spread of, call it, 400 basis points, 500 basis points between the two of those, and I expect there continue to be a gap between the lease growth and renewal growth.
And Gary, your comment on July rents being even better than Q2. Is that both on renewal and turnover?
Yes, they're slightly better than Q2. Just for July though, so I don't necessarily want to see that that one month makes a trend, but it does look like at this point, that it continues to ratchet up.
Just maybe a couple of quick questions on the JV and perhaps maybe on the accounting for the JV, so there has been an uptick in corporate overhead allocated TAH for quarter which presumably majority of that related to getting the JV off the ground. How should we think about the allocation of corporate overhead between TAH, and then to the JV going forward?
So, most of the significant ramp up, and most of the change in the overhead associated was with the JV this quarter. It's primarily related to significant ramp-up costs and setup costs this quarter, and we expect that to go forward -- going forward to increase by another roughly a $1 million for Q3 going forward on a run-rate basis. Because the fees, we haven't incurred any fees, we haven't earned any fees in Q2, but we will start earning fees as we start investing our capital in Q3 going forward. In terms of cost attributed to the JV and associated to the JV, these cost all incurred as overhead for TAH and also cost is directly attributed to the joint venture, it cannot be charged to the joint venture, it is also by the fees that we are.
I'm just thinking from a longer-term, from an FFO perspective, once the fees start coming in from the JV. How to think about the cost allocation to that fee stream, in terms of getting to a net FFO figure --?
Well, Mario, the net FFO number is driven in part obviously by the property level metrics. But then the overhead of TAH, which is deducted to get to FFO. And what you are seeing this quarter, and we probably will see for a couple more quarters is a ramp-up in TAH overhead, and that's related to the start-up costs associated with this. For example, we've hired about 30 people, 10 in acquisitions, 20 in the field to ramp-up for the acquisitions, the higher piece of acquisitions. So there are start-up costs and so you should expect to see in these -- in these early quarters, the higher overhead that you saw in Q2, but over time, the joint venture and certainly or TAH gets the benefit of a series of fees, including property management fees that will be paid to Tricon, and that will offset some of this early stage incremental overhead.So the long and short of it is, the FFO this quarter is a little bit lower than maybe what you would have thought, because of the start-up costs for the JV. But over-time, we will get the benefit of it. The thing to keep in mind, obviously we can't give you a specific example, but the thing to keep in mind is that the asset management fees are paid on committed capital, but the actual fees, operating fees, for example, property management fees, there's also acquisition fees and construction management fees, those are paid to TAH on invested capital. So we're in a situation right now where we're having incurred as overhead, but we're not getting any fee income in. But as soon as we start ramping up, the acquisition volume and stabilize in that JV, you'll see a real benefit.
And then just in terms of the accounting treatment for the future JV purchases. Is it expected that you'll be showing the income associated with the home to buy through the JV on a proportionate basis or consolidated with the minority interest?
No, it's projected, we're going to have a consolidated look. So you'll see total TAH, not segregated by joint venture homes, but then at the bottom, you'll see deduction of minority interest and that minority interest will deduct the shares of our partners from [ suite online ].
And then on the acquisition front, 1/3 of, let's say 700 to 900 homes a quarter gets you to about 230 to 300 homes at Tricon share per quarter, which is kind of below the 400 to 500 that you were targeting before. Obviously, there could be portfolios and other things along the lines going forward that can significantly increase that to 230 to 300 Tricon share over time. But how do we think about the acquisition pace in that context?
Yes, I would think that you are really trying to guide to what we think we can control. So when we talk about doing 700 to 900 a quarter, that's largely through the MLS, one by one supplemented by a little bit of built-to-rent, maybe some through the iBuyers channel, small portfolios, but nothing large. In order, I think for us to get up to, let's say, 1,200 where we would get back to the 400 pace prior to the JV, we need to buy some larger portfolios. So obviously -- we have the capital reserved essentially to be able to do that over 3 years, but without being able to access as larger portfolios, we're more comfortable guiding to around 700 and 900 per quarter.
Our next question comes from the line of Himanshu Gupta with GMP Securities.
So on Tricon American Homes, very strong fundamentals in the single-family rental space. Needless to say, industry is taking notice. Are you seeing any new players, new competition in the single-family space or is it mostly expansion by existing players?
The only new player we've seen is Cerberus. So they've been pretty aggressive, they're also going with more of a middle-market strategy. They see a lot of opportunity in single-family rental and it ramped-up. But apart from that, it's the usual suspects; on the private side, it's Progress and Amherst, between them and Cerberus continue, we're main competition, I think over the MLS for one to choose these Invitation, AMH, I think we're a little bit less active. Obviously, we just saw the announcement with Front Yard buying HavenBrook, that portfolio had been in the market for a while. So it wasn't a surprise to us as it is traded. But it's largely the usual suspects.
And just to follow-up on the rent growth on new move-ins, looks like it was equally strong for legacy Tricon assets and Silver Bay portfolio. Does that change quite a bit by markets, I mean, are there markets pushing rents 10% to 15% and are there markets like 5%, just looking -- just want to get a sense of the geographic mix of the performance?
No, and that's a good question, Himanshu. And yes, there is some variance between markets and there's a number of factors, though. So in some cases, it has to do with certain markets performing stronger and higher demand and for example the West Coast market in particular Northern California, Reno, Las Vegas, we're seeing strong demand. But in other cases, where we're buying a lot of homes in a market like Atlanta, we might actually temper our rent growth because we have more homes coming online at once. We're trying to balance, as I said before, occupancy as well as rent growth. So I would say there are some variances by market, but some of it is caused by us and where we're buying homes and adding more volume to our portfolio.
But what I would say, Himanshu, just to add to that, it's relatively consistent across the portfolio. In other words, it's not like we're getting 20% in one market and 5% in another. I mean, we're not really getting much more than 10% in any market. So it is relatively consistent across the board.
And maybe just to follow-up on the market broad performance. Houston, we saw some reduction in property taxes. So is this -- just isolated the Houston market or should we, I mean -- how should we model the property tax growth for on the full-year basis. Still 9% type growth?
Yes, I mean, I think last quarter, we thought we'd be around up 8% to 9% for the year, like I mean we were surprised, I mean that the Houston assessments came in much better than we thought, which allowed us to reverse the Q1 accrual, so that's great news. We're still up 4% on property taxes, year-to-date and I think now we think we are going to be closer to 6% to 8%. So, it's a little better than what we thought in Q1, but it's obviously still a significant increase and obviously in line with HPA.
And just switching gears on TLC sale, obviously very impressive, annualized returns on equity there. How does the investment pan out relative to your underwriting, your initial expectations. And then, at what point of time do you shift focus to TLR US now?
I mean it did significantly better than what we thought. I mean we -- everything we looked at and we underwrite to probably a 15% and 20% return and I think for this type of asset class, which is stabilizing competitive, probably we would have expected to the lower end of that range, probably closer to 15. So to achieve a 25 net over 4 years is just -- it's off the charts for the vintage of that investment. So, we're extremely happy with the result and it obviously speaks to our ability to add value and just -- also just how much competition there is for this asset class, and again a reason why we were exiting it. On TLR, we feel good about the prospects for maximum McKenzie, we think that we will see some sort of transaction in the first half of 2019. Both projects narrow substantially completed in the start of their lease up, the early leasing at the McKenzie, which is a project near Highland Park in Dallas, is about 10% ahead of our budget. The Frisco asset, I'm going to say it's probably closer to budget. So I think at this point, we probably hit our expectations, I don't know if it's going to be homerun like TLC or something far better than what we expected, that it should probably be closer to our underwriting on TLR. I think, again, I think we've told the Street that we expect to receive proceeds back of about $75 million.
Sure and maybe just one final question, I can squeeze in, on Tricon Housing Partners, I mean the pressure is mostly on the cost side, what we understand and timing related, have you revise any of your revenue assumptions, I mean given the HPA, and are they helping to offset the increased -- increases in construction cost there?
Yes, I mean when we update the budget is obviously holistic. We just don't update the cost, we update everything, revenues and timing and in a lot of cases, yes, we are seeing higher revenues as well. So it has helped the impact, the offset and has helped to offset the cost increases. In many cases, there's been really no impact on overall profits, but we have seen elongated -- extended time and that's obviously impacted the fair value. So, it's interesting because in some business plans, we actually see no material change in profits, yet we're showing these kind of negative fair value adjustments just because of the time value aspect.
Our next question comes from the line of Johann Rodrigues with Raymond James.
So, you're couple of months out from completion of the Selby and the cost was projected caught a $140 million. This one, do you currently underwriting, or what do you think the value is, on stabilization of this thing, $180 million, $200 million?
Yes, I think you're in the ballpark. I think you're in the ballpark. I can't tell you exactly what the number is, but let's just see, it is significantly higher than the $140 million and this project that we just talked about TLR, but I will tell you this project for us is probably going to be home run. The costs are in line with what -- they're probably going to be below what we budgeted, the revenues are probably going to be a lot higher. The cap rate evaluation is probably going to be a lot lower than what we underwrote as well. So everything is pointing in the right direction.
What rents are you currently underwriting?
We underwrote 290, I don't know where we're going to end up, it wouldn't shock me first to get around 350, I think it was a smaller building, we could do better than that, but it's a big building it's 500 units. So we've got to be careful about where we set the rents, so I think it's possible that we could achieve 350.
What's the average size of the units?
It's about 650 -- 680 square feet, that's right Andrew, 683, sorry its off by 3 feet.
Our next question comes from the line of Tal Woolley with National Bank Financial, Inc.
Just wanted to ask, Silver Bay that portfolio enters the Same Home pool next quarter, like is there anything materially different about it versus the rest of the portfolio that we should keep in mind, that would make its growth sort of run ahead or behind, the other asset?
Yes, the -- that's not true. It will enter in Q1 2019. And at that point, we'd ramp up to roughly 16,000 homes on a same-store basis. It's actually interesting if you look at our consolidated portfolio, the metrics are better than our same store, on a much bigger portfolio and part of that reflects obviously -- and that obviously reflects the Silver Bay acquisition where there's still some loss to lease which is allowing us to get slightly higher revenue growth, but this is, yes, there's definitely some geographic differences which have minor impacts on things like margins, but on the whole, it's actually we'd be better off right now the same store with the entire portfolio.
And then just on these -- like where are you seeing in the markets, where you're looking to dispose of the assets in Texas for TLR like where you're seeing assets trade right now in terms of cap rate?
We are seeing. Well, obviously depends on whether you're -- urban concrete, you're suburban garden style. So there can be a huge range in where the cap rates are, but we are seeing, I think for Suburban Class A garden style, we're seeing cap rates around 5%, you say that's right, Andy. And then for -- and the McKenzie though, which is probably going to be the best, one of the best assets in Dallas that, that's going to trade well. I would guess it's going to trade well inside of 5%, I just don't know. There's not a lot of comps, but I would suspect it could trade at, it's 4.5% possible, 4.5% maybe.
And then just to be clear, like I think, Wissam, you talked earlier though at the time of the JV announcement maybe $1 million to $2 million a quarter in sort of like ramp up/platform building for the joint venture. Is that spending sort of permanent cost or do you think that can be optimized down the road, like how should we think about -- because I got like some of this is like set up where probably is truly one-time in nature, but some of that's going be stickier too?
Yes. So, step 1 for us is really stabilized meaning higher the people that we need to in order to perform our jobs and then step 2 would be create efficiencies as we go along in the process. So I would say, this will be a permanent cost for the short while meaning maybe the first year, 1.5 years and after that, then we still look at optimization and we still look at getting better what we do.
And I guess my next question is just in relation to that, obviously you are bearing the cost to build out this platform, where you can really start to get more targeted layering on more deals on top of this, I mean I know it probably seems unfair to ask after having just started this. But like when do you start looking for the next deal for to add to this platform?
Well, we're always looking for opportunities. I mean they don't come up every day, you have to be -- Tricon always had a very opportunistic mindset. And so it's something strategic came up and it made sense, we definitely look at it, but we don't need to do anything strategic. I mean, we can just to finish what we started, invest the JV, go from 16,000 homes to nearly 30,000 homes, and we get a lot more scale and then -- and the question is, does that take us 2 years or 3 years? Right now, we're projecting 3 years. But if it's just that and it ends up being a very good result, there is -- again, we just can't speak to these numbers unfortunately, but from an overhead perspective, this becomes -- you're not going to see it for the first year, so, but this is very accretive for us over time. When you start to get to year 3, when this is fully invested and then over the whole period, the fee income is going to be very substantial and you will start to see that improvement in the [ Opcor ] or TAH overhead. Now that assumes we -- everything stays constant and obviously we do something strategic, we're going to have to ramp up even more and there will be even more overhead. So, keep that in mind.
[Operator Instructions] Our next question comes from the line of Dean Wilkinson with CIBC.
Gary, just following on that, that line of conversation there. As you look towards Tricon 3.0 or maybe even Tricon 4.0. Do you have in hand right now enough of the product, people, et cetera, processes to get to $10 billion of AUM. Are you going have to grow sort of the underlying corporate headcount and additions to people and space et cetera?
No, I mean we can pretty much get to $10 billion with, not only with our existing team. Obviously, we've talked about ramping up some people at TAH. But I think, apart from that, with our existing team, but also I think with our existing assets and program. So if you think it through, once we fully invest the TAH JV, we're going to add another $1.5 billion, let's say, despite layering on the debt and finishing acquisition program. And then at TLR, if we complete the build-out again of the existing assets, that is just in Canada alone, it's about $1.3 billion of cost, substantially higher in value. So that gets us I think to render -- $8 billion or $9 billion just by finishing what we started. So I think we are very optimistic about getting that $10 billion to make up the last $1 billion or $2 billion, we have to do something new, but we're confident that we'll obviously add more properties for TLR in Canada or maybe something else will come up, maybe something strategic will come up and allow us to go faster.
Right. I think that math also assumes the book value where it is, right? Like there's going to be growth along way as well. So you don't need to do another big overarching $2 billion, $3 billion joint venture to get there?
We don't, and that's why we outlined in the last couple of pages of our earnings presentation today, that if we literally just put our pens down and just finish what we started, there is substantial book value growth ahead and also substantially AUM growth.
Sure enough. I've known you for a while now though, you're not putting your pen down. So I think --
No, we're not getting, we're also -- we just announced 3.0. So we're not going to -- we will wait a little bit before we go to 4.0.
There are no further questions in queue at this time. I will turn the call back over to our presenters for any closing comments.
Thank you, Lindsay. I would like to thank all of you on the call for your participation and questions. We look forward to speaking to you in November, when we discuss our third quarter results for 2018.
This concludes today's conference call. You may now disconnect.