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Tricon Residential Inc
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Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon 2Q analyst call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session.[Operator Instructions] I would now like to turn the call over to Wojtek Nowak, Managing Director, Capital Markets. Please go ahead.
Thank you, Michelle. Good morning, everyone, and thank you for joining us to discuss Tricon's results for the 3 and 6 months ended June 30, 2019, 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 the call, we'll be referring to a supplementary conference call presentation posted on our website. If you haven't already accessed it, it will be a useful tool to help you follow along during the call. You can find the presentation in the Investor Information section of triconcapital.com under Events and Presentations.With that, I will turn the call over to Wissam Francis, EVP and CFO of Tricon Capital Group.
Thank you, Wojtek, and good morning, everyone. Q2 was another great quarter for us, driven by strong operating metrics at our core rent business and continued growth in our contractual fee stream. This coupled with the completion of the Starlight U.S. Multi-Family (No. 5) Core Fund acquisition on June 11 delivered strong results for Tricon.Let's begin with the highlights of our results on Slide 2. In Tricon American Homes, we grew NOI by 29% and FFO by 60% year-over-year as we continued to grow the portfolio, post strong revenue growth and focus on cost containment, all of which contributed to a record same home NOI growth of 11.6%. Tricon Lifestyle Rentals, the recently acquired multi-family portfolio, delivered 5.6% same home -- same property NOI growth, while our first development project in Toronto, The Selby, achieved 50% lease-up. And finally, contractual fees related to all of our business verticals increased by 25% year-over-year.Let's dig deeper into our IFRS financial results on Slide 3. In Q2 2019, Tricon generated net income of $12 million and diluted earnings per share of $0.04, compared to $40 million and $0.29 per share in Q2 2018. This year-over-year variance was largely driven by, first, transaction costs of $25 million this quarter, primarily related to the acquisition of Multi-Family Core Portfolio; second, disposition of the TLC manufactured housing business, which added investment income of $20 million last year; third, lower Tricon American Homes fair value gain of $24 million this quarter compared to $37 million last year; and fourth, a fair value gain on the derivative financial instrument of $8 million this quarter compared to a loss of $10 million in the same period last year. This is related to the change in our stock price that affected the valuation of our convertible debentures.These four items alone account for $41 million of the variance from year to year. Meaning, all else being equal, our net income would have increased by $13 million year-over-year, without these items.Our adjusted results on Slide 4 give you a better sense for the various factors that contributed to our earnings this quarter. We generated $66 million of adjusted EBITDA and $0.19 of adjusted diluted earnings per share this quarter. Within the EBITDA figure, Tricon American Homes generated $39 million of net operating income, a 29% increase compared to last year, driven by a growing portfolio of rental homes, strong rent growth and margin expansion. Tricon Lifestyle Rentals generated adjusted EBITDA of $4 million compared to $3 million last year, driven by the acquisition of Multi-Family Core Portfolio.Contractual fees, net of minority interest, also grew by 25%, as a result of higher development fees at our Johnson master plan development business, asset management fees from our Tricon American Homes joint venture and higher performance fees earned this quarter. These positive factors were offset by ongoing costs and time line pressures affecting the results of Tricon Housing Partners, our for-sale housing business. Meanwhile, our corporate compensation and G&A expense were relatively flat year to year.As with our IFRS results, the change in adjusted EBITDA compared to last year is affected by 2 large items. First, the $23 million gain on TLC for the sale that occurred last year. And second, a $14 million swing in Tricon American Homes for value gain. Without these 2 items, adjusted EBITDA increased by 31%, reflecting another solid operating quarter and stable overhead expenses.With that, I'll turn the call over to Gary to talk about the highlights of our business verticals.
Thanks, Wissam, and good morning, everybody. Let's turn over to Slide 5 and dive into operational results starting with Tricon American Homes, our single-family rental business, which is our largest vertical. And this was another incredibly strong quarter, achieving records across many metrics. Let's start with our total managed homes, now up to 19,080 homes. We added 977 homes in the quarter, all through the joint venture.The quality of homes we're buying has never been better based on product quality, vintage, school scores and so we're essentially buying a better home at a consistent cap rate of 5.9%. And I will add that our joint venture portfolio is now over 3,500 homes. We expect to be about 50% of way through that investment program by the end of this year and to have it largely completed by the end of 2020.On the revenue side, we can see that the overall portfolio is up 23% year-over-year revenue up to $72 million. That's as a result of 2,600 more homes in service and very strong blended rent growth of 6.2%. That's an industry-leading metric. Our expenses are also up, obviously, because of the larger portfolio, but not nearly as much as revenues. And the big story here is the continued internalization of repairs and maintenance function, and also lower turnover year over year, which is driving very, very strong margin increase.Overall NOI, up 29% year-over-year to $47 million. The NOI margin up more than 300 basis points to 65%. And the other thing to notice is, if you look at our net corporate overhead at TAH, that is actually down about $1 million year-over-year to $5 million. That's as a result of increased efficiencies as we continue to scale. Overall, a record quarter for FFO. Core FFO up to $19.6 million, that's up 73% year-over-year and Tricon's share after the minority interest at $18.2 million, up 60% year-over-year.Let's turn over to Page 6 and talk about our same-store portfolio at TAH, which is obviously the best way to measure year-over-year performance. And as a reminder, our same home portfolio is 14,466 homes. It's about 75% of the total managed portfolio and includes the Silver Bay acquisition. You can see that our revenue -- same home revenue year-over-year is up 6%, that's on slightly higher occupancy, up 30 basis points. And blended rent growth of 6.4%, that includes 9.8% growth in re-leasing spreads, that is a record for us, and 4.8% increase on renewals. These are obviously extremely strong numbers.I will add that, we continue to self-govern on the renewals. And if we didn't, this blended rent growth would be probably significantly higher than what we're reporting. And what's driving it is a number of things. The first is our investment strategy, which again focuses on the strongest Sunbelt markets where the economy is incredibly strong. Second would probably be some continued loss to lease in the Silver Bay portfolio. And the third factor would be our revenue maximization efforts and customer service. And I would say, each one of these in equal parts is contributing to our industry-leading metric of 6.4% blended rent growth.On the expense side, again the big gain is in lower repairs, maintenance and turnover costs. That is down 30% year-over-year. We've had lower turnover in the quarter but we've also increased 45% more work orders in-house and saved about 50% on labor. So that's been a major factor in our controllable expenses. What's offsetting that is property taxes. This is up 11% year-over-year. It's higher than what we thought. It's been impacted by special assessments or onetime assessments in places like Houston, where they essentially did not assess higher property values after the hurricane, and now we're seeing a bit of catch up; in Mecklenburg County, which is Charlotte, we've seen a special revaluation after eight years, which has led to a significant increase. So this property tax increase of 11% year-over-year is higher than where we thought. It is dragging, but overall the numbers are still outstanding.Our total operating expense is down 4% year over year. And as a result, as Wissam talked about, our NOI -- same-store NOI margin is up at a record 11.6% year-over-year, industry-leading metric. And our NOI margin is up 344 basis points to 65.6%, another record for the quarter. And this is now in line with our larger peers.Let's move on to Slide 7 and talk about our multi-family business in the U.S., Tricon Lifestyle Rentals in the U.S. The big news in the quarter is the acquisition of the Starlight Multi-Family Core Portfolio for roughly $1.3 million. As a reminder, this is a 23-property portfolio, 7,289 units. A very high quality located in the Sunbelt new vintage of roughly 7 years. And what really excited us about this acquisition, apart from a longer-term synergies that will come in asset management and property management, was the ability to take advantage of the strong growth in the Sunbelt to drive occupancy and over time to implement a value-add initiatives. And you can see that it taking shape in the quarter. Revenue up 4%, that's largely on a gains in occupancy of 170 basis points, as we get closer to 95%, which is our target. On the expense side, more of the same story. Starlight, the asset management team has done a good job, stabilizing this portfolio. Turnover is lower. They've renegotiated service contracts. They've been more diligent on over time, and that's led to a drop in controllable expenses by 4%. Property tax is more of the same, in keeping with Tricon American Homes and the overall industry, rental housing industry, in the Sunbelt, where we see those up 10% year-over-year. All in all, a very good start to the acquisition.NOI up to $16.6 million on full quarter, that's up 5.6% year over year and the margins increased 100 basis points to 58%. Now remember, we've only owned this portfolio for 20 days. So our contribution for the 20 days, NOI is $3.8 million and our core FFO is $1.6 million. If you extrapolate that over the full year, that is about $28 million to $29 million of core FFO, which is in line with our underwriting.Let's move on to Slide 8 and talk about our build-to-core multi-family portfolio in Canada, which is now up to 3,200 units either under lease or development. And we've introduced a new chart here to track our progress. You can see that, of the total cost of about $1.35 billion, we've completed $331 million to date and have about another $1 billion to go. The good news is all the equities essentially in the ground and the remaining costs will be funded by construction financing. And when that gets complete, we project conservatively that we'll have annualized FFO on the portfolio of $36 million, that's in roughly 2 to 3 years, and our share of that's 30% or $11 million.Selby had a very good quarter in lease-up. We signed 145 leases during the quarter. At the end, June 30, the building was 50% leased, 40% occupied at average in-place rent of 371 that compares to our underwriting of 290. So very good progress there. I can tell you now, at the time of speaking, our lease-up is now up to 65% and occupancy is over 50%. We continue to make great progress. We moved in more than 60 people in June. Our season professionals on the project had never seen that type of move-in rate. And next month, we should also lock in our permanent financing, hopefully at very attractive rates and continue to drive very good returns on this project, which bodes well for the overall portfolio.Let's move on to Slide 9 and talk about Private Funds and Advisory, where we continue to enhance shareholder returns by raising more third-party capital. Wissam talked about the growth year-over-year, an impressive growth of 25% in contractual fees. But I think what we're also seeing, which is terrific is, we're seeing more balanced growth, more diversification and contribution coming from all our different businesses. So we now have contributions and fees from TLR and TAH, and our legacy THP funds which are now in harvest mode are also getting closer to their end and so performance fees are becoming more prevalent.Our goal over time is to have enough fee-bearing third-party capital that generates fees to cover our corporate overhead. And you can see -- and so we're comparing our contractual fees to our corporate overhead in the quarter and you can see that we're not quite there yet, but we made substantial progress year-over-year. We talked a lot about raising third-party capital, how that provides us with scale advantages and efficiencies, and we want to raise third-party capital in everything we do. But let's also talk about the economic benefit of doing that.And let's take an example where we assume that we raised $500 million venture, where Tricon makes a 20% co-investment, the other $400 million comes from a third-party. Let's assume that we can achieve 15% gross return and an asset management fees of 1%. In this example, we can take our gross return of 15% on the investment, and increase it to 19% and that doesn't include the potential for development fees or property management fees, performance fees. So this is very accretive for shareholders and it also partly explains why we've been able to drive book value per share by roughly 20% since going public in 2010.Let's move to Slide 10, where we introduce FFO per share as a key metric of our performance. In prior quarters, we talked about the shift to recurring rental income streams, as we continue to transform Tricon into a predominantly rental housing company that also manages third-party capital. And after gathering feedback from the investor community, we decided to take this framework one step further and adopt FFO per share as a key performance metric beginning formally next quarter, introducing it this quarter but we'll formally introduce in our disclosure next quarter.We believe FFO per share will provide investors with one simple cash flow based metric to evaluate our performance and growth, rather than evaluating individual business verticals in isolation. It's going to allow our investors to compare our performance and growth to other real estate companies. It will remove material volatility in earnings related to TAH fair value gains, which skew our IFRS metrics, and it will provide a simpler valuation framework as compared to some of the parts. Our experience with companies that have some of the parts valuations is that they often traded at a discount to their intrinsic value and it is time for us to move away from that.You can see on the chart in Slide 10 that our FFO per share metric includes our published core FFO from our single-family and multi-family businesses and our reported fee income. The Starlight multi-family portfolio was acquired on June 11, so multi-family FFO includes only 20 days of contribution. For our residential developments, which include for-sale housing and Canadian multi-family developments, we use investment income as an approximation of cash flow over time. Actual cash from residential developments in a given period could be higher or lower than investment income, but by using investment income we're able to provide a smoother performance metric. In Q2, for example, residential developments generated $5.2 million of investment income and $6 million of actual cash distributions. Year-to-date cash distributions have been $10.3 million.In the case of Canadian multi-family developments, please note that investment income -- as a project stabilize, investment income will be replaced with core FFO. And overall residential developments currently represent about 15% of total FFO and we expect this number to go down over time given our core rental business is growing at a faster pace. So next we did our corporate G&A and cash compensation, which are figures you can find in our financial statements.For Q2, our FFO metric was $0.10 per share or CAD 0.13 and has increased by 150% from the prior year, clearly demonstrating that our strategy of moving to recurring rental income is taking shape. Assuming performance in the back half of this year is relatively in line with the first half, we expect our FFO per share for 2019 to be approximately $0.37 to $0.40, which translates to CAD 0.48 to CAD 0.52 using today's exchange rate of CAD 1.31. Although we can make no promises, we believe that we can grow this figure at a compounded annual growth rate, or CAGR, of over 10% over the near term. If you extrapolate that over three years, we would land between $0.50 and $0.55 of FFO per diluted share by 2022 and in Canadian currency this works out to a range of CAD 0.66 to CAD 0.72 for fiscal year 2022.So how do we achieve this growth? We're using a detailed financial model to drive these projections. But high level, we assume that we continue to acquire 800 homes per quarter in the JV, all through 2020 and partly into '21 until we're fully invested. Our 1/3 equity contribution will be funded by internal cash flow, largely coming from THP. We assume in single-family rental same home NOI growth of 4% to 5% going forward. We assume multi-family rental same property NOI growth of 3%. And we assume further that we raise third-party capital to further our build-to-core program in Toronto to raise third-party capital around our U.S. multifamily strategy and to raise more third-party capital for for-sale housing. That will also drive our growth, and we assume normal inflation for overall cost structure and corporate overhead. So this is ambitious, but we believe that if the environment stays as it is that we can achieve 10% growth and deliver strong value for our shareholders.Let's move on to Slide 11 and talk about our strategic priorities, which really amount to a 3-year growth plan. We've got 5 key priorities here. The first one is to continue to transform Tricon into a residential real estate company, primarily focused on rental housing, providing our shareholders with stable, predictable income. And in doing this, we're going to shift our key valuation metric to FFO per share and target a 10% CAGR of FFO per share growth through 2022. That's our key strategic priority.Our second one is to increase our third-party AUM. We want to raise more third-party capital, as I said in all our business verticals, to enhance scale, improve our operational efficiency and drive ROE with incremental fee income. We would like to add -- our goal is to add new third-party equity capital commitments of more than $1.5 billion over 3 years and generate fee income that largely covers Tricon's corporate overhead. Now if this sounds familiar, if you believe you've heard this before shifting to FFO per share and raising copious amounts of third-party AUM, is because you have. And there is another large Toronto-based asset manager that has done this extremely successfully. And we plan to replicate it -- replicate this playbook.Our third priority is to continue to grow our book value per share. And to do that, by reinvesting the majority of our free cash flow into accretive growth opportunities largely focused on rental housing. If you think about it, if we can earn yields, our cap rates of 5% to 6% on rental housing, either through acquisitions or development and then lock in financing at 3% to 4%, we're going to continue to grow our book value per share quarter-in, quarter-out, and that's what we plan to do.Our fourth priority is to reduce leverage. We want to minimize corporate level debt, while maintaining prudent and largely non-recourse leverage at the subsidiary level. Our goal is to pursue look through leverage, that's net debt to assets of 50% to 55% over the next 3 years, largely by reducing debt using THP cash flows.And finally, we want to improve reporting. We believe in continuous improvement. We like to adopt financial disclosure practices that reduce our complexity and improve our comparability of results with real estate peers. We think there's nothing complex about our business, rental housing, collecting rent every month, there's nothing complex about that, but our accounting, sometimes our disclosure, even though it's much improved, can be upgraded to enhance comparability across the industry.Now let's move on to Slide 12, where we show our new performance dashboard that we're going to use to track our progress against our 5 key strategic priorities. And we're going to repeat this almost like a Broadway play, quarter-in, quarter-out, we're going to talk about our strategic priorities and our dashboard. And you can see here starting with FFO per share, that albeit we're starting from a very low base, significant growth year-over-year in FFO per share up 150% to $0.10 in Q2 2019. A target of $0.37 to $0.40 for fiscal year '19. And then by growing it 10%-plus per year, we hope to hit $0.50 to $0.55 all in U.S. dollars by 2022, and we're going to track this over time.Third-party AUM, we're currently at $1.8 billion. We'd like to add $1.5 billion of fee-bearing capital in the next three years take us to roughly $3.3 billion by the end of 2022. And if we do that, we should be in a position where we can largely cover our corporate overhead with fees. Book value per share, we've been growing this at 20% per annum since going into single-family rental in 2012. We're now at CAD 10.77, that does not take into account our private funds and advisory business or our management business. And also we know that there is embedded growth in the underlying investments, which should grow this more in the future, but we believe we can continue to grow our book value per share by roughly 15% to 20% going forward.And then on leverage, we've got minimal corporate leverage, our current look through leverage, that is net debt to assets, which excludes the convertible debentures, is currently at 60%. And again, our long-term goal over 3 years is to get that down to 50% to 55%. And we're going to do that with asset sales and THP cash flows.An update on asset sales. We're hoping to syndicate Trinity Falls in Q4, the Bryson master plan community in Austin, maybe a quarter or 2 quarters behind, Q1 or Q2. And we expect to start a process to sell Maxwell, our last development -- multi-family development asset in the U.S. in the next month or so. That is now 80% leased and is getting closer to completion.And then, in terms of improving reporting, you can see we've got boxes here which we like to check by the end of 2020. We want to review and potentially upgrade our financial disclosure practices vis-a-vis our peers. We like to adopt -- formally adopt conventional Company-wide real estate performance metrics like FFO per share we introduced at this quarter, that we'd like to formally included in our disclosure next quarter and check that box. And then in 2020, we'd like to introduce a comprehensive ESG plan. Again, all of these things are designed to make us increasingly investor friendly.So overall, let me finish by saying we had another very strong quarter of operating performance, particularly in our core rental housing business. I'm proud of our team, I'm proud of our progress and we've taken a big step this quarter by introducing a 3-year growth plan and adopting FFO per share as a key performance metric, that is simple and intuitive to real estate investors and one that should be a true reflection of sustainable value creation over time.With that, I will pass the call back to Michelle to take questions and we'll be joined by other members of senior management team, including Jon Ellenzweig, Andy Carmody, Andrew Joyner and Kevin Baldridge.
Your first question comes from Geoff Kwan from RBC Capital Markets.
The first question I had was just on the TAH side, your two JV partners. Just wondering if you -- are you able to kind of talk about now we're kind of a year in, their comfort with the single-family rental industry, their willingness to -- if there was an opportunity to make big step-up in terms of their investment in the sector. And then also, two, if there's been any interest you've gotten from other institutional investors, potentially looking to partner with you?
I would say, Geoff, that they are extremely comfortable. The acquisitions are -- in terms of the volumes are exactly what we told them. This is -- I never thought in my career, we would ever get into automatic buying of real estate. But that's essentially what we've done with our algorithmic underwriting. So on -- we're hitting the volume. I talked about in the call, I think the quality of homes that we're buying at a 5.9% cap rate, which is -- where the joint venture is buying, is never been better. So the cap rate is not moving, but the quality of home keeps on getting better. Better product, newer vintage, better school scores, better curve appeal. And then on the operational side, obviously you saw the results this quarter. I mean we have industry-leading metrics across the board. I think they are extremely happy with the progress. We will be, as I said, 50% through by the end of this year and largely complete by the end of next year. And as we get through 2020, we'll certainly be talking to them about creating another joint venture. But I'm confident that if a large opportunity came up outside of the venture, they would take a hard look at it with us. So I think we're in very good position with our partners. And we obviously haven't been really talking to anybody else. This joint venture obviously exclusivity provisions, but both of these investors are global leaders in real estate, others follow them. And so I think we feel confident that if there was ever an opportunity to bring in other major institutional investors, there will be others to follow.
On the margins at TAH continued to improve. Obviously, R&M has been one of the key contributors. But at some point, there will probably be some limit as to how much it can help the margin. I know Q3 is seasonally lower margin, but just bigger picture, just any thoughts you have on how much higher the margins it can go, all else equal, given, yes, you've talked in the past, for example, property tax can have a bit of an impact on where the margin goes, given the mix.
Well, I mean, we're surprised. We're even surprised ourselves by how strong our results have been. I think that's going to continue, but it's not going to go on forever, obviously. And I've talked about in the past. I mean if we can grow our same-store NOI margin by 5%, we're going to grow that margin by roughly 75% or 75 bps, I should say, year-in, year-out. So it can definitely continue to move higher. On the R&M side, which has been the big story on controllable expenses. A lot of it's been catch-up with our larger peers. So if you look at the R&M margin now or the R&M as a percentage of revenues, we're about 7%. We used to be at about 12%, so that's come down substantially. And I still think we've got a little bit more room to go. But most of the savings are now -- I mean internalization are now in place. And so we'll probably continue to get the benefit of that on a same-store basis through this year. But I think as we look forward to 2020 and 2021, those savings will be much more modest. And the real benefit, I think going into 2021, one, hopefully then will [ come from property taxes, as again those are a lagging indicator. We've seen home price appreciation, you track that chart, that's obviously coming down. And that's a double-edged sword, but the benefit for us is, it should help us in the margin going forward into '20 and '21.
And just one last question if I could. On the Starlight portfolio, the 58% NOI margin. And when I take a look at TAH and how that business evolved, you kind of went from 60% margins to kind of 65% today. Not saying, you may be able to do exactly what you've replicated, but just high level as you look at the portfolio, the opportunity to try and replicate some of the things that you did with TAH, do you still see that you'll be able to materially improve the margins at the Starlight portfolio/
I think long term, we can. And I think there is an opportunity for -- in some ways for multi-family to be revolutionized. And we can take some of the practices that we've implemented at single-family rental, which is a very inefficient business that we've had to learn to use the technology and logistics to make it efficient. I think we can apply some of those to multi-family. So as an example, I mean we're using self-showings in our single-family rental business, why can use self-showings in garden-style properties. That's a longer-term opportunity. And if you can do that, obviously, you can save on your payroll, or you could allocate your payroll more efficiently and do more value-added work. So I'm not going to give you a specific number because I don't really know, but I do believe we can be more efficient. And I think just on the specific portfolio alone, remember we bought it with the occupancy rate at 92.5% and our underwritten plan was to take it to 95%. So that's a big opportunity for us. And as we increase and get a market-level rent growth, we will see that margin move up.
[Operator Instructions] Your next question comes from Jonathan Kelcher from TD Securities.
Just sticking with the TAH. And I know you're self governing on renewals, but what would you say the mark-to-market is for that portfolio right now?
Well, I think on the loss to lease, I would guess -- we don't know exactly, but I would guess that the loss to lease is 3%, maybe 4%. So you can see -- you're not going to get that right away, but if you can take that over 3 or 4 years, there is some upside there. And I think on the renewals, I mean, in the past we're seeing renewals of 6% and we've been solidly under 5%. So that gives you, I think, some more insight into where the rent growth could be, but we're not going to red line it. We prefer to take that rent growth over time.
And on turnover, like the 10% or so you did this quarter. How sustainable is that?
I think the turnover is sustainable for the quarter. But remember, this is a seasonal business and it's going to ebb and flow. So our turnover is going to move up in Q3. And that now -- that we always have to look at it kind of on a year-over-year basis. I think the turnover might be lower than it has been, but it will move up in Q3. I think we believe that long-term we can operate the business between 25% and 30%. 25% might be a real stretch, but Kevin believes we could probably get 26%, 27%, 28%. And obviously, Jon, this really depends on 2 major factors. One is the economic conditions and how tight the housing market is, and the other obviously is what we can control, our own customer service. So Kevin is -- it would be too modest to say but we have an incredible culture and customer service. And I think a lot of that's driving our numbers. It's hard to pinpoint out numerically. But I think with a great customer service, the way we take care of our residents, we can keep that pretty well.
I was more asking what sort of rent bumps can we get on the turnover.
Yes. So I mean, like again, on the re-leasing spreads -- if you're talking about re-leasing spreads being at 10%, is that sustainable? Clearly, that's not long-term sustainable. That is coming from, again, the extremely robust economic environment in the U.S. Sunbelt and is coming from some loss to lease in our portfolio. Again, I think that loss to lease is 3% to 4% and we're getting some of that benefit. But it's not long term sustainable. I think we will continue to see very good results through the remainder of this year, but we would never model that those type of re-leasing spreads or blended rent growth over time. I mean over time we would think that blended rent growth would probably drop, I would think too, instead of being 6% probably 4% to 5%.
And then just on THP, could you maybe give us a little bit of color, if you can on the expected -- the cash flows you expect from that business. The rest of this year and through 2020?
Yes. So overall cash flow, we expect roughly $600 million, let's say, over 8 years. And we expect to generate a substantial amount of cash flow over the balance of this year and into 2020. And so where does our cash flow going to come from, it's going to come from the syndication of Trinity Falls, syndication of the Bryson master plan community, THP1 U.S. cash flows, more cash flow probably from Cross Creek Ranch and Viridian. So I would think that over the course of the back half of this year and into 2020, we could generate at least $100 million. [ We think we’re saying ] at least $100 million in cash flow.
Yes, we can generate about $100 million from Trinity Falls and the disposition. And then for THP1 U.S., we're still expecting about $80 million of cash over the next two years.
So let's say between $100 million to $150 million.
Through the end of...
2020.
Your next question comes from Himanshu Gupta from GMP Securities.
Thanks for the additional disclosure with regard to FFO per share. Just want to clarify, is it pre-tax or post-tax? And also how do you normalize FFO or adjust FFO for TLR Canada and THP? I mean I assume there will be some sort of fair value adjustments or catch up on development as and when you reach certain milestone. So how do you adjust for these changes?
Yes. So we're looking at FFO per share as really a cash proxy. And I would say it's post-tax and essentially we're paying no cash tax. So it's not really a factor in the analysis. With respect to any of the developments, whether it's THP or TLR, as we've talked about in the call, we're using investment income as a proxy for cash over time. Remember the investment income is just the future cash flows that are discounted back. So it's today a proxy for cash flow and it's a preference to use investment income as a proxy for cash flow rather than actual cash because the actual cash could ebb and flow materially from quarter-to-quarter. It turned out this quarter that our actual cash was -- it was higher than the investment income but pretty much in line. But you could have periods where it could be significantly higher or lower. And the goal here is to produce some more stable number. If we don't include the residential developments in the FFO calculation, then you're back to some other parts. And our goal here is to be transparent about how we're doing it, but really to help the investment community and you, the analyst, to help come out with a more reliable framework to get the valuation, so that's the way we think about it.
And then on the 2019 FFO target of $0.37 to $0.40, what annual numbers are you assuming from TLR Canada and THP?
For THP and TLR Canada, we're assuming the quarter times 4 basically. So we're assuming $10 million for THP and $10 million roughly for TLR Canada. Again very conservative and significantly lower than the actual cash we're expected to receive in 2019.
And maybe just one follow-up on your 10% target compounded annual growth rate up to 2022. Are you assuming some kind of deleveraging as well?
Yes, we are. We are assuming some deleveraging in that in our detailed model. And the biggest opportunity to deleverage would be to raise third-party capital around the Starlight acquisition that -- because the question is how do we grow and deleverage at the same time. We're going to be using, obviously, internal cash flow and THP cash flow to continue to acquire single-family homes and complete the joint venture, that's going to lead to a lot of growth. But then the way we are going -- I think the biggest way to delever and really move the needle -- we'll move the needle on some of these asset sales, but to really move the needle, we'll probably need to raise significant capital around the Starlight acquisition.
And then just switching gears to multi-family Starlight portfolio. So the rent growth on new leases, I would say, flat to slightly negative. Is it any particular market or any property specific, are you offering incentives to push occupancy here?
I'm going to hand that question over to Jon.
I think as we've noted on the call as well and in our MD&A, this quarter in the U.S. multi-family portfolio really what we're doing is keeping new lease growth flat to slightly negative in order to drive occupancy. So if you look at it quarter-over-quarter or year-over-year, we've had a meaningful uptick in occupancy and that was really a trade-off from rent growth. In terms of individual market really varies from an asset by asset basis. We have a couple of assets that we inherited where the occupancy was in the high-80s, and those are ones where we've pushed concessions a little bit more in order to drive the occupancy higher. Conversely, in some other markets occupancy was as high as 96%, 97%. We're actually seeing positive new lease growth. So really it's market-to-market, but even within that it's asset-to-asset.
So you are basically pushing occupancy for the rent. And bigger picture, I mean, my understanding your philosophy on the single families rent maximization versus occupancy. So why is it a bit different for multi-family or just where the market is right now?
Yes, it's not that different, Himanshu. It's just that occupancy was actually lower when we took over this portfolio. Occupancy was in the lower-90s and our goal is to stabilize this more at 95% to 96%. And so that was where we made the trade-up this quarter. We would expect that over time, as we see stability around 95% to 96%, we would be able to drive on new lease growth a little bit more as long as the economy continues to perform.
And maybe just final question from me on Selby. So it looks like already 65% leased, I mean, despite the relatively large building in first year itself. So can you now put permanent financing on this asset? And I assume you can take out your entire equity investment out. And probably given the success of Selby, are you seeing added traction in the TLR Canada segment vertical from a third-party capital raising perspective?
So we are now -- at the time of this call, we are 65% leased at the Selby and more than 50% occupied. We expect to lock in our permanent financing within the next month. I can't get into the details of that. I can tell you that we will be able to repatriate the majority of our equity, the spread, the interest rate will be incredibly attractive. There'll be a -- again, I didn't want to get into specifics, but there will be a very large spread between our development yield of 6% and our cost of permanent financing. So this project is a home run. We have other projects in the portfolio that are going to do extremely well. And it bodes well for a number of things. One, new opportunities. We've got about 20 irons in the fire right now. I would guess that we will probably add one, maybe two more projects over the balance of this year, and add a couple of more projects into 2020. And we are also working on a major raise -- capital raise to further our build-to-core program here in Toronto. I can't tell you more than that. But everything in this vertical is going extremely well.
Your next question comes from Dean Wilkinson from CIBC.
Gary, don't know if you can answer this, but I'm going to run it up the flagpole anyway. There is another single-family multi-operator out there, who is undergoing a bit of a review. Similar size, if not a bit smaller than your current portfolio. Is that something that you have taken a look at? Or do you have sort of any views on sort of the quality of assets, how they compare and could that possibly be something maybe in another joint venture agreement that would be of interest?
Well, they announced yesterday on their call -- you're talking about Front Yard, they have undertaken a strategic review, which potentially could include selling the company. So if they formerly run a process, we would absolutely take a look at it. We look at all major opportunities in the sector. So it's definitely something we wouldn't want to look at. I believe there are about 14,500 homes, we're 19,000, so they are a little bit smaller. It's obviously difficult to add that amount of scale quickly. So it's definitely something we want to look at. In terms of the asset quality, I would say it's mix, it's lower than ours, if you look at the -- if you just, let's take rent as a proxy. If you just take rent as proxy, let's say, we're at [ 13 50 ]. I’m guessing, they’re probably at [ 12 50. ]
[ 12 78, ] pretty close.
[ 12 78. ]So they are a little bit lower. But again, if we get to that point, we'd have to really dig in and really analyze the portfolio because they might have a whole bunch of homes or markets that are excellent, and they might have others that are lower quality. So I would gather that within their 14,000 or 15,000 home portfolio, there's many, many homes we would want to own and maybe some we wouldn't. But if you remember when we bought Silver Bay, we only kept about 80% of the homes and then selling of a 20%. I would guess in this portfolio, we probably -- I don't really know, I mean, again, we'd have to dig in, but my hunch is in this type of portfolio maybe we would keep 70% and sell 30%. I don't know, we'd have to dig in, but it's definitely something we'd want to look at.
Something you take a look at. Okay. That's great. And then just sort of a directional question. On the tax assessments, obviously, it's an increase in value that came up. I mean the number was, I think, it's something like 11%. What would have been in the ballpark, the average increase that you've got assessed on those properties because it wasn't clearly the whole portfolio? So the assessments got to be higher than sort of 10% or 11%.
On the tax assessment side, we are assessed on specifically 2 assets or 2 areas, specifically; one was Houston, one was in Charlotte. And they do onetime assessments, that they haven't done it in a while. The assessment was higher, obviously, in the near 11%. On average, we expect it to be closer to 9%, but we end up being around 11%. So those 2 assessments were closer to like 12% to 13%.
12% to 13%. Okay. And when was the last time that would have been done?
Yes, so let me add to that. So Mecklenburg County went through a revaluation. I believe they do it every 8 years. So this was their kind of 8-year revaluation. And obviously it's not -- I mean, Charlotte is one of our larger markets. It's, obviously, not the entire portfolio, but the reassessment was substantial. And I don't know the specific numbers, but basically we were thinking that our property taxes would be up for the year 6% to 8%. And this quarter they came in at 11% year-over-year and we think for the year maybe it's a top end of our initial range, closer to 8% or 9%, as Wissam said. But the difference there, the delta between 8% and 9% that we expect, and 11% that came in this quarter, really comes from Mecklenburg County and Houston. And again in Houston, they really did not increase property assessments after the hurricane. They wanted to give residents a break, but this year my understanding is assessments were up as high as 10% to 20%.
And that's all property value. It's not mill [ rate ], right?
Exactly, it's property value.
Your next question will come from Johann Rodrigues from Raymond James.
First question just on TLR. You mentioned in the slide deck, FFO of I think it was $36 million for the whole portfolio once it's kind of stabilized. What rent per square foot are you guys assuming for that?
So it's just -- which number you're talking about, Johann?
The FFO number on Slide 8, the $36 million projected stabilized FFO number for the TLR Canada development.
Okay. I'm with you. Okay, so what's the question related to the FFO?
What's the rent per square foot number you guys are assuming for that?
Well, I don't know the exact rent per square foot because it's blended across a whole number of different properties. The assumptions we're using to get to that is a target development yield of 5.25%. So we're assuming 5.25% on the $1.35 billion cost, resuming LTC of 65% and we're financing that at 3.5%. So I would say those assumptions are based on what we're seeing so far are conservative. Obviously, the Selby, the development yield is coming in at 6%, the interest rates are going to come in well under at this point 3.5%, but obviously that could change. So and then if you talk about the blended rent, like again, I don't know what exactly but typically the Selby is at $3.70 [ today, most of our properties are probably going to come in at around $4, maybe $4-plus. [ So I would guess that -- I don't know exactly Johann so -- but my best guess is that that blended rents is around $4.25. ]
But Johann, just a reminder that in our underwriting, whenever we underwrite a property, we underwrite to the rent next door. So whatever the condo next door is getting is what we're underwriting out. So we're not projecting what future rent is, we're underwriting to the rent next door at that specific point in time.
I guess I'm just trying to get a sense as to how conservative that $36 million is?
I mean we can take it through it offline, I think we'd be happy to do that. But again, I think it's conservative. Because I think our development yield is going to come in above $5.25 million [ and I think our interest rate on the financing on the perm financing -- again, in this environment who knows like we can't really predict the future. But if the environment stays the same or in a kind of low interest rate environment, we think the interest rate will come inside of 3.5%. In some cases, significantly inside 3.5%, so we can help you build out a model to help drive the FFO for this vertical.
And then for TAH, a big driver of kind of the cost savings was in-house orders. What percentage of all orders are being done in-house now?
I'm going to hand the hard questions to other people. So I'm going to give the hard question here to Kevin.
We are at 57% right now. This is a program that we started about 18 months ago. Last year, we're about 47%. This time we're at 57%. Now we're trying to get to -- our goal is to get to 65% by the end of this year. And that includes all work orders, HVAC, R&M, calls we get from our residents.
And then just maybe on the top line, like you guys have seem to be driving really, really strong rent growth, that's kind of far surpasses with way Invitation and AMH are doing. Is there anything specific that you guys can point to that -- attribute that to?
Well, I'll start and Kevin, if there's anything you want to add, chime in afterwards. But it's not one factor, it's a combination of factors. As I said before, I mean I think our investment strategy focusing on the fastest growing Sunbelt markets, and also the middle market is really proving to be very successful and it's helping us drive -- it's helping drive the rent growth, that's one clear factor. There's definitely loss to lease in the overall portfolio, in particular, the Silver Bay portfolio. We talked about that being about 3% to 4%, as a kind of best guess. I mean I think the other factors are clearly our revenue maximization program. When we implemented that, our rent increases moved up about 200 basis points. And then again more of a qualitative factor, but I just think our team and Kevin are doing such an unbelievable job on customer service and you see that through the Google ratings and our employee ratings at Glassdoor that that's also having an impact in our ability to drive rent. Because if you -- very similar to the hospitality industry, if you provide a great product and great service, residents are going to be more willing or able to pay higher rent. And I think the other thing is that if you look at our rent to household income, I think our underwriting has probably gotten better. Our rent to household income remains in the low-20% range. So there is room to continue to push rent. So those would be the factors, I think, that are leading to the differentiation and the industry-leading performance. Kevin, anything else you want to add?
Yes, the only thing I would say -- and all those are exactly right. The only thing I would add to is that we just have just a maniacal interest into the details of each lease that comes up. So we have weekly calls, we have our centralized revenue management team, it is constantly looking at all of the renewals that are coming out three months ahead and we're sending out letters that are automated. And the homes are vacant, again, we're having communications weekly with our field teams and we're talking about every home and we're talking about the potential for an increase. And then we test -- and the program that we have will test the rent and if it doesn't lease at that level, then we'll bring it down a little bit. But we're constantly testing rents and then we're learning with each transaction, whether we make the right decision or not. And so every time we get incrementally better with each week and each month that we go through the process.
Your next question will come from [ Bruce Edmund ] from BMO.
This is [ Bruce ]. Just my first question was just on the TLR U.S. NOI margin. It came in at 58%, which was a little bit below what you guys disclosed at the time of the acquisition of 59%. So has your expectation for that changed going forward or is it predominantly still at 59%?
Jon, do you want to answer that?
Our expectation hasn't changed, unless like we've seen in single-family rental. NOI margin might move by 1% or 100 basis points here on a quarter-over-quarter basis. But no, our expectation for the year and everything we disclosed when we made the acquisition still remains the same.
And one thing I would add to that is the margin when we owned -- for the 20 days that we owned, the portfolio was actually 58.4%, not 58%. The difference is there was a special onetime property tax assessment that happened before our ownership, so that definitely had an impact on the margin. But certainly, property taxes, which is again a little bit harder for us to control, will have an impact ultimately where we end up. But I would agree with Jon, based on where we think we are going to hit our underwriting.
And my next question was just on the -- so you guys outlined that $1.5 billion target for third-party AUM. Could you provide a breakdown of where you expect that to flow-through to in terms of the verticals?
I can't be that specific, but what I will tell you is we are working on a significant capital raise for for-sale housing for our THP business, and that capital raise would be to further our master plan community business with Johnson to potentially look at build-to-rent communities, which is I think an exciting new subset in a sense of single-family rental. So we're working on a significant raise there. We talked about working on a significant raise to further our build-to-core multi-family business here in Toronto. We would love next year to raise a significant amount of capital around the Starlight platform or the U.S. multi-family platform. Out of all the things we're doing, that's probably the easiest thing to raise money for. And then lastly, once we're through the TAH joint venture 1, which will be towards the end of 2020, if all goes well, we'd like to raise joint venture 2. So if you put those things together without getting into any specifics, we might get pretty close with those raises alone.
And my last question is just on the THP business. You guys had previously spoken about some of the challenges you are having and how investment income was trending a little bit lower than you had previously expected. Has anything changed on that front, or are those challenges still present in the multi-family?
I'm going to turn that over to Andy Carmody, who runs our THP business for us.
Great. I think our view on the for-sale housing business in the US is essentially stable. We kind of accepted that the market is going to go up and down a bit quarter-to-quarter. Fortunately, rates have come back in, which is helping pick up a little bit of slower home sales that we saw earlier in the year. But I think what's probably most important under that stable outlook is there are kind of winners and losers emerging in the US housing market where in our portfolio and many other markets in the country, the luxury segment, the multiple move up or higher priced segments are really underperforming and our portfolio was a little over allocated to that space now, which is why we've seen some pressure on our results. But if you look to our core portfolio or what I'll call our middle market for-sale housing portfolio, our results there are actually very strong. In fact, we're seeing year-over-year increases in home sales and lot sales. So it's a little bit of a tale of the two ends of the barbell here. And we've talked about this before in both the middle market and the luxury portfolio is bringing, re-planning future phases down to bring average price points down and more affordable product to market, and the places where we've done that we're seeing very good traction we're a little ahead in that process, in Texas with Johnson and a little behind in some of the other markets. But I think that will continue to allow us to offset some of the losses and gives me a little bit of optimism that we may be able to turn the tide on our results here going forward in a few quarters or so.
So is the 3% return for the year is still reasonable, do you think?
Yes, we think it is. We think the results for the rest of the year are stable and I wish we were doing better, but it kind of it's what it is. And so if you're looking it from a modeling perspective, we would assume that is a constant for the remainder of the year.
[Operator Instructions] We have a question from Mario Saric with Scotiabank.
Maybe just sticking to the advisory business on that $1.5 billion target increase by 2022. Gary, I appreciate not being able to get into the details, but if we just sit back and think bigger picture in terms of what can happen over the next 3 to 4 years. You mentioned the [indiscernible] seems to be very strong institutional upside for SFR today. And so presumably, the next fund could be materially bigger than the existing fund. You've talked a little bit about the opportunities in the MPC business, as well as TLR Canada, and then you have the multi-family business in the U.S. It just seems when we aggregate all of that, the numbers could be materially higher than $1.5 billion. So I'm just trying to understand how conservative you think that number is and kind of what has to go right for you to achieve it versus [indiscernible].
Well, I mean we're always a little bit conservative. But I think we still want to provide fairly solid goals internally. Like I mean a lot -- these goals and targets we're setting are not just for the investment community or you as analysts, but they're also for us internally to reach for something. So we don't want goals that are too ambitious that we can't hit. But we also don't necessarily want them too low that they're cakewalk. So it's trying to kind of strike the balance. And I think the $1.5 billion plus is a reasonable goal over the next 3 years because remember once we implement a raise, you can't raise more capital for that vertical. So you've got to invest that money over, let's say, 2 or 3 years before you can go out and raise a follow on investment vehicles. So that does put some limitations on what we can raise unless, as you said, we can raise just a bigger vehicle. But if we raise a bigger vehicle, then it might take us longer to invest it and that might stunt the growth in the future. So it kind of really depends. Like, in order for this to happen, I mean the environment needs to stay the same. Like, again, in all the projections we're making here, they are not guarantees or promises. We think that if the environment stays relatively constant, we can hit this growth on FFO per share and on third-party capital. Obviously, if there is an exogenous shock, a recession, famine, floods, pestilence, we're not going to be able to hit it. And I think the market would understand that, but we're very -- I mean, we feel very good about the long-term opportunity for rental housing. Affordability is a major issue in all our markets, including the Sunbelt, and the market desperately needs more quality rental housing for the workforce. And this is what private institutions also want because they are looking for recurring income. So I said before, I think if we had the product, we can almost raise unlimited money. But it really depends on having the products and in sizing each one of those investment vehicle. So our institutional partners think it's reasonable as to how we're going to be able to allocate the capital. And that's a very kind of broad answer, I wish I could be more specific, but I can't.
Okay. So the $3.3 billion that will reflect deployed capital as opposed to committed [indiscernible] because that’s what you’re...
It could include some committed in there. Because, obviously, depending on the vehicle, it sometimes you raise vehicles on the basis of committed capital and sometimes on deployed capital, so it could be a mix of being -- of having some vehicles where we raised committed capital and earn fees on that, but it might take us longer to draw down the fund. So I would say, it could be a combination of both, but the way we would report our AUM, third-party AUM, we think we can go from $1.8 billion to $3.3 billion, that will include, by the way, some run-off. So you have to take into account some run-off of the existing or legacy vehicles and they're starting to generate performance fees. And we think based on that, hopefully, we can cover or largely cover our corporate overhead with fee income.
And then you touched on my other question, in terms of the assumption of a steady-state environment in some of these numbers including the 10%-plus FFO per share growth. So I guess, presumably that's assuming kind of a steady-state U.S. economy GDP growth, 2% to 3% [indiscernible]. I'm wondering if you can highlight how your capital allocation decisions or strategy changes, if at all, during the U.S. Fed easing cycle as if [indiscernible] we're entering an easing cycle and it's not just a one [indiscernible] relative raise [ opposed to what we've been accustomed to last couple of years in terms of the tightening cycle?
An easing cycle for us, unless it's accompanied by some, again, major global exogenous shock, trade war, tech crash, it's phenomenal news for being in U.S. Sunbelt base rental housing because the underlying economy is extremely strong, it's robust. If you go and talk to people down in the Sunbelt, they feel very good about their future and their environment. There is basically full employment. And that obviously allows us to drive rent growth. And if we're an environment where we can drive rent growth and our underlying cost of capital is going down, that's a win-win scenario for us. So it would make us want to allocate capital even more aggressively to the U.S. Sunbelt in this environment.
And then lastly, does the 10% CAGR reflect any incremental equity issuances or I guess higher shares outstanding in part to fund future potential co-investments, possibly bigger fronts?
No, it does not. And we are taking into account obviously the higher share count as we got the full load from the Starlight acquisition of 50.8 million shares. So the share can obviously does move up next year.
At this time, I will turn the call over to Mr. Gary Berman for closing remarks.
Thank you, Michelle. I would like to thank everyone on the call for your participation. We look forward to speaking to you in November, when we discuss our Q3 results.
This concludes today's conference call. You may now disconnect.