Tricon Residential Inc

TSX:TCN

Earnings Call Transcript 2021-Q2

[Operator]

Good morning. My name is Theresa, and I will be your conference operator today. At this time I would like to welcome to the Tricon Residential's Second 2021 Analyst Conference Call. Operator Instructions] I would now like to hand the conference over to your speaker today, Wojtek Nowak, Managing Director of Capital Markets. Thank you. Please go ahead.

[Wojtek Nowak, Managing Director of Capital Markets]

Thank you, Theresa. Good morning, everyone, and thank you for joining us to discuss Tricon's second quarter results for the 3 and 6 months ended June 30, 2021, which were shared in the news release distributed yesterday.I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. For more information, please refer to our most recent management's discussion and analysis and annual information form, which are available on SEDAR and our company website.Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in the MD&A. I would also like to remind everyone that all figures are being quoted in U.S. dollars unless otherwise stated.Please note that this call is available by webcast on our website and a replay will be accessible there following the call.Lastly, please note that during this call, we will be referring to a supplementary presentation that you can view by joining our webcast or you can access directly through our website. This will be a useful tool to help you follow along during the call. You can find both the webcast registration and the presentation in the Investors section of triconresidential.com under News & Events.With that, I will turn the call over to Gary Berman, President and CEO of Tricon.

[Gary Berman, President, CEO & Director]

Thank you, Wojtek, and good morning, everyone. We appreciate you joining us today. Tricon's momentum continued in the second quarter, strong demand trends coupled with excellent operating performance with the solid financial results for our company.I want to start by thanking our dedicated team members who continue to raise the bar quarter-after-quarter in how we perform and serve our residents. We've had an incredibly productive year-to-date and none of it would have been possible without the dedication and passion that our team brings work every day.For those listening in, please know, I'm extremely proud of your efforts and what we're all accomplishing together.Let's start on Slide 2 and talk about the key takeaways we want to emphasize for you today. First, our business is benefiting from long-term tailwinds that support our Sun Belt middle market rental strategy. Americans are choosing to live in a Sun Belt because of superior job growth, better weather, lower taxes, more affordable living options and now heightened preference for space brought upon by the pandemic, and our rental homes address the housing needs of America's largest demographic, the millennials.Second, our core single-family rental business continues to deliver solid operating performance. With exceptional demand trends and low supply of available homes, it's clear that our single-family rental business is booming.Third, we achieved a record pace of acquisitions this quarter with 1,504 single-family rental homes acquired primarily through organic retail channels, and we expect volumes to accelerate further into Q3. The toward piece of acquisition should silence any questions or concerns about our ability to invest in what is admittedly a very competitive housing market.Fourth, our growth initiatives are supported by $2 billion of third-party equity capital commitments announced year-to-date, making this the most prolific year of fundraising in Tricon's 33-year history. These investment joint ventures provide a clear path for us to double our portfolio to 50,000 homes over the next 3 years.And finally, we've achieved all of the above while remaining disciplined with our balance sheet, substantially exceeding our deleveraging target a year ahead of schedule.Let's now turn to Slide 3 for a summary of our results. We reported earnings per diluted share of $0.72 compared to $0.16 in the prior year. Our core FFO per share was $0.14, representing a 27% increase when compared to last year. Our consolidated net operating income grew a solid 16% year-over-year, while overhead and interest expenses remain relatively stable on the whole, creating strong bottom line growth.We also recently achieved a number of strategic accomplishments, including the formation of our $1.5 billion Homebuilder Direct Joint Venture, inclusion into the FTSE EPRA/Nareit Index. And subsequent to quarter-end, the launch of our largest JV to date, the $5 billion SFR JV-2. We also completed a partial equity financing for CAD 201 million, which helped to reduce our leverage and position us well for continued growth.Moving to Slide 4. In our single-family rental business, we saw strong growth from new and existing assets as Tricon's proportionate share of NOI increased by 10% and same home NOI grew 5.5% compared to last year. Without the impact of the Texas storm, our same home NOI growth would have been 60 basis points higher at 6.1%. We also achieved a near record same home NOI margin of 66.6%, driven by strong operating metrics. It is worth noting that our NOI margin would have been 67%, if we're to exclude the impact of the Texas freeze.In U.S. multifamily rental, we had our best quarter since Q1 2020 with operating metrics exceeding pre-pandemic levels, including a return of positive NOI growth as well as solid occupancy turnover and blended rent growth trends that are accelerating further into Q3.And finally, for-sale housing delivered another very strong quarter, distributing $19.7 million of cash to Tricon.Let's now turn to Slide 5 to discuss the fundamental trends supporting our Sun Belt middle market strategy. We often talk about the great migration to the U.S. Sun Belt. And I've shared with you numerous statistics in recent quarters that clearly show these demographic trends accelerating during the pandemic as the suburban and single-family lifestyle becomes even more enticing during a health crisis. These are not just passing trends, but rather long-term population shifts that have been in place for many years. You can see from the most recent census data that population growth in Tricon's markets has outperformed the national average by about 400 basis points over the past 10 years and is expected to continue to outperform in the foreseeable future as growth begets growth.And over the past year, these markets have also seen the fastest rebound in employment growth, exceeding the national average by about 300 basis points. Population growth and job growth are the key drivers of housing demand, and we believe the attractive combination of warm weather, lower taxes, strong job growth and affordable living options has been in place for some time will continue to drive housing demand in the Sun Belt for many years to come.Let's turn to Slide 6. With such strong housing demand trends, it's no surprise that home values continue to appreciate. Tricon's single-family rental portfolio experienced home price appreciation of 15% year-to-date, which contributes meaningfully to our growth in book value per share. But at the same time, we're also seeing market rents continuing to rise, and we've been able to increase new move in rent growth by a similar 15% year-to-date. This compelling correlation between home prices and rents has allowed us to acquire homes at attractive cap rates and create value for our shareholders quarter after quarter.With such compelling long-term trends on our side, it should come as no surprise that we focused on single-family rental as our core growth strategy.On Slide 7, we outline our asset mix, where you can see that single-family rental now represents 93% of our consolidated real estate assets and is expected to remain above 90% going forward. Residential development is expected to remain near 5% of assets and also includes build-to-rent communities that add to our SFR portfolio.Multifamily rental has been reduced to 2% of assets as a result of the portfolio syndication and is expected to remain below 5% going forward.Let's now move to Slide 8 to expand on our SFR growth strategy and talk about our various acquisition channels. As you can see, we have a diversified acquisition strategy and have formed complementary joint ventures with leading third-party investors to help us scale faster. Through these channels, we plan to double our portfolio of 50,000 single-family rental homes over the next 3 years.Subsequent to quarter-end, we announced SFR JV-2, the successor to SFR JV-1, where we'll continue to acquire retail homes mainly through the MLS as well as off-market channels and portfolio acquisitions. SFR JV-2 is our largest joint venture to-date and will add approximately 18,000 homes to our portfolio over the next 3 years alone.During the quarter, we also announced the formation of Homebuilder Direct JV, which focuses on buying new scattered homes and complete build-to-rent communities directly from homebuilders. This new venture is very synergistic with our legacy for-sale housing business as it leverages our long-standing relationships with homebuilders to gain access to newly built homes.Over the past year, we've also expanded into the development of SFR build-to-rent communities under our joint venture with Arizona State Retirement System.On Slide 9, you can see a summary of our SFR joint ventures. The key takeaway here is that these complementary investment vehicles each have a unique acquisition strategy that allows us to grow faster and diversify our portfolio while providing a variety of housing options to our residents at accessible price points.Turning to Slide 10. We'd like to give you some more insight into how these JVs have allowed us to expand our buy box and double our acquisition volumes. Our expanded buy box enables us to buy homes in 21 markets compared to 12 previously under SFR JV-1, including cities such as Phoenix, Las Vegas and Greenville, South Carolina, while still remaining focused on our middle market demographic.Our target cap rates are tightened by about 50 basis points to a range of 5% to 5.5%, which reflects the shift to lower cap rate markets, where we have in place operations but did not bind JV-1, and also the inclusion of new homes under Homebuilder Direct acquisition channel.Interestingly, even with lower going-in cap rates, our underwritten returns for JV-2 and Homebuilder Direct are higher than that of JV-1 as we continue to benefit from the incredible attractive debt financing environment and the ongoing institutionalization of the SFR industry.Let's shift gears to Slide 11 for an ESG update. Following the release of our inaugural ESG report this quarter, we engaged in several initiatives in support of our company-wide commitment to ESG.We completed our first GRESB submission in June, which positions us to receive our first GRESB rating in 2022 from the most prominent real estate focused ratings agency. Second, construction began in June, Ontario's first purpose-built indigenous hub, which is a part of Tricon's West Don Lands project. This is something we feel honored to be a part of as the hub will be a gathering place for indigenous people to help support the reclamation of culture and identity at a time when the atrocities of the residential school system are top of mind for all Canadians. The indigenous hub will help meet critical health care, spiritual, employment, training and family support needs for the community.And finally, I'm pleased to report that Tricon has met or exceeded commitments to both the 30% Club Canada campaign and Black North Initiative's CEO pledge to increase gender diversity and black, indigenous and people of color representation at board and senior management levels. Although there's still lots of work to be done, diversity, inclusion and belonging, remain a priority for our organization and a key aspect of hiring plans for both leadership and non-leadership positions.At Tricon, there's genuine purity in our mission. We care deeply about our employees and the communities in which we operate. And we know that a diverse organization will position us better to serve our residents and the communities they live in, as they themselves are inherently diverse.That concludes my opening remarks. And speaking of diversity, I would now like to pass the presentation over to Wissam, to discuss our financial results.

[Wissam Francis, Executive VP & CFO]

Thank you, Gary, and good morning, everyone. First of all, I want to thank our team for the strong results we produced this quarter. With our efforts, we achieved record-breaking numbers while launching significant investment vehicles to grow our business, effectively controlling our costs, and meaningfully reducing our leverage.Slide 12 highlights our progress against the 5 key priorities that we set out in 2019. These include growing our core FFO per share at a compounded annual rate of 10% over 3 years through 2022; raising approximately $1 billion of third-party capital over 3 years; growing our book value per share by reinvesting our free cash flows into accretive growth opportunities; reducing our leverage and improving our reporting.As you can see, we are well on our way to achieving, and in most cases, exceeding the goals we set out well ahead of schedule. Let's begin with our 3-year FFO target.So far, we've achieved $0.27 of FFO per share year-to-date. Assuming the current trend holds, we are confident that we can achieve our FFO target of $0.52 to $0.57 in 2022, even with higher diluted share count caused by our exchangeable preferred share offering last year and our recent equity offering.In terms of raising third-party capital, it has been a record-breaking start to the year. We have raised $2 billion of fee-bearing equity capital so far, which is double the goal we set out and a year ahead of schedule. This includes our recently announced SFR JV-2, our single-family rental Home Builder Direct joint venture, our U.S. multifamily portfolio syndication and our Canadian multifamily joint venture with CPP Investments.With regards to reducing our leverage to the target range of 50% to 55%, we have exceeded our target ahead of schedule and now are sitting at 46% net debt to assets. This translates to 42% net debt to assets on a proportionate basis and gives us ample flexibility to continue growing while keeping our leverage at a prudent level.Our final priority was to improve our reporting, which is substantially completed with our transition from investment entity accounting to consolidated accounting last year as well as adopting REIT like MD&A disclosures, such as FFO and AFFO per share. We also published our first annual ESG report in May, a major milestone in our journey. This report showcases our ESG commitments for the coming year while detailing how we performed last year.Now let's turn to Slide 13, where we'll provide highlights of our key metrics for the quarter. First, our net income from continued operations grew almost fourfold year-over-year to $146 million. This included approximately $71 million of NOI from our single-family rental properties, representing a 16% year-over-year increase. We also had a $254 million fair value gain on rental properties in Q3 compared to $33 million in the prior year, reflecting significant home price appreciation in Tricon's markets.Second, our core FFO per share increased by 27% year-over-year to $0.14 or CAD 0.17. And third, we reported AFFO of $0.11 per share. This translates to CAD 0.14 and provides us with ample cushion to support our quarterly dividend of CAD 0.07 per share, reflecting an AFFO payout ratio of 42%.Now let's move on to Slide 14 and talk about the drivers that contributed to our FFO per share growth this quarter, which relates to our proportionate share of the portfolio. The year-over-year increase of $0.03 per share or 27% can be attributed to the strength across several aspects of our business.First, our single-family rental portfolio, which makes up 90% of our real estate assets, delivered 10% growth in Tricon's proportionate NOI. This was driven by a 16% increase in the number of homes, coupled with strong blended rent growth of 5.7%. All this was partially offset by a 1% decrease in occupancy due to our accelerated acquisition pace of vacant homes.Our other businesses also contributed meaningfully this quarter. Of note, residential development continues to perform exceptionally well as demand for development lots in our for-sale housing business remains strong. The business contributed $8.3 million to our FFO this quarter and generated $19.7 million of cash flow for Tricon, including performance fees. The result was $4.9 million increase in private funds and advisory revenue, driven by an increase in development fees earned from Johnson lot sales, higher asset management fees earned from our syndicated U.S. multifamily portfolio and Homebuilder Direct joint venture as well as substantial performance fees earned from legacy for-sale housing investments. The offsetting factor was a lower U.S. multifamily rental FFO year-over-year due to the 80% portfolio syndication.On the expense side, we saw a year-over-year decrease in interest expense due to refinancing activities that have allowed us to benefit from the lower interest rate environment as well as lower balance outstanding on our corporate credit facility. This was largely offset by higher corporate overhead as we continue to grow our company as well as higher weighted average diluted shares outstanding from our preferred share equity issuance last year and our recent equity bought deal.Turning to Slide 15. Let's discuss our debt profile. As we look out to 2022, we expect to refinance the bulk of these maturities with new property level debt, including securitizations. We see a significant opportunity for interest expense savings in today's low interest rate environment, given that the blended rate on these maturities is approximately 3.1%, whereas the current market is around 2.25% for 5 to 7-year terms.Moving to our liquidity profile on Slide 16, you can see that our current liquidity position is strong, with annual recurring cash flows and projected cash flow sources, providing ample funding for our near-term growth initiatives. Our current AFFO run rate, net of dividends, gives us over $55 million of annual cash flows to reinvest in growth. And this number continues to grow.Meanwhile, on the liquidity side, we have approximately $570 million of our current liquidity, plus $185 million of net distributions expected from our residential developments over the next several years. In terms of investments, we have $720 million of cash commitments in the next 3 years, which gives us strong visibility into our growth profile.In short, we are well funded for our growth plan, and we will aim to calibrate the pace of growth such as our leverage metrics remain at a comfortable level.On that note, let me pass the call over to Kevin Baldridge, Chief Operating Officer, to discuss the operational highlights for the quarter.

[Kevin Baldridge, Chief Operating Officer]

Thank you very much, Wissam. Good morning, everyone. We had another stellar quarter of operating results, and I want to acknowledge the efforts of our operations and customer service teams. These teams, I'm extremely proud to work with and who continue to put our residents' well-being first.Let's move to Slide 17 to review the performance of our core single-family rental business. We continue to benefit from strong demand trends, which drove higher occupancy, rent growth and resident retention and resulted in same home NOI growth of 5.5% year-over-year or 6.1%, excluding the impact of the Texas storm.Getting into the numbers, same home revenue grew 5.4%. This was driven by a slight occupancy increase of 10 basis points and average rents increasing by 5.4% lease-over-lease. I'm pleased to report that our bad debt has stabilized, representing 1.7% of total revenue this quarter, only 10 basis points higher than this time last year and down from a high of 2.7% in Q4 2020. With that said, over time, we believe we will return to pre-pandemic levels of sub 1%.On the expense side, we saw an increase of 5% compared to last year. This was largely driven by a $500,000 increase in property taxes, representing a 4.8% variance from the prior year as a result of the higher assessed property values. We also had a $600,000 increase in repairs and maintenance expense, which was about 19% higher than last year, largely driven by the Texas storm. This was partially offset by a $500,000 decrease in turnover expenses, which are down by almost 37% year-on-year due to lower turnover as we continue to focus on exceptional resident service. We also returned to ordinary course capital improvements, which resulted in fewer items being expensed.Turning to Slide 18. You can see that the strong demand trends in single-family rental continue to fire on all cylinders. With exceptional demand for our homes and limited available supply, occupancy remains near all-time highs, while rent growth on new move-ins continue to increase and hit an all-time high of 17.8% growth in June as we harvested the loss to lease for this build up over time with our low turnover rate.Meanwhile, rent growth on renewals is inching up as strong demand for our homes allows us to adjust that metric up a bit more, while continuing to be sensitive to our residents' financial circumstances.July's KPIs built and improved on the strong operating performance produced during the first half of 2021. Same home occupancy was 97.5%, while blended rent growth printed a new record high of 9.3% based on 20.7% new lease growth and 4.9% renewal rent growth. In terms of turnover, our same home rate was a low 23.2% on a proportional basis in July and compares to 27.9% in July 2020.Let's turn now to Slide 19 to discuss our U.S. multifamily rental business, where I'm pleased to say that we've now largely internalized property management of the portfolio. This has been a huge undertaking, which we believe will lead to operating efficiencies and superior resident experience.Following our 80% syndication, in Q2, we reported only our 20% proportionate share of the operating sales. With that, I'm pleased to report that our NOI for same home NOI growth is once again in positive territory, with a 5.9% increase year-over-year.When we dive into the components of NOI, revenues were up 5.7% compared to last year. This was largely due to a 210 basis point increase in occupancy to 95.6%, while being partially offset by marginally lower average monthly rent.Bad debt has generally stabilized and was only slightly higher, 2% of total revenue versus 1.8% last year. And revenues from ancillary services, such as bundled entertainment package, increased slightly.In general, concessions have almost disappeared, while blended rents are improving, driven by a lease trade out rate of 14.3% in the quarter. This is arguably off a low base, but rent growth is expected to continue to improve further.On the expense side, there was an increase of a $100,000 or 5.5% year-over-year for Tricon's proportionate share, driven mostly by expenses returning to pre-pandemic levels, including deferred maintenance activities that occurred in the quarter.All in all, this has been an incredibly strong start to the year with the most compelling demand transit I've seen in almost 30 years in this business.I want to thank our operations team again for their contribution this quarter and our unwavering dedication to our residents. I know we say this again and again, but it really is because of their genuine commitment to our residents that we're able to continue to deliver these exceptional results.Now I'll turn the call back over to Gary for closing remarks.

[Gary Berman, President, CEO & Director]

Thank you, Kevin. I'd like to spend a minute on Slide 20 with an overview of the value creation opportunities beyond our core SFR business. Our investments in U.S. and Canadian multi-family rental and residential developments represent less than CAD 3 of book value per share today. And we see a path to doubling that value over the next few years.As you've heard from Kevin, our U.S. multi-family portfolio is starting to show significantly better operating results at a time when cap rates are compressing meaningfully. Assuming Sun Belt multi-family cap rates of 4%, which may still be conservative given how fast valuations are moving, we think the portfolio is actually worth much more than our balance sheet suggests.Second, our Canadian multifamily development portfolio is on course to triple in value as we complete and stabilize the projects over the coming years, thereby capturing the value creation that comes from developing to an untrended yield of 4.75% in a market where quasi buildings are valued at approximately 3.5%.And lastly, our U.S. residential developments are expected to deliver about 2x return on book value with a robust for-sale housing market providing a constructive backdrop for this business. Taken together, these investments could be worth over CAD 6 per share when fully realized.And so let's conclude on Slide 21 with an overview of what we believe makes our story unique and compelling for our shareholders. We believe that SFR may be the best business in real estate and is a golden decade ahead. With over 16 million single-family rental homes across the U.S., but only 2% of these homes being institutionally owned, there is a phenomenal opportunity to roll up a fragmented industry and provide more American families with badly needed professionally managed rental housing.With our recently announced joint ventures, we have a clear path to doubling our portfolio to 50,000 homes and strengthening our position as a leader in the SFR industry, which is still in the early innings of institutionalization.We also have the unique opportunity to manage strategic capital for some of the largest and smartest third-party institutional investors in the world, which enables us to become a larger and more efficient operator, pursue development activities largely off-balance sheet and overtime generate a higher return on equity for our shareholders.And last but not least, we've established an industry-leading operating platform, which allows us to deliver consistently strong results while offering superior service to our residents. Our people-first culture and focus on innovation are competitive advantages that we believe makes us a leading operator and also a good corporate citizen.That concludes our prepared remarks. I will pass the call back to Theresa to take questions. Wissam, Kevin and I will also be joined by Jon Ellenzweig, Andy Carmody and Andrew Joyner to answer your questions.

[Operator]

[Operator Instructions] And your first question comes from Matt Logan with RBC Capital Markets.

[Matt Logan, Analyst]

Gary, you've done a great job of setting the business up with new joint ventures and significant progress on the balance sheet. Can you talk about your key priorities over the next 3 years and how you define success over this period?

[Gary Berman, President, CEO & Director]

Well, thank you for the kind words. I mean, look, we've done a ton of heavy lifting over the last year or 2, and now the big opportunity over the next 3 years is simply not to execute on what we've delivered. I mean, we have all the capital in place now not to grow our portfolio or single-family rental portfolio from 25,000 homes to 50,000 homes. And so we just need to put our heads down and acquire roughly 1,500 homes to 2,000 homes per quarter and get those joint ventures invested with really high-quality homes, so we can offer more options to our residents.So that's by far and away the biggest goal. I'd also like to see us make progress in all our developments where we're building a burgeoning built-to-rent business that will deliver about 2,500 homes over the next 2 or 3 years. And so we'd like to get that off the ground. And that again provides another option to our residents with brand-new high-quality housing. And then in Canada, North of the border, over the next 3 years, I'd love to see us stabilize, largely stabilize our portfolio, create substantial value for our shareholders and potentially give ourselves an opportunity to lift that portfolio and create even more value. So those are the big things we're going to work on over the next 3 years.

[Matt Logan, Analyst]

And maybe a question for Wissam. Really appreciate the proportionally consolidated disclosures this quarter. And when we tally those up, certainly there are some sizeable marks in Q2. But over the past year, they seem globalized the Case-Shiller Index perhaps a bit. Can you talk about what region drove the fair value gains in Q2? And if you think there's potential for further fair value gains over the next couple of quarters?

[Wissam Francis, Executive VP & CFO]

We do -- number -- the way we calculate our fair value is really backwards looking. So we always take 4 quarters rolling, and we are very conservative about that. And it's actually catching up over the past several quarters, seen home price appreciation increased significantly across a lot of the areas that we're in. So it's not just 1 area specifically, it's across the entire regions that we're in in the Sun Belt.We do expect fair value pickups to continue going forward and we'd expect the same amount to continue over the next several quarters going forward. I remember if you evaluate it on a cap rate basis, we're still very conservative from that perspective. So we do expect fair value pickups to continue.

[Gary Berman, President, CEO & Director]

And Matt, maybe I could just add to that. If you look at even with the big fair value increase this quarter, if you look at our SFR portfolio on in place NOI, it's about a 5% implied cap rate, if you use huge run rate -- or sorry, if I should say, if we use in place is 4.8%. And if we use run rate, it's about a 5% cap rate. So extremely conservative. And again, as Wissam said, because a lagging nature and methodology of how we determine the fair value. So that -- we're not seeing any portfolios trade anywhere near those levels. And so there's substantial opportunity for more fair value increases going forward.

[Matt Logan, Analyst]

Great. And maybe 1 last one for me. If I look at your subscription facility, it would appear that the Homebuilder Direct JV has started to deploy capital. Can you give us a flavor for the initial acquisitions in terms of region, home size? And maybe talk about if Tricon has any input in developing the home construction?

[Gary Berman, President, CEO & Director]

Jon, you want to take that?

[Jonathan Ellenzweig, Chief Investment Officer]

Sure, Matt, and thanks for asking that question. As you recall, we closed Homebuilder Direct midway through this quarter, and we ended up closing on 105 homes in that vehicle during the quarter. And I think as we discussed before, we expect it might take a couple of quarters for the acquisition volume in HD to really ramp up, because in many cases, what we're doing is actually ordering homes from builders in advance. And so if we place an order today, for example, for a 100 homes in the community, we may not start receiving deliveries until Q1 or Q2 of next year.And in terms of the product, as you asked, home sizes are not that dissimilar from our existing portfolio, they're slightly larger because most new homes being built are a little bit larger than resale homes. So call it closer to 1,900 to 2,100 square feet, whereas our standard portfolio is a little bit smaller than that. And home prices are towards the higher end of our range, simply because of the cost of new construction.And then lastly, if you discuss the market, we're seeing strong supply coming online in places like Dallas, San Antonio, Houston and Austin in Texas. We're also acquiring homes in Phoenix, Atlanta, Charlotte, so not too dissimilar to our broader portfolio, but there's going to be some more concentrations as we place orders for entire communities in certain markets.

[Operator]

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

[Mario Saric, Analyst]

Just maybe wanted to touch on the expense growth this quarter. I recognized in Texas freeze played a role, but these are 5% a bit higher than what we've seen in the last couple of years. How should we think about that expense growth -- it's going to show in the second half of this year and then going into 2022, given that there could still be further scaling opportunities in the business?

[Gary Berman, President, CEO & Director]

Well, okay. So it's a bit of a noisy quarter on the expense side. And one of the reasons for that is the Texas freeze. If you isolate or remove the Texas freeze, the expense growth for the first 6 months of the year is about 2%, 2.5%. So that I would say is a more normalized number, Mario. The other issue is that in the height of the pandemic Q2 of last year and in Q3, we really deferred nonessential maintenance in CapEx. And so that also is creating a bit of a kind of -- it's also creating some noise in the numbers.So I would say the numbers because of that are higher than they normally would be, but to be fair we are an inflationary environment, right? We're seeing wages, material costs or supply chain issues creating pressures on all of our expenses. Property taxes are going to move up with higher home prices. Insurance premiums have moved up. So all in all, we are in an inflationary environment, and I think we should expect higher expense growth. But I would say that the business is so strong, the fundamentals are so compelling that we still should be able to drive our revenues faster than our expenses and therefore grow our margin.

[Mario Saric, Analyst]

Okay. And then I guess 1 associated question. I know that the direct expenses are recorded under SFR with $2.5 million. That up over the $1 million kind of per quarter on average over the past 5 quarters. So is that explained by the noise, Gary, that you have it as well, or is something close to $2.5 million on the direct cost a decent run rate going forward?

[Gary Berman, President, CEO & Director]

Indirect expenses under SFR?

[Mario Saric, Analyst]

Yes.

[Gary Berman, President, CEO & Director]

Yes. I mean, I think some of that -- some of this noise, there's also if we're talking about the same line, Mario -- I'm just going to take a look at that. Yes, other direct expenses, yes. The other issue -- the other thing to keep in mind there, as we are rolling on our smart home technology, and so the expense associated with that is a gross out. So we show that the revenue in the fee, in the revenue item fees and other revenue, but then we show the expense associated with that in other direct expenses. So that part of the increase in the other direct expenses associated with the rollout of the smart home technology program.

[Mario Saric, Analyst]

Got it. Okay. And then just maybe focus on the top line, either Gary, for you or for Kevin, kind of rolling on all cylinders here in terms of the rent growth, the occupancy extremely high, rent are at least still below the home prices in the U.S., that they should be across most regions. When you sit back, what do you think is the biggest risk or the thing that takes up the most mind share for you in terms of continuing this really strong top line revenue growth?

[Gary Berman, President, CEO & Director]

Well, I mean, we're -- actually, we're holding back and it's -- and it's one of the things I think Kevin and I are and the organization we're most proud of. And the fact is that we are self-governing or limiting on renewals. And if we weren't doing that, if you look at our renewal growth, I mean, it has that job, it's in the high 4% range now. But if we weren't limiting growth on renewals, we could see a renewal increases in many markets close to 10%. So if anything, we're really protecting our residents. We're giving them more visibility and stability with their own finances, but we're also building in more and more loss to lease in our portfolio. And that explains why our new lease spreads are higher than the industry and it accelerated 20% now into July, which is just unbelievable. The part of that is because we are self-governing on renewals.So we're not really concerned about anything on the top line at this point in time. And I think the way we're running our business just gives us a much longer runway.

[Mario Saric, Analyst]

Got it. And new lease start, would that be a fair indication of where you think the mark-to-market and your portfolio is on the whole today?

[Gary Berman, President, CEO & Director]

Maybe a little high. 20% seems high to me, but it wouldn't shock me if the loss to lease was in that kind of 15% range. That was similar to where we comp the portfolio a quarter or 2 ago against [indiscernible]. So for me, 15% sounds more reasonable. But obviously we continue to build more and more loss to lease every quarter as we again hold back in renewals.

[Mario Saric, Analyst]

Okay. My next question is more of a high-level question. On your 2020 Investor Day in Florida, you kind of laid out various initiatives, and you've achieved pretty much all of them sooner than anticipated.So the question is somewhat similar to an earlier one, but, looks like over the next 3 years, that's really kind of keep your head down and focus on what's been announced in terms of initiatives. If we look out at call it 3 to 5 years, what are some of the things today that the organization is focused on that may not necessarily be material, such as the Canadian multi-family development completion over the next 3 years? It may not be material, but it's like new, interesting thing that organization is looking at that you think could have a very material impact call it 3 to 6 to 7 years out?

[Gary Berman, President, CEO & Director]

Well, I think if we keep on looking further out, look, so high level we're going to -- and this is the big thing that everyone should focus on. We're going to go from 25,000 homes to where we are today to 50,000 homes in 3 years. And after that, if all goes according to oil and we do a good job, there's no reason why we can't raise another round of joint ventures that will ultimately allow us to go from 50,000 to a 100,000 homes. So that's ultimately what we're focused on, and it's absolutely achievable. We need to observe the natural speed limit of our business and not grow too fast, because then we might have operational hiccups, but we're able to go from now 800 homes to 1,500 homes, to 2,000 homes, a quarter without skipping a beat. And so we have this incredible runway ahead to grow the portfolio. And as we do that, we're going to become more efficient. As an operator, our overhead efficiency will continue to improve. We'll become more innovative and we'll be able to offer more options and ultimately, I think services to our residents as we ultimately build out state-of-the-art resident app.So that's something that, you know, we're going to be working on. I think we're just scraping the tip of the iceberg in terms of ancillary revenues. But long term, if you think 5 or 10 years, I always say to our team, and, this is not, it doesn't necessarily need to be taken literally, but why couldn't we potentially rent an autonomous car to our residents by the hour by the day, but that's just to give you a sense of what ultimately can be done if you control the rooftops with ancillary revenue.So there's a lot of exciting times ahead, I think on that and on innovation. And then in other parts of our business, which don't get as much attention, like all the development the build-to-rent, we're building a state-of-the-art build-to-rent portfolio. Andy Carmody is running that. And up in Toronto, Andrew Joyner is running what is going to be the unique and highest quality multi-family apartment business, certainly in Canada, but maybe anywhere, and that will be an opportunity for us to create real value for our shareholders.And the other thing I would just say is we're incredibly focused on ESG. ESGs, I think it's still early days for the real estate industry right now. It's maybe only focused on environmental impact, but we think that with the events through the pandemic, investors have really allowed us to prioritize the social factors, which we think really allows us to run a much better business as we prioritize our employees and then our residents. And you're going to hear more and more about that.So we're going to be unveiling programs for both our residents and our employees that we think are incredibly exciting and will make us a better and better company over time.

[Mario Saric, Analyst]

Got it. Just on the SFR, over a long period of time, given what you've learned and developed in the U.S., there's the potential in you attracting, to export that model into other developed countries across the world, or there's simply enough more than enough growth in the U.S. to not even think about that?

[Gary Berman, President, CEO & Director]

I mean, absolutely it could be extrapolated to other markets. I just don't think we're focused on that today, because it's just such a deep market. The U.S. housing market is the largest asset in the world. I mean, it's depending on how you measure it. It's $40 trillion to $50 trillion asset class. The single-family rental business based on 16 million or 17 million units is a $4 trillion to $5 trillion asset class, right? So it's bigger than all of the entire Canadian housing market. It is so big, and institutions like us only own about 2%. So there's this massive opportunity to roll up a fragmented industry. And that's why I would say that single-family rental maybe the best business in real estate, because you have this incredible roll-up opportunity that you don't typically have another asset class. It maybe reminds me a little bit of where storage was 20 years ago. But this is -- it's -- there's incredible runway ahead in the U.S. We don't need to look further afield.

[Mario Saric, Analyst]

Great. Okay. And congrats on executing on the strategy that you laid out.

[Operator]

Your next question comes from the line of Jonathan Kelcher with TD Securities.

[Jonathan Kelcher, Analyst]

Are you guys still looking at doing a U.S. Department Sun Belt joint venture?

[Gary Berman, President, CEO & Director]

We are. We are significantly advanced on creating what we call a growth vehicle. That growth vehicle will probably be announced with a deal, and this is not going to be a major -- it's not going to be a major fund. It's really a growth vehicle that will allow us to really round out our portfolio and just kind of build on it on the margin, right? Some places, for example, we might only have 1 or 2 assets, and there's an opportunity to really kind of round that out for our institutional partners. And so that's something you should expect later in the year, probably in Q4.

[Jonathan Kelcher, Analyst]

Okay. That's helpful. And then just on Slide 12, and just so I understand it, because it does sound through previous questions, that you guys are with, I guess with the exception of the department JV pretty much done with third party capital raisings until you get a good chunk deployed. But it still shows a $1 billion 2022 target. Is that how should I think about that?

[Gary Berman, President, CEO & Director]

That was our -- so what we're doing on this performance dashboard is setting up targets, right, long-term goals that were basically put in place in 2019. So the 2019 target was $1 billion by 2022. And we doubled that already in 2021. So we're double where our target is. That's all it is. Yes.

[Jonathan Kelcher, Analyst]

Okay. Just double checking on that. And then the second question I have is, how should we -- it's like very good for-sale housing quarter and the performance fees obviously helped your quarter? How should we think about both of those lines for the back half of 2021?

[Gary Berman, President, CEO & Director]

Yes. So I mean, look, the for-sale housing business is booming, right? And this is where I think when we set some of our targets, we didn't expect such a strong market in for-sale housing. The pandemic, just with all the urbanization and densification trends, work-from-home, it's really -- it's created an unbelievable backdrop for all type -- all things housing in the U.S. certainly for-sale housing. And so everything in that business for us today is on fire. That is coming through in our investment income. As we use discounted cash flow analysis and appraisals, cash flows coming in sooner, home prices and lot prices are moving up. And so the numbers are higher than where we thought they would be.I would say where we typically think they should be on the for-sale housing side would probably be half of where they're coming in this quarter. We would typically target high single-digit unlevered returns on invested capital. And they're -- right now, they're double that. So I would say those are -- they're quite a bit higher than where we would expect.On the development fee side, I think this is a strong quarter. But I would say we think the development fees are probably pretty stable going forward. Although I will say that, Johnson is benefiting from this really strong environment. As home builders start to limit their releases, which they're doing, we may see a lot feels slowed down a bit. But other than that, I mean, look, Houston and Texas are extremely strong. So I would say the development fee line is pretty stable, but we had a strong quarter.

[Jonathan Kelcher, Analyst]

Okay. So for-sale housing should continue elevated for, I guess, the rest of this year. And the other one was on the performance fees, which are obviously very lumpy, but you have that line of sight for the backup?

[Gary Berman, President, CEO & Director]

Yes, I would say -- look, they're extremely episodic and lumpy, as you said. We do not -- we cannot predict them quarter-to-quarter. So I'm not going to predict them quarter-to-quarter for you except to say that there'll be significant performance fees over time, but I would expect probably quieter back half of the year.

[Operator]

[Operator Instructions] Your next question comes from Stephen MacLeod with BMO Capital Markets.

[Stephen MacLeod, Analyst]

Lots of great color on the call, so thank you. I just wanted to focus in on your goal to double the size of the single-family rental portfolio. Could you just give a little bit of color around the pace to get there? I assume -- is it fairly even over the next 3 years? And then secondly to that, how do you see margins evolving as you double the size of the portfolio? Are there any mix impacts? And then I guess, thirdly, you've obviously invested a lot in the infrastructure to support the single-family business that we've seen at some of the Investor Day, which is impressive. What size portfolio does the infrastructure support or cannot support without adding more investments along the way?

[Gary Berman, President, CEO & Director]

So Jon, do you want to start on a pace and then maybe I'll fill in on the margin, and maybe -- and Kevin can chime in out there, yes.

[Jonathan Ellenzweig, Chief Investment Officer]

Yes, sure. And Stephen, that is a great question. I think as we indicated earlier on the call, this quarter we acquired just to hair over 1,500 homes. We think that this coming quarter Q3 we're on-track to acquire 2,000 plus homes. But recall also there is some lumpiness in seasonality in acquisition volume. And in particular, Q3 tends to be our highest of the year. So it's likely to drop down a little bit into Q4. But all in all, if you think about the acquisition volume, 6,000, 7,000 plus acquisitions a year, and if you multiply that by 3 years, 6,000 times 3 is 18,000 to 20,000. That gets you to that 45,000 home target that we indicated earlier.

[Kevin Baldridge, Chief Operating Officer]

And in terms of mix story, I'll talk on that and Gary can speak on margin. Now that we've been able to expand our joint venture, that -- our joint ventures across all of our markets and even add a few more, we think that the mix is improved actually a little bit. When you think about the margins in some of these markets, for example, Phoenix, where we're now buying in meaningful volume, it's typically been a higher margin market for us, which is certainly helpful. And they offset some of the drags that we see and some of the slightly lower margin markets without with higher property taxes. But Gary, I'll let you talk to me about the total margin of that.

[Gary Berman, President, CEO & Director]

Yes. So -- and again, just to add little bit more color on the pace. So we're going to -- I think if Jon has his way, we're going to go in front of that, 6,000 home pace, annual pace to 8,000, right, over time. And if we can get it up to 8,000, then obviously we go from 25,000 to roughly 50,000. But then the other thing is you also have to remember that we have the build-to-rent program, and that's going to deliver that 2,500 units over the next several years. And then if all goes, according to plan, we'll probably raise another build-to-rent fund, which will allow us to grow even faster.So we're very confident about our ability to go from kind of 25,000 to 50,000 over the next few years. And then – so on the margin, yes, absolutely. Some of these west coast markets do have higher margins. New homes, the Homebuilder Direct will be favorable to the margin, because all of the things being equal, because when we buy new homes, they have lower repairs and maintenance in the early years, so that's favorable to the margin.And then I think in terms of giving some kind of commentary on where the margin could go, we're roughly -- we're at about 67% a day, if you exclude the impact of the Texas freeze. And again, I think there's still quite a bit of opportunity in the portfolio, obviously you've seen the releasing spreads, which is a major opportunity. I think we can probably push our occupancy higher. We're about 97.5%. There's no reason why we couldn't push that hard in 98%. The bad debt is elevated and will start to come down probably next year. And so that alone could bring us as we normalize all of that could bring us from 67% to 68%.And then I think, look, if we can be in an environment where revenues are going to grow faster than expenses, there is a path to getting to a 7 handle on the margin. So that's probably not a short-term goal, Steve, but probably over the mid-term, mid to longer-term, there's no reason why we couldn't ultimately get to 70%.

[Stephen MacLeod, Analyst]

That's great. That sounds very encouraging. And then maybe just finally with respect to the capacity around the investments that you've made, what size portfolio can the infrastructure currently support?

[Gary Berman, President, CEO & Director]

Yes, sorry. We didn't get to that part. Yes, the organization has definitely been built to manage a much larger portfolio. That's one of the things that's so exciting. We could do a lot more with the team we have in place. And so we should see real efficiencies in our overhead as we deploy the capital and go from 25,000 to 50,000 homes. So that's a really exciting opportunity, I think, to become more efficient and that will drive our FFO per share growth over the next few years. But in the field though, as you add more homes, you do need to add more -- add more bodies, right? So that is -- the synergies really will come more in the centralized office and corporate. But as we go from 25,000 to 50,000, we're obliviously going to need to add a lot more maintenance tax.

[Stephen MacLeod, Analyst]

Yes, right. Well, that's great. Congrats on the performance.

[Operator]

And your next question comes from the line of Tal Woolley with National Bank.

[Tal Woolley, Research Analyst]

I wanted to talk about the Canadian platform for a second. The Taylor, you're going to be finishing construction towards the end of this year. When should we expect you guys to start pre-leasing and what do you think your expectations of net rents are going to be? Have you had an idea, like on stabilization what your expected yield is going to look like?

[Gary Berman, President, CEO & Director]

Yes. So we are going to complete the building in March. We're a little bit behind, but that's a -- it's a much better opportunity I think to lease the building in March than maybe December, January. We will start pre-leasing around that time, maybe a little bit before. And I think in terms of lease expectations, it'll clearly be $4 per foot plus, right, is where we're going to lease.And I would say that -- and this is, I think for The Taylor, but it's a commentary probably for the entire portfolio. We've seen pressure on the rents during the pandemic, but I would really view it as a disruption. It is really kind of a temporary disruption and we'll ultimately probably be back on target for our underwriting. And it's -- and we're seeing that on the Selby. I mean, it's unbelievable how fast the market's moved over the last few months. We've gone from 82% occupancy that we'll probably be closer to 97% in a month or so. So you can see how fast we're going to be going back to pre-pandemic rents and then growing from there.And so we typically view the pandemic that really is a disruption. And given how tight the market is, is everything opens up and the border opens and we get more foreign students coming back, we'll be back to where our underwriting is. And I think on The Taylor, we're expecting a trended development yield closer to like 5.5%, maybe even as high as 6%, but 5.5% to 6%. So certainly above the 4.75% we've been guiding to in terms of how to think about the valuation of the portfolio. The Taylor should be quite a bit ahead of that.

[Tal Woolley, Research Analyst]

Okay. And you're talking about your leasing experience at the Selby 2. Any lessons you've learned from there that you could take to the other projects?

[Gary Berman, President, CEO & Director]

I'm going to hand that question over to Kevin. Kevin, any questions -- any lessons learned on the Selby that we could apply? And then, Andrew, you're welcome to chime in.

[Kevin Baldridge, Chief Operating Officer]

Yes. I think that it's really having the staff trained and ready and being nimble and learning, understanding what the market is, understanding what our competitors are doing constantly, looking to see what is being advertised and then being nimble listening to the resin as they're coming in. And we've brought in and we started using Yieldstar at the property. That's helping us set rents. So compared to the market but also to our own property, and it's just looking at how long a unit sits on the market, and whether we need to move the rents up or down.And then just making sure that the property is presented themselves and that they're completely -- it's inviting, it's well maintained, it's groomed, making sure that the renting experience is unsurpassed.And what we've noticed with Selby was the quality of the construction and the amenities that were delivered are second to none. And we were in the pandemic and it was hard to use the amenities, but as we started to open up, we'd seen how people just gone back in.So the humanity package, I know we're doing the same with Taylor and on the other projects are going to be remarkable.And then the, what we've learned too is just really engaging with our residents. So having a good social media presence and having in the property, having all the different events, and even if they're virtual events, we had a lot of people that were taking part in those events, and they were spreading that. And as the economy started open up that word of mouth and really brought in the resident base and the prospects in, which has helped us to move back in and really get up to stabilization.

[Tal Woolley, Research Analyst]

Okay. And then just my last question. On the residential development income that you booked this quarter, I apologize if I've missed this somewhere in the MD&A, but is it possible to get just a little bit of clarity on the composition of that income? Like, is that predominantly lots sale income, is it realized, unrealized gains on the value of the investments?

[Gary Berman, President, CEO & Director]

Yes, we could -- I mean, we can probably take that offline for you. But I would tell you it's really the way that income is determined Tal, is through largely we talked about this earlier in the call, is through a discounted cash flow analysis and appraisals. And so this all being essentially for-sale housing, it's all for-sale housing. So it's mainly lots, lots sales, but in some cases we're also selling homes to consumers. But essentially, if you're an environment where lot prices and home prices are going off and you're selling faster from a discounted cash flow perspective, you're going to have higher income, and that's essentially what's happening.So that's why the income is quite a bit higher than what we would have forecast. We said earlier that we typically expect, an unlevered yield on the invested capital in the high single digits. And we're probably double that rate today. And that again is a reflection of just how strong the U.S. housing market is. But the entire makeup of that is essentially lots and home sales.

[Tal Woolley, Research Analyst]

Okay. Sorry for the double question. I'm triple books to seller.

[Gary Berman, President, CEO & Director]

No long-term questions.

[Operator]

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

[Gary Berman, President, CEO & Director]

Thank you, Theresa. I would like to thank all of you on this call for your participation. We look forward to speaking with you again in November, discuss our Q3 results.

[Operator]

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