Tricon Residential Inc

TSX:TCN

Earnings Call Transcript 2022-Q2

[Operator]

My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Tricon Residential's Second Quarter 2022 Analyst Conference Call. Today's conference is being recorded. [Operator Instructions] I'd 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, executive]

Thank you, David. Good morning, everyone, and thanks for joining us today to discuss Tricon's second quarter results for the 3 and 6 months ended June 30, 2022, which were shared in the news release distributed yesterday.

I'd like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. For more information, please refer to our most recent management's discussion and analysis and annual information form, which are available on SEDAR, EDGAR and our company website as well as the supplementary package on our website. Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A.

I would also like to remind everyone that all figures are being quoted in U.S. dollars, unless otherwise stated. Please note that this call is available via webcast on our website and a replay will be accessible there following the call. During this call, we will be referring to a slide presentation that you can follow by joining our webcast or you can access directly through our website. You can find both the webcast registration and the presentation in the Investors section of triconresidential.com under News and Events.

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

[Gary Berman, executive]

Thank you, Wojtek. Good morning, everyone, and thank you for joining us today. As we navigate through some volatile and uncertain times, I'm happy to report that our business performed well through the second quarter with strong operating fundamentals continuing into July and August.

Let me share with you some of our highlights from the quarter on Slide 2. First, we continue to benefit from the resilience of our Sun Belt middle-market strategy with exceptional demand for high-quality rental homes. Despite the uncertain macroeconomic backdrop, our business is firing on all cylinders and continue to deliver consistent results quarter after quarter.

Second, our growth plan remains on track. We grew proportionate NOI by 24% year-over-year and had a record quarter of single-family rental acquisitions. And as home prices stabilize, we're now seeing opportunities to buy homes at higher cap rates. Third, we had another excellent operational quarter in our SFR business with near record low turnover, record high occupancy and strong rent growth. Next, our private funds and advisory fee revenue increased meaningfully, bolstered by strong performance fees. And finally, we achieved these results while keeping leverage at the low end of our target range with minimal near-term maturities and ample liquidity to fund our growth plans.

You can see a summary of our headline results on Slide 3. Our SFR business is performing extremely well, and we'll delve into these metrics throughout the call. In our adjacent businesses, we also achieved 2 important fundraising milestones this quarter I'd like to highlight. First, we closed a successful JV with Arizona State Retirement System to extend our build-to-rent program and increased housing supply in our core Sun Belt markets. This new $500 million JV includes $100 million or 20% co-investment from Tricon, which we expect to fund gradually over a 3-year investment period.

Second, we restructured our Canadian multifamily built-to-core joint venture with Canada Pension Plan Investment Board. It's an all equity capital structure, increasing the total equity commitment from CAD 500 million to CAD 1.5 billion while simultaneously lowering Tricon's equity commitment from CAD 150 million to CAD 116 million. The restructured JV will help reduce our balance sheet exposure to development activities and maintain lower leverage metrics as we add new projects.

Moving to Slide 4. We had another productive quarter on the ESG front, publishing our second annual ESG report and expanding our sustainability initiatives. First, we made headwind addressing our environmental footprint. We've now completed energy-efficient upgrades to 70% of our SFR portfolio, including ENERGY STAR appliances, efficient HVAC and hot water systems, low-flow water fixtures and smart thermostats. We're also deploying rooftop solar in over 11,000 newly constructed homes and are piloting our first Net Zero rental homes in a build-to-rent community located in Grand Central Park, a Johnson Master Planned community in Houston.

And second, we announced a market-leading down payment assistance program, which also allows qualifying long-term residents to receive $5,000 towards a down payment to buy a home of their choice. At Tricon, we are deeply committed to providing housing optionality for our residents, including the ability to either rent or own a home as we aim to be part of the solution in addressing America's significant shortage of affordable housing options.

As we move to the next few slides, we want to address some of the key questions we've been getting from investors and analysts of late, given the rapidly shifting economic environment. First, on Slide 5, let's talk about acquisitions. Clearly, acquisition financing rates have moved up. In March, we were financing at rates just over 4%, whereas in July, we completed the JV-2 securitization at close to 5.5%.

While higher financing rates will have a negative impact on the cash flow we earn from our homes, we're also seeing a moderation in home prices, which in turn has allowed us to buy homes at cap rates at a range of 5.25% to 5.5%, which is roughly a 30 basis point increase compared to where we were buying 3 months ago. This change to our acquisition underwriting or the combination of higher rents and stable home prices enabled us to buy nearly 2,500 homes in the quarter at a positive going in spreads to current financing rates.

We thought it'd be interesting to show a price to FFO multiple for typical single-family home given that the FFO contribution from every home includes fees we earn from managing third-party capital. We're effectively buying homes at a 12x price to FFO multiple compared to 11 times earlier this year, still a very accretive use of capital. I would point out that securitization rates have come down recently, and we think that the same deal we did in July can be done at closer to 5% today, which brings us back to an 11x multiple.

Looking at it differently for a real estate lens, we're buying homes at again a nominal cap rate of 5.25% to 5.5% and when including the net fee income of fully loaded or adjusted cap rate of 6.5% to 7%, which remains very compelling even in a much higher interest rate environment.

So what's driving cap rates higher? As you can see on Slide 6, there are 2 factors at play. NOI or the numerator is rising while home prices or the denominator is moderating. On the one side, NOI is rising because of higher rents. Market rents were up 6% nationally compared to last year, it's even with that change, it's probably never been more affordable for rent versus own a home, given how high mortgage rates have moved.

On the other side, we see home prices cooling. Average MLS closing prices in our markets are down about 3.5% since April, and we find ourselves pivoting for making offers that are premium to less price to now offering below list price and still being successful in our purchases. Clearly, our acquisition opportunity is attractive and from a cap rate perspective, should become even more attractive over the balance of the year. So how do we go about funding our growth plan? Let's turn to Slide 7 to see the building blocks of our cash sources and uses.

On the left side, you can see we have a rapidly growing cash flow driven by strong same-home NOI growth and a growing portfolio of homes. We're also looking at opportunities to unlock the value of our U.S. multifamily portfolio and to sell a small number of noncore SFR homes, which could provide a significant amount of growth capital. And lastly, we have more than $500 million of liquidity available for our revolving credit facility and cash on hand.

On the right side of the slide, you can see we have planned investments of about $300 million per year in our SFR business, including about $130 million remaining for 2022. If we think about our growth plan through 2024, we estimate having over $1 billion of cash sources when extrapolating cash flow growth over 2.5 years and layering on the other cash sources from our adjacent businesses compared to about $750 million of planned investments over the same time period.

In other words, we have sufficient capital in the medium term to fund our growth plan and don't need to rely on the equity capital markets. The next question is, how will our business fare in a recessionary environment, which we addressed on Slide 8.

We have some experience in this department during the 2015, 2016 oil price crash, the impact of the Houston market. When we look back, we came out largely unscathed as oil prices declined and unemployment spiked. As you can see, occupancy in our Houston portfolio remained stable and subsequently improved, while average rents grew over 4% during the same time period, illustrating the past stability of single-family rental even in a down market. And most recently, our business spared extremely well during the pandemic, another proof point for the expected resilience of our business model.

Now let's move to Slide 9 to answer the question of what is the impact of rising interest rates on our long-term outlook. As we've spoken about earlier, higher interest rates are a drag on our acquisition economics, which we are mitigating by buying at higher cap rates. From a longer-term perspective, it's actually the same home NOI growth is a more significant driver of our results.

So as higher rates factored into our long-term forecast, we'll need to deliver higher same home NOI growth in order to get to the same endpoint. The nice thing is that NOI growth is indeed trending higher than expected, and we feel comfortable that our 2024 core FFO per share target of $0.83 to $0.88 is still achievable. In short, what we're giving out with higher financing costs, we expect to make back up with NOI growth, providing an attractive hedge in today's uncertain environment.

I would now like to pass the presentation over to Sam to discuss our financial results.

[Wissam Francis, executive]

Thank you, Gary, and good morning, everyone. We delivered another strong quarter with exceptional financial results, and I'd like to thank the entire Tricon team for their contribution in making this such a successful year so far.

On Slide 9, we summarize our key metrics for the quarter. Net income from continued operation was up 185% to $417 million, which includes $396 million of fair value gains on rental properties. Core FFO was up 43% year-over-year to $52 million. Core FFO per share was $0.16, an increase of 14% year-over-year. And AFFO per share was $0.13, up 18% year-over-year, providing us with ample cushion to support our quarterly dividend with an AFFO payout ratio of 39%.

Let's move to Slide 11 and talk about the drivers of this core FFO per share. Our single-family rental portfolio delivered 24% year-over-year growth in Tricon's proportionate NOI. This was driven by a 10.5% increase in same home NOI and a 12% increase in proportional rental home count. Our FFO contributions from fees increased by 110% compared to last year.

This was driven by incremental asset and property management fees from newly created SFR and multi-family joint ventures in the past year, along with strong performance fees from legacy wholesale housing investments, which added over $0.02 of FFO per share. In our adjacent residential businesses, the year-over-year decrease in FFO reflects lower results from U.S. residential development versus a very strong comp in the prior year.

On the corporate side, interest expense was down slightly as we reduce our proportion of debt balance while keeping the effective interest rate stable compared to last year. And our corporate overhead expenses increased from last year as we staffed up for the growth and started to travel more often. This also included costs associated with our U.S. listing and SOX compliance program.

Of note, overhead expenses was actually down 4% sequentially from Q1, and we expect them to stay around this level as we focus on driving overhead efficiency. Lastly, the diluted share count this quarter was 24% higher as a result of last year's equity offering to fund growth and reduced leverage.

Let's turn to Slide 12 to discuss our fee revenue and overhead efficiency. The fees we earn by managing third-party capital allow us to scale faster, improve our operational efficiency and offset a large portion of our corporate overhead expenses. Our recurring fee streams totaled over $22 million in the quarter, up 108% from last year. This includes asset management fees, property management fees and development fees but it tends to exclude performance fees as they tend to be episodic in nature. Together, these recurrences covered about 74% of our recurring overhead costs compared to 50% coverage in the prior year. Ultimately, we expect our fee revenue to cover the majority of our overhead expenses and allow our shareholders to benefit from strong NOI growth contributing directly to the bottom line.

Let's now turn to our proportionate debt profile on Slide 13. I am happy to report that we ended the quarter at 7.8x net debt to EBITDA, which is just below our near-term debt target. We have minimal near-term maturities and we tend to limit our exposure to rising interest rate environment by having the majority of our debt at fixed rates.

Nonetheless, we do have 31% of our debt at floating rates as of Q2, which is largely related to short-term warehouse facilities that we use to acquire homes. I will also note that the benchmark rates have moved up significantly since Q2, and our weighted average rate that you see here of 2.98% to probably closer to 3.4% today.

We understand how important it is to be proactive with floating rate debt and near-term maturities. So on Slide 14, we want to highlight what we're working on today.

First, you'll see that we're in the process of refinancing and extending our $218 million term loan to 2024. That will eliminate any '22 maturities and refinancing exposures. Second, in July, we refinanced and extended $101 million of our proportionate JV warehouse debt via securitization maturing in 2028 at a fixed rate of 5.47%.

Admittedly, this was a high rate to pay but we aim to blend at an attractive rate over the life of the joint venture. Sometimes we'll finance at higher rates and sometimes, we'll finance the lower rates, but we are focused on improving our weighted average rate and [ term ] over time. As Gary mentioned, that same deal today would be closer to 5%.

And finally, we want to remind you that our SFR JV-2 and Home builder Direct floating rate facilities are used to fund our SFR acquisitions, which are expected to be refinanced with long-term permanent debt over time, once loans are stabilized. And so we are constantly extending our debt profile with permanent financing.

Moving on to Slide 15. I'm pleased to present our updated guidance for 2022, which includes an increased same-home NOI growth by 75 basis points at the midpoint. This increase is driven by stronger than projected revenue growth trends and expenses tracking at better than previously expected. We are reiterating our FFO per share guidance as the strong same-home trends are being offset by future potential higher interest expense. We are also on track to acquire 8,000 homes, but we don't expect to exceed this target.

On Slide 16, we are reiterating our long-term targets as well as part of our 3-year performance dashboard. The 2024 targets include growing our core FFO per share at a compounded annual rate of 15% over 3 years; expanding our SFR portfolio to 50,000 homes; maintaining stable leverage of 8x to 9x net debt to EBITDA; and improving our overhead efficiency such that 90% of our recurring overhead will be covered by fee revenue.

Although rising interest rate environment is a headwind for our FFO target, this target was set with increasing rates in mind. Moreover, the strong NOI growth we are seeing also provide a buffer, which makes us comfortable with the outlook.

And to give more insight on the drivers of the NOI growth that occurred this quarter, and if Tricon celebrated Christmas in July, he will be our very own Santa Claus, I'll turn the call over to Kevin Baldridge, Chief Operating Officer.

[Kevin Baldridge, executive]

Thank you very much, Sam. Good morning, everyone. Let me start out by saying that as we continue to grow our company, add more homes and welcome new residents, our operations teams have done a fabulous job supporting momentum of our business without missing a beat. I continue to be amazed that our team's unwavering commitment to resident service and operational excellence and how they keep raising the bar quarter after quarter.

Now let's start out with our portfolio growth on Slide 17. When we compare to last year, we've grown our portfolio by 34% in aggregate to almost 33,500 homes. In Q2 alone, we acquired a record of almost 2,500 homes diversified across 18 primary markets. These include both newer MLS homes and new homes purchased directly from homebuilders, which together are gradually bringing up the average vintage of our portfolio as well as the average acquisition price and rent while remaining true to our middle market strategy. With over 4,400 homes acquired year-to-date, we firmly are on track towards our target of buying 8,000 homes this year.

The second aspect of our growth is same-home NOI, which expanded by a solid 10.5% compared to last year. Let's dig into the components. As you can see on Slide 18, same-home revenue growth of 8.2% was driven by a 7.6% increase in average rents and 80 basis points in occupancy gains. Our rent growth remains healthy with the blended rents increasing by 8.4% during the quarter, derived from a 19.6% increase on new move-ins and a 6.4% increase on renewals. Our renewals reflect our policy of self-governing, which maintains rent growth below market levels for existing residents and in turn, helps keep our turnover low.

As we moved into July, we saw a continuation of the strong rent dynamics with blended rent growth over 9% and occupancy at a high 97.8%. These demand trends are an absolute dream and the best I see in my entire career. We expect that strong demand, such as this, along with an estimated portfolio loss release about 20% will continue to drive robust rent growth through 2022 and beyond. Our bad debt expense has been trending around 1.5% over the past few months and we see it reverting the pre-pandemic levels of 1% and sub-1% by early next year.

Finally, other revenue also grew over 11% from last year as we rolled out ancillary services and resumed late fees after putting them on pause during pandemic. We see a path to increasing other revenue by about 15% per home over the next couple of years as we continue to roll out current programs such as smart home technology and renters insurance and introduce new value-add ancillary services to enhance the resident experience like telecom partnerships, solar panels or discounted home cleaning services.

Let's now turn to Slide 19 to discuss same-home expenses. Our same-home expense growth of 3.7% was driven by property taxes going up 15.6% from last year, reflecting significant human price appreciation in our markets. On the other hand, repairs and maintenance expenses were down this quarter. Although the portfolio experienced higher work order activity as well as cost inflation post-pandemic, we had an easier comp against last year, which included $300,000 of repair costs related to the Texas freeze.

Turnover expense was also down considerably as our turnover rate decreased by 730 basis points from last year to a near record low of 16.5%, thanks to our occupancy bias and focus on customer service. We also capitalized a higher proportion of turn costs given the more extensive work being done on homes with longer resident tenures and people spending more hours in their homes during pandemic.

On the property management expense side, although we're seeing the benefits of scale as we're managing 34% more homes compared to last year, this is being offset somewhat by general cost inflation from a tighter labor market and increased hiring to meet future growth and demand.

In this inflationary environment, our focus remains on the expenses that we can control. This includes leveraging our national procurement program, driving efficiencies through technology and making operational improvements wherever we see the opportunity, all the while creating the best resident experience possible.

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

[Gary Berman, executive]

Thank you, Kevin. I want to highlight on Slide 20 that our adjacent businesses, which account for about 5% of our balance sheet still represent a meaningful source of upside and potential cash flow to supercharger SFR growth. These include our Canadian multifamily built-to-core business, a 20% interest in a high-quality multifamily portfolio located in the Sun Belt and legacy for sale housing assets.

These businesses are all benefiting from a robust housing market, and we believe they could ultimately be worth nearly 2x our IFRS carry value and represent $1 billion of value for our shareholders. Should we monetize these assets over time, we would use the proceeds to pay down debt or grow our SFR portfolio and in the process, simplify our business.

We want to leave you with a few key takeaways on Slide 21. First, we know these are difficult and uncertain times, but our business is resilient, it's defensive and it was designed to perform well in good and bad times. Next, there's incredible disconnect right now between property fundamentals and public market valuations. We know that interest rates can fluctuate, but if you look at cap rates over time, they tend to be more stable.

And finally, we have the platform, people and technology in place to grow to 50,000 homes with confidence. We believe that favorable tailwinds in our industry could drive strong operating performance for years to come, and we think our growing portfolio, coupled with strong same-home results should translate into meaningful NAV appreciation for shareholders.

We acknowledge that we are living through an uncertain economic environment, but once hasn't changed is the demand trends in our business, which remain rock solid and leave us confident in our outlook. To close out, I would like to take a moment to thank our amazing team who lives and breathes our mission of positively impacting lives of our residents through housing every single day. the care, compassion and heart that each of you put into serving our communities is truly unmatched.

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

[Operator]

[Operator Instructions] We'll take our first question from Chandni Luthra with Goldman Sachs.

[Chandni Luthra, analyst]

So could you throw some color on occupancy? Occupancy, obviously, picked up sequentially and then your same-store revenue trends slowed coming from 1Q? So could you talk about the drivers there? And then what's going on in July, obviously, trends accelerated, but could you perhaps throw some insight into what you are lapping in July? And what's behind that acceleration?

[Gary Berman, executive]

Chandni, I'm going to hand it over to Kevin to talk about occupancy and leasing trends. Go ahead, Kevin.

[Kevin Baldridge, executive]

Sure. Thank you. Yes, we're seeing continued demand strength in this business, right? And so we're -- this is also the strongest time of the year. I mean, the season is when people are moving and people are -- households are being formed, people are having that -- make decisions because they're kids were in school.

And so typically, this is a time when leases are expiring, and we're picking up a lot of demand. So we constantly -- we have a revenue management team that's very sophisticated and we're constantly looking at -- by market, what our availabilities are and what the rents are, where occupancies are. And we're constantly playing the pricing to try to maximize the demand between occupancy and rent growth. And this is the strong season. I think they've done a fabulous job and we've been able to push occupancy.

And for you to know, we play in kind of what we call the sweet zone of 97.5% to 98% and we'll play with rents while we're in that zone. And so you'll see quarter-to-quarter, we'll try to keep between 97.5% and 98%. This past quarter, we reached that a little bit to the high end, and so it allowed us to push rates a little bit higher. So I think we'll see occupancy stay high in Q3. And then again, as a seasonality dipped -- back down into the lower range of 97.5% going forward, but we try to stay in that same range.

[Chandni Luthra, analyst]

And then...

[Kevin Baldridge, executive]

And -- go ahead.

[Chandni Luthra, analyst]

Please, go ahead. I was going to say July.

[Kevin Baldridge, executive]

So for July, our occupancy really isn't like the 97%, 98% range. And again, it's a within that sweet spot. We were able to push rents. You'll see our blended rent growth grew to above 9%. And so it's playing with rents and occupancy. So the occupancy -- even though it dipped in the 98%. It's in that sweet range we play with occupancy and rents.

[Chandni Luthra, analyst]

So is there a way for you to tell us what was July last year? Like what are you lapping?

[Kevin Baldridge, executive]

Well, I think we've seen just stronger trends. People have come out of the pandemic. It started moving again. It started going out and having back to normal activity. And so we're seeing that our occupancy has grown, rents have grown appreciably as people have started going back to normal life and we've seen our demands grown. We've had our website visits have increased like 73%. We've seen out in our properties. This is for the total portfolio that has been over 100% over last year.

So a lot higher than the overall portfolio growth. So we've seen very strong demand trends since the pandemic has kind of been in the rearview mirror. We're getting upwards of 50,000 leads per month on 1,000 homes are available in any given month. Property -- new lease properties are also like close to 100%.

So we're just seeing a lot of household formations and now especially with interest rates having climbed. You've got a lot of millennials that are forming households, and they have been getting pushed through into SFR. So we've got a lot of tailwinds that are hitting and it's showing up in July. So we're pretty enthused.

[Gary Berman, executive]

Chandni, we can always go back and look at where we were in July. But I would tell you from my standpoint, it's clear that all these metrics are at record levels. The occupancy in Q2 was at a record level. I believe even in July, is back at 97.8%, even though it's dipped down 50 bps, it's still a record level. The new lease trends at 23% into July are also at record levels. So we don't have the numbers off the top of from July of '21, but they're all at record levels. And we're seeing sequential growth in new leasing trends, especially in the Southeast, in markets like Atlanta, Charlotte and Colombia.

[Chandni Luthra, analyst]

That's perfect. And any ways that you can contextualize earn-in going into 2023?

[Gary Berman, executive]

Sorry, I didn't hear the question, earn-in?

[Chandni Luthra, analyst]

Earn-in. The embedded growth.

[Kevin Baldridge, executive]

The loss to lease.

[Gary Berman, executive]

Yes. I mean I think the loss -- we still think the loss to lease is in that 20% range. I mean there's a little bit of internally. We've got some people who think it's higher than that, but I think we're guiding probably conservatively to about 20%. And it is strongest in the Western markets, Florida, the Southeast, we've seen, as I said, stronger sequential growth in the Southeast Texas and Indianapolis tends to be weaker.

But I think with that loss to lease, I think all of these trends are sustainable for quite some time, right? All of them occupancy, blended rent growth. Remember, we're holding back on the blended rent growth because of the -- because we self-govern on the renewals. But overall, I mean, I think if you look into later this year and into '23, I mean, we're very confident in the outlook for occupancy and rent growth.

[Chandni Luthra, analyst]

Fair enough.

[Wissam Francis, executive]

Yes. I'll just add to that very quickly on the renewal rent growth, we still have room to grow that we cap our rents. We still have at least another 50 basis points to move those higher and it just takes time because the renewal drought, 60, sometimes, 90 days. And so you'll continue to see our renewal rent growth grow in the future months. And in Q3 of last year, our occupancy was 97.6. I don't have July with me, but for the whole quarter, it was 97.6.

[Operator]

Next, we'll go to Brad Heffern with RBC Capital Markets.

[Brad Heffern, analyst]

Obviously, you've had your public peers curtail acquisition pace in a pretty significant way. I guess can you walk through the decision not to do that and potentially wait for better opportunities further down the road?

[Gary Berman, executive]

Yes, Brad, well, I think -- I mean, the first question, I would say is that you've got no product on the shelf, why wouldn't you supply more, right? And that's essentially the environment we're in. I mean we're seeing insatiable demand for our homes. We've never seen an environment like this where I would say the cost to rent a home versus the cost of owners has been better, obviously, with much higher mortgage rates.

So there's insatiable demand for our product, we feel we need to supply more homes to meet that demand from consumers or residents. And on top of that, we don't have the scale of our peers. And so operationally, we think it makes sense to continue to grow. So there's definitely operational reasons to want to continue to grow.

I think from a real estate fundamental perspective, it's also incredibly compelling. We have this ability to very quickly for our Triad acquisition program to adjust cap rates to flex those quickly, and we've been able to increase those cap rates probably 30, maybe even 40 basis points over the last 3 months. And we think we're going to be able to increase those maybe by another 25 bps over the course of the year, with the trends we're seeing in home prices and rents.

And we think with that -- with those normal cap rates compared to where we can finance today, it's attractive. On top of the fact, as we talked about, we manage third-party capital and earn fees and so our adjusted cap rates are in that 6.5% to 7% range, which, again, compared to where we can finance today remains very, very attractive. So those are some of the differences.

Our peers don't, I think, manage the same amount of third-party capital as we do. Maybe they don't get the same accretion that we get, but it's absolutely accretive for us to keep on growing. We have held back a little bit though, I will say that. We were guiding to above 8,000 early in the year this year. Now we think we're going to hit 8,000, which means 4,400 homes in the first half, 3,600 homes in the second half of the year.

So that is a little bit of a slowdown. And that just really reflects our own internal capital plan. How much capital we have in order to be able to fund our growth. We do not want to rely on the market, the equity capital markets. We don't like our cost of capital. So we have to be able to manage that. And so we are slowing down a little bit, Brad, but we are sticking to the overall guidance for 2022.

[Brad Heffern, analyst]

Okay. Got it. And then in terms of the opportunity set for acquisitions I'm not sure if you've said in the prepared remarks or not, but have you shifted at all to more newer homes? And are you seeing a greater opportunity set from your homebuilding partners versus the traditional and the last channel?

[Gary Berman, executive]

Yes, I'll start and I'll hand it over to Jon. Just one other thing I would say is that it's very difficult to be a market timer, right? I just want to say one thing back to your earlier question. I mean, we're not [ clear buoyant ]. But if you think about it, if you said, why not stop buying, right? I mean, by the way, we've done that before. I mean, we stopped buying at the onset of the pandemic. We just had no certainty what the future was going to look like.

We didn't even know how we're going to renovate the home. So we're never afraid to stop. But we want to keep on going if it's compelling. But back is this question of market timing, why stop, why not buy later? If you go back a year, where you could buy homes, let's say, a 5% normal cap rate and now we're buying at a 5.5% cap rate, which you would have been giving up was 10% NOI growth, right?

So you would have been back to the same place anyway. And so we don't think about buying at any point in time. We're continuously buying and we're financing, obviously, an environment that may change from time to time, but it's an ongoing process that we just might speed up or slow down depending on our cost of capital.

With respect to this quarter's acquisitions, about 20% are our new home through what we call Homebuilder Direct, and 80% are through JV-2. And Jon, maybe you want to give a little bit of color on what we're seeing in the new home channel through Homebuilder Direct.

[Jonathan Ellenzweig, executive]

Yes, for sure. And Brad, on the new home side, what we're seeing is a little bit more home price -- faster home price reduction and homebuilders, obviously, are looking to hit their quarterly targets as well. So they're a little bit faster to reprice than the average person who might be reselling their home. So when you talk about what we're seeing from a cap rate expansion perspective, it's been a little bit faster to expand on the new home side. And we actually expect that will continue.

Now anecdotally, we've been able to buy homes scattered across various markets that might have listed for $400,000 in the past that have been reduced by -- in some instances, upwards of 10%. So we're seeing a little bit more price reduction on the new home side. And we're really starting to see more articulation on the community acquisition side as well where builders are realizing that they had new communities started to or set to launch later this year or early next year.

And then they might have thought they'd be selling 8 or 10 homes a month, and they're looking at how can they meet those sales objectives. Otherwise, and they realize that there's this kind of wholesale or SFR channel that they can move their homes into. So builders that 8 to 12 months ago, I might have been disinterested in partnering with a single-family rental owner-operators are much more interested now. We're getting way more into inquiries from, let's say, the top 10 or 20 largest homeowners in the U.S. that should result in more acquisitions later this year and early next year.

[Operator]

Next, we'll go to Adam Kramer with Morgan Stanley.

[Adam Kramer, analyst]

Just wanted to kind of drill in a little bit on kind of the expense side. I think some positives here from your lower turnover, on the turnover expense line and maybe some of the other lines, but maybe just drilling in on the kind of the property tax line, and I recognize there are some -- maybe walking us with the year-over-year comp. Maybe just walk us through kind of that 15% increase. And maybe what you're kind of thinking for the back half year?

[Gary Berman, executive]

Adam, I hope you're doing well. So what we're seeing is largely assessments come in significantly higher. I mean, they're up 14% right? So I mean, we can't suck and blow. I mean, you can't take the home price appreciation on one hand and not be prepared to see higher assessments. So that's where the number comes from. It's a 14% increase in assessments across the board. About 2% is related to the fact that we under accrued last year in Q2. So that gets us to about 16%. And at the current time, we're expecting for the balance of the year to be about 15%.

Now that's a real question mark. I would say it's the one key question mark on our expense profile because we haven't got the tax bill. We'll largely get those in September, October. And then we'll be able to see what happens to the millage rates, are the tax bills lower than the assessment. So there could potentially be upside. There has been in the past -- in the past, we've also contested and receive some rebates. But at this point in time, to be conservative, we're assuming 15%, but we'll see whether municipalities want to strike the balance or not.

[Adam Kramer, analyst]

Got it. That makes a lot of sense. And then just on the kind of interest rate on acquisitions -- on future acquisition debt. Looking at kind of the Slide 5 in the deck, and it's certainly helpful, the breakdown you guys provide. It looks like maybe you're kind of assuming that I think the July debt was at 5.5%, maybe it would be 5% debt today. Maybe just walk us through kind of the -- if you were to go out and raise that today on kind of the next batch of homes that you buy. Am I reading that correctly that will be at a 5% rate, give or take, and maybe just kind of walk us through kind of the interest expense assumptions for the remainder of the year and kind of given the new debt implications?

[Wissam Francis, executive]

Yes. Thanks for the question, Adam. Yes, so we're assuming that if we are to go out today and do another securitization deal or any type of financing, you'll be around the 5, maybe [ 5, 10 ]. Again, the market has moved, it peaked when we did our deal. And now so far, it's come in a little bit, and we expect it to stay pretty stable over the next several quarters. But obviously, we -- as Gary mentioned, we tail our acquisition program as well as we're very flexible. So if we think like the market's really going to move significantly higher, we'll look at acquisitions again. But we're expecting it to be in the 5 to 5, 10 range over the next several quarters.

[Gary Berman, executive]

Yes. And Adam, the only thing I would add to that is that on that [ 5,5 ] deal, I mean, we did top pick the benchmark rate or the slots. And that was unfortunate, but it is what it is. I mean there's -- as Wissam said in his prepared remarks, there's going to be periods where we finance the higher rates and others where we finance at lower rates. We don't look at it at 1 point in time.

But I think the other thing to talk about is really the spreads, right? And the spreads have widened significantly. I mean they're -- in the last field, they were about 250, that was a blended spread. That takes us back to 2015 and 2016 when the securitization mark opened up for these type of single-family rental deals.

And then as there is more acceptance of SFR and CMBS-type debt offerings, those spreads got cut in half. And now they're back to where they were in 2015, 2016. So you can see there's some pretty significant dislocation in the debt markets. And so as we kind of get through that, I think ultimately, we'll stabilize not only hopefully, we see better longer-term benchmark rates, but we also see lower spreads. So that's just to give you a little more insight into the market.

[Adam Kramer, analyst]

That's really helpful, Gary. And just maybe last one, if I may. Just on the renewals, really robust loss to lease, 20% and even higher. Any kind of thought of kind of raising, I guess, the renewal rate that you guys have kind of the cap -- the self-imposed capital you guys have, maybe kind of make whether it's an effort to kind of capture as much of the loss to lease as you can, maybe in a little bit of a shorter time frame by raising the renewal?

[Gary Berman, executive]

No. We're going to keep to the 6.5% cap. Kevin talked about how there's still a little bit of catch up later this year that will flow through our numbers. But we're going to stick to that 6.5% cap rate for the year. We'll reevaluate next year. We look at a number of different metrics to determine how to do this, but the key thing, obviously, is wage growth. In all the surveys, we see wage inflation in that kind of 4% to 8%. And so we think we're striking the balance. And remember, we have a resident focus of people-first approach in running our business, which is incredibly important. And we know ultimately, we'll capture that back through the lost lease when we can mark to market. So if rent growth slows down in the future, we should be able to do a little bit better because you've got the loss to lease built up in the portfolio.

[Operator]

Next, we'll go to Jade Rahmani with KBW.

[Jade Rahmani, analyst]

Yes. Thank you very much. I think the inventory and supply picture is somewhat complex to analyze right now. On the one hand, homes listed for sale still are low, relative to historical trends. And in 2019, but they are up sharply and continuing to increase. In addition, the homebuilders have very high backlogs yet the supply chain has forestalled the delivery of inventory into the market. And so new homes for sale supply is going to increase.

And then finally, homes under construction, looking at both multifamily and single family is extremely high, not as high as we were in the '05 period, and especially on a per capita basis, but it is high. So I noted in your -- I noticed in your commentary, especially in the press release, you said relatively tight housing supplies. So what's your view of the overall supply picture right now?

[Gary Berman, executive]

Relatively tight. That's a quick answer, but let's try to unpack it because there are a lot of moving pieces. So first of all, in our markets, the new listings are actually down about 10% year-over-year. So that's not a story -- and by the way, that's as high as we've ever seen it. So new listings, down 10% year-over-year. And that makes sense because when you think about it, when mortgage rates really move up and have almost doubled the way they have, people aren't going to list their homes. They're going to keep them off the market and that leads to a compression of new listings. But for homes that are being listed, they are taking longer to sell.

So that's the other side of the equation. The days on market is increasing and sellers don't have the same pricing power that they used to have. So we are seeing a slight moderation in home prices from the peak. As we said in our remarks, I mean, we were in the past, say, 2 or 3 months ago, having to buy or to really make offers above list, let's say, 5% or 6% above list. Now we can make offers below at a discount to list and still get the same acceptance rate on our offer. So the market is moderating and the month of supply in the market, Jade, in a lot of our Sun Belt markets has gone from about half a month, let's say, 3 months ago, which is absurdly low to about 1.5 months today.

So yes, the supply is increasing, but the supply remains extremely tight. We used to think that a balanced market in the resale in the secondary market was about 5 months, 5 months of supply, and we're about 1.5 months today. So this bears watching. It is moving quickly. If it continues to move up, then you're going to see more pressure on prices. But as of today, as we speak today, we would say that the market is tight.

On the new home side, yes, there are quite a few builders. I would say many builders or sales today are probably half of where they were last July. So they're seeing some pressure. There's the cancellation rates are moving up. There's more spec inventory than there ever was, and that's probably what you're referring to. And the reason it was more spec inventory is still as we're always trying to match in this inflationary environment, pricing the cost, so they would build more specs. And so now they're going to have to unload those specs, and that's going to be likely an opportunity for us, right, in our Homebuilder Direct channel.

It also will ultimately lead to opportunities in development. And that's why we're excited about being able to raise a new fund today and take advantage of future opportunities. But we don't think we're going to see widespread distress. This is nothing like post-GFC. The market on the whole is tight, there might be a little bit of dislocation, short-term opportunities, but not widespread distress.

[Jade Rahmani, analyst]

Okay. Yes, that does make sense. And I wouldn't anticipate widespread distress because the balance sheets are in very good shape. And also the nature of the mortgage structure is primarily fixed rate, nearly all fixed rates. So there's going to be a cascade of defaults just simply driven by rate increases.

In terms of the current environment, I know that you cited the impact of average closing price on the MLS, down 3.5% since April. Have you seen any stabilization based on recent, just in the last few weeks, dip in mortgage rates dipping back below 5% in concert with the treasury market improvement?

[Gary Berman, executive]

No, we haven't. Because I mean, mortgage rates still compared to where they were, let's say, 6 months to a year ago are significantly higher, even though they've moved down from, let's say, 6 down to like lower 5s, they're still really high, right? So we're still seeing consumers still have sticker shock. They're pausing. And we're seeing that through higher cancellation rates and lower sales for new homes.

[Jade Rahmani, analyst]

And just lastly on the adjacent businesses. Is it correct to assume that U.S. multifamily is the asset with the most near-term potential for capital release either through sale or refinancing or recapitalization of that project? How realistic is that? Any time frame around timing?

[Gary Berman, executive]

Yes. I mean the short answer is yes. Your assumption is correct, but I can't, at this point, give you any more clarity around that timing.

[Operator]

Next, we'll go to Tal Woolley with National Bank Financial.

[Tal Woolley, analyst]

Just wanted to start actually with the restructuring of the CPP JV. I appreciate you giving us some color on what you think the benefits will be. I'm just wondering if you can talk a little bit about what the genesis was for that transaction, was that driven by you or by the client? Can you give us a little bit more color there?

[Gary Berman, executive]

Yes. I mean I wish I could say it was driven by us because we think it's a great idea, but it was really driven by them and it really illustrates, I think, the dichotomy that we're seeing in the market right now between the public market valuations and private market valuations. And really what we're seeing from all our private investors is that you want to put out more capital right? This is the reason. I mean, when you use construction financing, you don't get to put out nearly as much capital.

So CPP came to us and said, "Hey, why don't we make this an all equity capital structure?" We can put out way more capital. You don't have to worry about the volatility in the debt market and it was restructured in a way where our co-investment is lower and it's neutral fees. And so all in all, we thought, well, this is a great deal. Let's go for it.

And well, as an extension, same thing, Arizona State came to us and said, "Look, we're really bullish long term about build-to-rent. There might be some dislocation now, but let's get on fun [ ready ] and take advantage of opportunities. So that's what we're seeing on the private fund side.

[Tal Woolley, analyst]

And you can, obviously, look at further down the road, the debt markets stable out, you could decide that at that point to refinance, too, as well, I'm assuming?

[Gary Berman, executive]

Yes. We absolutely have that flexibility. We do, but we're also comfortable in capitalizing these development projects on an all equity basis, and we've looked at it both ways. It's untraditional. I mean, as you know, all these products have built a significant amount of debt, but it gives us a real significant competitive advantage to be able to go in an institutional process, let's say, what we're doing with the government to say, "This can be -- we've got all the capital lined up. It will funding all equity."

[Tal Woolley, analyst]

Got it. And then just a little bit more on third-party fundraising. Just with all of the volatility in the market, is it impacting how you approach raising more third-party capital? Or are you seeing any impact on demands from partners to put capital to work?

[Gary Berman, executive]

We're not. I mean, again, I think the proof in the pudding, because of the 2 private fund announcement this quarter, right? Obviously, the restructure of the CPP JV, I just talked about the launching of what we call TPaaS to our next build-to-rent vehicle. We're seeing significant interest and demand from private investors. We talked in the past about the beds and sheds strategies about how private investors really have a preference for residential and industrial.

I'd say in this environment, they probably have even more preference for no beds in residential because of the short-term duration of the leases in an inflationary environment where industrial, in some cases, you have longer-duration leases, which creates some uncertainty and less inflation protection.

So residential, we feel, has never been in higher demand from private investors and it keeps us very confident in our outlook. And it bodes also really well for ultimately when we get through JV-2 and then Homebuilder Direct and then be able to go and launch successor funds to buy single-family homes.

[Tal Woolley, analyst]

Okay. And then just in Toronto here, as you start to approach the lease up phase for the Taylor and West on land, can you give us a sense of where you think rent per square foot would blend now and where that was relative to pro forma in your underwriting?

[Gary Berman, executive]

Sure. Yes. So I mean, I think we were just joking about this earlier. I think we've got to hang a knee on no vacancy sign in front of the sale deed because we literally don't have one vacant unit at the building today. It's staggering. The growth we've seen in the Toronto purpose-built [ rental ] market over the last several months. We're now signing leases on one bedrooms, close to $5 per square foot, which is massively ahead of where our underwriting would have been even if we were to kind of fast forward that to where we are today.

And I think that flows all the way through to the Taylor, which is starting lease-up and then obviously, Block 8 later this year. So we -- I think, Andrew, tell me if there's anything you'd add, but I mean I think on the revenue side, we're going to be at or above all our trended rent projections, right? So we've seen a little bit of cost creep.

We lock in the cost upfront, but we have seen a little bit of cost creep, but it's taking a little bit longer to complete these projects, but that should be more than offset by the revenue growth. And I think the Taylor right now is looking at -- we're looking at a development yield close to 6%. So that's looking really good based on where rents are today. Anything to add?

[Andrew Joyner, executive]

Yes. Tal, it's Andrew speaking. I would just add in advance of this call, walked by marketing group, and they were sharing that -- we're getting about 50 leasing inquiries a day at the [ Selby ]. So I think demand has certainly come back in a very meaningful way in Toronto, and we'll be delivering these projects into the right environment.

[Tal Woolley, analyst]

Okay. And then just lastly, obviously, there was the congressional hearing 6 to 8 weeks ago, I believe. What's your sort of sense on what could be building on the regulatory front, if anything? As the federal government, at least, starts to examine this a little bit -- examine the industry a little bit more closely?

[Gary Berman, executive]

We don't see much coming out of that for now. I mean those congressional hearings did not seem to be conclusive from our perspective, did not seem to indicate that they would lead to any kind of short-term action. The way we think about it is this is an emotional asset class, right?

And when we're in an environment where there's a lot of inflation, much higher home prices, much higher rents, our single-family rental industry and all the housing for that matter is going to attract more attention from both the media and politicians. And it's always been like that. That's not going to go away.

When we get into an environment where home prices start to moderate like they are today, you're going to see less noise, less hearings or inquiries into our business. And it's going to ebb and flow, and it's just something that we're going to have to live with. We think the best way to manage it, obviously, is to be the best corporate landlord, the best corporate citizen we can be to take care of our own employees so they can take care of our residents.

And when they do, that's great for our investors and their business. That's the philosophy. And hopefully, we can lead by example. But the industry is still in its early days. It's still -- it evolved a lot. But compared to other industries, it's still in its infancy. And I think over time, we get better and better, and we learn to partner well with the governments and show them that this is an industry that's incredibly beneficial to residents or renters.

[Tal Woolley, analyst]

And just when I'm thinking about regulatory changes overall, it would seem to me to be more likely that if there were changes that would impact you, it would be more likely at more local government level and state level as opposed to the federal level? Or is that like all these sort of levels of government kind of have to align at some point to some things?

[Gary Berman, executive]

Yes, I would agree. I would agree. I mean we weren't probably face the most pressure over time, will be at the local level. It could be forms of rent control. I mean, there is, obviously, some of that in less California. The Sun Belt tends to be, obviously, much more libertarian, much more pro-business. So we see less risk there. but there is pressure from HOAs or communities, which may want to prevent buying homes or renting of those homes.

So that's where we'll see pressure. We've been very successful to date in having some states adult legislation that would mitigate some of the powers of HOAs to block out residents or renters. We actually think that, that is discriminatory, and we've been successful. The industry lobby NRHC has been successful in having legislation created to combat that. So -- but it's something we're going to have to fight locally. Kevin, do you want to add something?

[Kevin Baldridge, executive]

Quickly, you mentioned the National Rental Home Council, NRHC, they have been very active at the local levels. And we're going to start our first local [indiscernible] in Charlotte, and that will be -- there's going to be a kickoff next month. And so there's a very active initiative right now amongst all of us that are part of the NRHC to really build the state level to talk to the city council men, the mayors to really tell them our side of the story. There's a lot of education that needs to happen. And we're prepping through all of that. You'll see us take a more active role. We first track on for sure, but also our industry is in the NRHC.

[Operator]

Next, we'll go to Stephen MacLeod with BMO Capital Market.

[Stephen MacLeod, analyst]

Lots of great color on the call so far. So lots of my questions have been answered, but I just wanted to follow up with 2. The first one being the new build-to-rent SFR JV, can you just talk a little bit about sort of where that is focused, if it differs from the current JV that's almost fully committed by geography?

And then secondly, I just wanted to confirm, Gary, I think in your prepared remarks, you were saying that your NOI targets are sort of predicated or underwritten, reflecting higher rates. So I just wanted to -- if you could pose some color around any potential downside sensitivity?

[Gary Berman, executive]

Yes. So I mean I think on -- and John or Andy you're welcome to chime in. But I think on what we call our successful build-to-rent venture, TPaaS 2, we're probably looking for a little bit more diversity, I think, in the development or acquisition program, right? So TPaaS has largely been focused on California and Texas. And I think we'd like to see some more diversity -- and right now, I mean, from an MLS perspective, we're buying an [indiscernible] market.

So we have the ability to diversify into those [ 18 ] markets, and we'd like to see more of that. We're, obviously, increasing our development yield targets. Those are now closer to 6%, given where financing rates are. And we're taking our time a little bit there. The land market is -- there's a little bit of dislocation in the land market.

We think we're going to see some lower land prices. So again, we talked about the MLS or the acquisition market is one we were continuing with. Development is -- whenever there's uncertainty around how to underwrite a development, that's where you should probably pause or go slower. And so we actually take an approach where let's keep on going in acquisitions because that makes sense. We're getting us positive spreads to financing.

But on the development market, let's take our time. So we haven't done much in the last quarter and we may not so much over the next couple of months. But as we start to see land prices settle, maybe come down, construction prices come down, which we're starting to see for the very first time. We think we're going to get better development yields. And obviously, we think long term is a massive, massive undersupply. So that's a great opportunity to be able to deliver more build-to-rent. So anything else? Okay, we're good.

So then on the sensitivity on the longer-term outlook, really, what we're seeing is that the NOI gains are offsetting some of the interest expense, the increase in interest expense, right, both on new debt and existing debt. So in order to hit that kind of $0.83 to $0.88 target in the past, we were really assuming NOI growth of about 6%. So in order to hit it now with, let's say, interest rates 100 basis points higher, we're going to need NOI growth of 8% to get to the same place.

So hopefully, that gives you a little bit of insight, but we're in an environment right now with a higher NOI. NOI growth is being used to offset higher interest expense growth and is actually a really interesting hedge.

[Operator]

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

[Gary Berman, executive]

Thank you, David. I'd like to thank all of you on the call for your participation. We look forward to speaking with you again in November to discuss our Q3 results.

[Operator]

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