Tricon Residential Inc

TSX:TCN

Earnings Call Transcript 2018-Q3

[Operator]

Good morning. My name is Tasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Capital Q3 results analyst call. [Operator Instructions] I'd now like to turn the call over to your host, Mr. Wojtek Nowak. Please go ahead.

[Wojtek Nowak]

Thank you, Tasha. Good morning, everyone, and thank you for joining us to discuss Tricon's results for the 3 months ended September 30, 2018, which were shared in the news release distributed yesterday. I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. For more information, please refer to our most recent Management Discussion and Analysis and Annual Information Form, which are available on SEDAR, and our company website. Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A. I would also like to remind everyone that all figures are being quoted in U.S. dollars, unless otherwise stated. Please note that this call is available by webcast at triconcapital.com and a replay will be accessible there following the call. Lastly, please note that during this call we will be referring to a supplementary conference call presentation posted on our website. If you haven't already accessed it, it will be a useful tool to help you follow along during the call. You can find the presentation in the Investor Information section of triconcapital.com under Events and Presentations. With that, I will turn the call over to Wissam Francis, EVP and CFO of Tricon Capital Group.

[Wissam Francis, Executive VP & CFO]

Thank you, Wojtek, and good morning, everyone. Q3 was another solid quarter for Tricon, driven by strong operational results in Tricon American Home coupled with strong -- with growing fee revenues from our Private Funds and Advisory business as well as continued overhead and interest rate expense containment. Let me begin with our overall financial results on Slide 3 of the presentation. In the third quarter, our diluted earnings per share were $0.24 compared to $0.29 for the same period last year. On an adjusted basis, after removing the change in the fair value of the derivative related to our convertible debentures and other non-recurring and non-cash items, we reported diluted earnings per share of $0.27 compared to $0.37 last year. We also reported adjusted EBITDA of $75 million compared to $96 million last year for a decrease of $21 million. There are a number of key factors that contributed to the year-over-year negative variance. First, Tricon American Homes had a fair value gain of $42 million this year compared to $63 million last year, which alone accounts for the entire $21 million swing in overall adjusted EBITDA. You will recall that we completed the acquisition of Silver Bay in Q2 2017 and held the homes at cost until Q3 of that year when they underwent their first round of BPO valuations. This created a significant pick-up in fair value in that quarter. With that said, in Q3 2018 we still saw new home price appreciation of approximately 6% annualized versus an effective appreciation rate of 10% annualized in the same period last year. Second, adjusted EBITDA from Tricon Housing Partners decreased year-over-year to $3.3 million versus $4.6 million as a result of ongoing budget adjustments that reflect extended development timelines and escalating construction costs, a trend we have seen for several quarters now and will continue to see in the near future. And third, Tricon Lifestyle Communities manufactured housing business had no contribution this quarter as it was sold in Q2 2018 versus a contribution of $2.6 million to adjusted EBITDA in Q3 2017. These factors were offset by notable growth in Private Funds and Advisory income, which increased by 31% year-over-year to $7.1 million versus $5.4 million last year. This was driven by incremental fee revenue from the recently announced TAH joint venture as well as positive results from our Johnson Land Development subsidiary. Moving down the income statement. Our aggregate corporate overhead expense decreased from the prior year. This included a 14% reduction in compensation expense to $8 million versus $9.3 million in the prior year where the bonus accrual was higher under the previous compensation structure. The reduction was partly offset by higher general and administrative expenses. Lastly, our adjusted interest expense was $27.1 million this quarter reflecting a 1% decrease from $27.3 million in the prior period as well as we continue to focus on fixing the majority of our interest rate exposure as well extending the maturity. Taking a closer look at the adjusted interest expense, the biggest driver for the reduction was Tricon American Home. As you can see on Slide 4, in the third quarter TAH's overall interest expense decreased by 6% year-over-year from $20.8 million to $19.6 million. In the past year, we have made significant progress in implementing a more balanced credit structure at TAH with the objective of reducing and fixing the cost of debt and extending the term structure. First, TAH reduced its overall debt balance by 2% year-over-year and lowered its debt to assets from 68% to 59% over the course of a year. Second, we laddered out the Silver Bay acquisition debt and extended the average maturity to 4.3 years from 3 years a year ago. And third, we secured attractive rates through a series of refinancing transactions and significantly increased the share of fixed rate debt to approximately 80%. This has greatly reduced TAH's sensitivity to interest rate swings. And as an example, over the past year the 1-month LIBOR rate increased by 88 basis points whereas TH's weighted average cost of debt decreased by 43 basis points during the same period. This is a great lead-in to Slide 5, where we present our corporate liquidity and debt position. We maintain a flexible balance sheet with almost $165 million available on our revolving credit facility and another $7 million of cash on hand. On a look-through basis, which includes the debt at the corporate level and Tricon's portion of non-recourse debt at the subsidiary, our current leverage, excluding debentures, stands at 59% debt to assets, which is down considerably from 62% last year when we had just completed the Silver Bay acquisition. Subsequent to the quarter, we also redeemed our 5.6% convertible debentures that were maturing in 2020. The full balance of CAD 85.7 million in Canadian dollars was converted and redeemed into 8.6 million shares saving us approximately $3.7 million of annual interest expense. Going forward, we have strong visibility into numerous sources of cash flow across our businesses. These include the expected sale of TLR US multifamily assets in 2019, cash from THP1 US where we expect approximately $100 million over the next 2-plus years as well as highly predictable operating cash flows from Tricon American Homes and our recurring contractual fee streams. Starting early next year, we also expect to see initial cash flows from our first multifamily development in Toronto followed by contributions from other buildings as they come on stream in the years ahead. Using these internal cash sources, we believe we are well-positioned to execute on our current growth initiatives including the acquisition of new homes for the TAH joint ventures. With that, I will now turn the call over to Gary to provide additional insight into the performance of our various business verticals.

[Gary Berman, President, CEO & Director]

Thank you, Wissam. Let's start our operational review with Tricon American Homes, or TAH, on Slide 7. I would like to touch on 3 aspects of the business, namely the joint venture, acquisition volume and operational results. The prime focus for TAH this quarter was the recently close joint venture with 2 leading institutional investors, which we announced in June. To recap this transformative partnership on Slide 7, the 3 partners including Tricon have collectively committed $750 million of equity, which we funded on an equal basis and deployed over a 3-year investment period to acquire single-family rental homes. The total value of the portfolio is expected to be approximately $2 billion when including associated leverage of up to 65% loan to value. Throughout the JVs term, Tricon and its investors will each earn their proportionate share of net cash flow from the properties and Tricon will earn asset management fees and, potentially, performance fees with the asset management fees from the joint venture reflected Tricon's income statement for the first time this quarter. In addition, TAH's operating platform will earn property management and other fees to offset the operating costs associated with managing, acquiring and renovating the homes. The JV intends to ultimately acquire and manage a portfolio of 10,000 to 12,000 single-family rental homes. And we are progressing nicely towards this goal, as TAH purchased a record 810 homes through its organic acquisition program in Q3, well above its historical pace of 400 to 500 homes per quarter. This included 711 homes acquired by the joint venture and 99 within TAH's legacy portfolio of wholly owned homes where TAH continues to acquire a small number of homes outside of the JV's target markets. At the end of third quarter, the JV portfolio owned just over 1,200 homes including the homes purchased during the quarter as well as 508 homes that were acquired in Q2 and vetted in from TAH's balance sheet portfolio at cost. With this current acquisition pace, TAH is well-positioned to employ the JV's capital within the expected 3-year timeframe and to drive further operating efficiencies in its single-family rental platform. The Q3 acquisition volume speaks to the vast opportunity to source homes within TAH core markets at cap rates ranging from high 5s% to low 6s%, as can be seen on Slide 8. In Q3, TAH TriAd acquisition platform filtered over 145,000 MLS listings based on specific acquisition criteria. The team then underwrote over 9,000 homes that hit our buy box and made close to 2,000 offers. In addition to the MLS channel, which represents the vast majority of acquisitions, TAH continues to buy homes from iBuyers, small portfolio sellers and build-to-rent. For example, TAH acquired 37 newly built homes this quarter, all of which were scattered across new home subdivisions and intermixed with ownership homes. With the buying power of the JV and the proficiency of our acquisition platform, TAH is well-positioned to acquire approximately 3,000 homes per year with stronger volumes in the summer months and lower volumes in the winter months reflecting the typical seasonality of active listings on the MLS. During the third quarter, the average all-in cost per home was $181,000 with a 5.8% cap rate. And on Slide 9, you can see some photos of the homes that were recently acquired. And I should add that the vintage of the home in Charlotte is substantially newer than the car in the driveway. Turning to TAH's operational results on Slide 10, a highlight this quarter was the record blended rent growth of 6.7% including 5.4% growth in renewals and 9.4% growth on new leases. The significant increase in rental rates speaks to TAH's successful revenue management initiatives and the strong demand for institutionally managed single-family rental product. From an occupancy perspective, our stabilized occupancy rate, which excludes new acquisitions, was 96.3% at quarter end. We think this metric provides a better indicator of our operational performance than total occupancy, which was 93.1% this quarter, and which captures the impact of our newly acquired homes that are not yet rent-ready. Translating these results to TAH's total revenues, the year-over-year increase was 2%, which is more impressive than it seems given the number of leased homes actually decreased by 3%. As you may recall, TAH sold 1,500 non-core occupied homes that were acquired from Silver Bay after Q3 2017 and then essentially replaced them with new acquisitions this quarter, most of which were vacant at the time of acquisition. On the cost side, TAH experienced lower repair and maintenance and turnover expenses. Although this number is a little noisy as it includes the impact of hurricanes with higher repairs expense last year and insurance recoveries factored into the current period. Taken together, the 2% growth in revenues and 2% decrease in operating expenses contributed to a year-over-year growth of 5% in NOI to $37.7 million. Moving down the income statement. Corporate overhead expenses at TAH were well-contained this quarter and, as Wissam discussed earlier, TAH's interest expense decreased year-over-year as a result of slightly lower debt balance and a lower average interest rate. With these factors taken together, TAH realized a 28% increase in core FFO from $10.1 million last year to $12.9 million in the current period. We think the best way to highlight our year-over-year operating performance is through the same-home portfolio presented on Slide 11, which excludes one-time or non-recurring items such as hurricanes. The clear highlight this quarter was same-home NOI growth of 8%, another impressive result for the business. Of note, the same-home portfolio experienced strong blended average rent growth of 6.7%, in line with the consolidated portfolio metrics. This strong rent growth was partly offset by a 1.2% decrease in occupancy as our revenue-maximization program favored rent growth over occupancy. All in all, TAH's same-home portfolio achieved 3.9% revenue growth year-over-year. Meanwhile, expenses decreased by 1.4% driven by lower repair, maintenance and turnovers at TAH as TAH continued to internalize and better control the cost of these functions. The other operating expenses remained relatively stable. With the strong revenue growth and reduced expenses, same-home NOI increased by 8% year-over-year with the net result being a 220 basis point expansion of the same-home NOI margin to 58.9%. And recall, from a seasonal perspective, Q3 typically has a lower margin because of higher HVAC repairs and potentially higher turnover. Let's now turn to Tricon Housing Partners, or THP, our for-sale housing vertical, on Slide 12. During the quarter, THP generated adjusted EBITDA of $3.3 million representing a 5% annualized net return on invested capital, which is below our long-term expectation. As mentioned in previous quarters, we continue to face headwinds in the U.S. housing market. A rise in costs and labor pressures are resulting in extended delivery timelines, slower absorption of new housing product and, in some cases, lower profit margins. We expect these challenges to persist and, as a result, we anticipate THP's earnings to run below the target return on capital for the foreseeable future. With that said, we are still seeing healthy demand for our products across various markets and product types especially those that are relatively affordable. Let me highlight some of the operational successes we've been having. At the end of the third quarter, Bedford Ranch, formerly known as Arintine Hills, a master planned community in Southern California, held its grand opening event with promising initial interest. Approximately 2,000 visitors toured the community clubhouse and model homes on site and initial feedback from home buyers was quite favorable. Also during the quarter, our THP2 US comingled fund distributed $8.4 million to its investors and marketed 2 multifamily developments for sale in Texas. Subsequent to the quarter, The Michael, a multifamily development in Austin, was sold at approximately $188,000 per door representing a record for local market and generating a net annualized return, or IRR, of 20% to the fund over a 4-year investment period. This transaction underscores the strong institutional demand for stabilized high-quality multifamily assets, which we believe bodes well for the forthcoming disposition of our 2 TLR US balance sheet assets in 2019. Lastly, despite broader headwinds in the U.S., we're seeing very positive trends in Texas, which represents approximately 35% of our balance sheet exposure in THP, and is the core market for our Johnson Development business. As you can see on Slide 13, home builders at Johnson's communities had 897 home sales in Q3 across all projects representing a 38% year-over-year increase and a 23% year-over-year increase for the year-to-date. We're seeing healthy demand across our master planned communities. Take Cross Creek Ranch and Grand Central Park, for example, where home sales were up roughly 20% year-over-year. Again, what the for-sale housing industry is experiencing is not a lack of demand, but a shortage of supply. And given that we have the lot supply readily available and in attractive markets, we believe we are well-positioned heading into 2019. As we look ahead, we continue to search for new investments in THP that meet our risk-adjusted return criteria with a focus on partnering with third-party investors. While we've been extremely selective about new investments for some time now as return expectations have compressed, we believe that the current challenges in the home building space have made capital even more scarce, which will, in turn, ultimately produce attractive new acquisition opportunities that we can take advantage of. Let's move on to Tricon Lifestyle Rentals, or TLR, our multifamily development and rental vertical. In the TLR US business, our 2 balance sheet projects continued their lease-up process during the third quarter. The McKenzie was 24% leased and The Maxwell was 11% leased at quarter end. Stabilization for both properties is expected in mid-2019, upon which we intend to sell the assets and apply the proceeds towards corporate debt reduction. Switching to TLR Canada on Slide 14, you can see The Selby, our first project in Toronto. The building is nearing completion with initial occupancy expected towards the end of this year. The interior renderings shown in this slide give you a sense of the unparalleled amenities and resident experience that TLR aims to deliver within all of its buildings. At The Selby, our beautifully restored historic mansion will feature a bar and bistro called Maison Selby, and we are excited to announce that a lease has been executed with well-known Toronto restaurateur, Oliver Bonacini. Our other TLR Canada projects are profiled on Slide 15. At 57 Spadina, our second Canadian project, shoring and excavation continued on site with approximately 50% of all trade contracts secured on budget. Our third project, Scrivener Square, remains in the pre-development stage with construction anticipated to commence at the end of 2019. At the West Don Lands development, TLR Canada is working with its joint venture partners, Dream Unlimited and Kilmer Group, on design development of the first parcel, called Block 820. The approval process with the City of Toronto is underway and construction is scheduled to begin in the third quarter of 2019. The design development of the second parcel, Block 347, is expected to commence before the end of the year. And at 6 Gloucester, TLR Canada's most recent acquisition, the project is currently in free development and construction is scheduled to commence in the second half of 2019. With the acquisition of the West Don Lands in Gloucester, TLR Canada currently has 6 projects with approximately 2,700 units under development and has demonstrated an ability to secure attractive development sites in the competitive land market. TLR Canada is currently evaluating a number of potential new sites with the aim of adding at least 2 new projects over the coming year in partnership with third-party institutional investors. As the TLR business expands with more products under active development and operation, we continue to enhance the development team. With that, I'm excited to announce that Andrew Gray has joined us as President of Tricon Development Group, Tricon's wholly owned subsidiary that serves as the principal developer for TLR's purpose-built rental apartment buildings in Toronto. Andrew has had an impressive career in development, which includes senior roles at [Concert] Properties, Waterfront Toronto and Tribute Communities. I would like to conclude with a summary of what all of our accomplishments mean to Tricon from a valuation perspective. Let's start with book value per share growth on Slide 16. Since 2012 when we entered single-family rental, Tricon has increased its book value per share at a compounded rate of 23% per annum in Canadian dollars to CAD 10.34 per share. Our share price is currently trading slightly above this level indicating that very little value is being attributed to our Private Funds and Advisory business, which generates approximately $30 million in annualized fee revenue, or to the future growth embedded within our existing portfolio. Let's explore these growth opportunities on the next slides. If we put our pens down on new projects and simply complete the existing development pipeline and continue to manage our existing assets, we could create the kind of value shown on Slides 17 and 18. In TAH, for example, on Slide 17, our current run rate NOI is $147 million. Now if we assume, for illustrative purposes, a 4% to 5% same-home NOI growth rate coupled with a cap rate of around 5% to 5.5%, we could generate incremental book value of more than CAD 1.00 per share per year without even considering reinvesting the free cash flow back into the business. In TLR, on Slide 18, if we assume the current market cap rates are around 4% on construction costs of approximately $1.2 billion, we can double the value of this business to over CAD 2.00 of book value per share. And in THP, we are projecting approximately $600 million net distributions to Tricon over 8 to 10 years, which is approximately a doubling of today's current value. These slides present the inherent value of our principal investments. But in addition to this, we remain laser-focused on Tricon 3.0, which involves growing the third-party capital portion of all of our business verticals. In TAH, we exercised on this strategy through the joint venture announced last quarter. In TLR Canada, we own approximately 30% of the total project equity and are leveraging third-party capital to quickly add scale to our platform. We see no shortage of interest in this business and we plan to continue adding projects in partnership with institutional investors. And in our THP vertical, we continue to have active discussions with numerous parties to take advantage of acquisition opportunities in the current supply-constrained home building environment. We expect third-party capital to be the key driver of our growth to $10 billion of AUM over the next 3 to 5 years with significant value being created for public and private investors along the way. With that, I will pass the call back to the operator to take questions and will be joined by other members of our senior management team including John Ellenzweig, Andy Carmody, Andrew Joyner and Kevin Baldridge.

[Wojtek Nowak]

Operator, I think we'll take questions now.

[Operator]

[Operator Instructions] And our first question comes from the line of Dean Wilkinson from CIBC.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Gary, I think that that was a classic Lincoln that you slammed in that picture.

[Gary Berman, President, CEO & Director]

Thank you. Yes, I thought we'd break out a little bit of humor to this call, Dean.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

I was wondering if that was actually Wissam's ride. But anyway. On the contractual fees that are coming out TAH JV1, can you remind us how those build up over the next couple of years? And where do you think that the run rate on that settles out once you're fully invested?

[Gary Berman, President, CEO & Director]

The asset management fees are going to be consistent, roughly consistent around $1 million per quarter I would say certainly for a couple of years. Yes because it's roughly 1% of the invested capital, Dean. And then the other fees, which are really more property-level fees, property management fees, and there's other fees related to construction and acquisition, those fees I can't really talk to, but ultimately we'll see the benefit of those really in the TAH OpCo.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. All right, that's clear enough. And then just as you look at both the acquisitions, I mean you were sort of 88% geared to the joint venture and 12% to sort of your own balance sheet. Is that kind of how we can think about the acquisitions going forward, that they are going to be predominantly done in the JV? And what would cause you to buy them sort of on balance sheet? Like maybe it's a secondary market or something like that.

[Gary Berman, President, CEO & Director]

Yes. I think the ratio will be generally consistent. But remember, we are opportunistic. But I think what we're expecting is to acquire roughly 800 homes per quarter in the JV and maybe up to 100 homes on our own per quarter. And obviously, that will fluctuate quarter to quarter depending on the seasonality, but that would be the average run rate over a period of a year. And essentially, the JV has got a very prescriptive buy box. Our partners want to buy in certain markets, and there's other markets which we operate in; for example, Phoenix or Las Vegas where occasionally we do see good opportunities to buy. And so we want to take advantage of those and we'll buy them for our own account.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay, great. And just on the THP. Should we be thinking 5% in terms of that return in the near term? Or is it closer 8%, 10%? I think certainly below your target, but I guess erring on the side of conservatism.

[Gary Berman, President, CEO & Director]

Yes. I would be conservative and err on the side of conservatism. And really I think 5% is a reasonable number, potentially even heading all the way through 2019. Until we see on-the-ground evidence that we can rise revenues or increase prices faster than costs and we can hit our time -- our milestones in terms of time, it's just prudent to be conservative and aim around 5%. I think I would go further to say it almost feels like we're in a technical recession right now for U.S. home building because, in many cases, we're seeing costs rise faster than prices. We're not able to hit our timelines. Certainly, in some cases, we're seeing starts decline year-over-year. So that feels to me like a bit of a technical recession. And you're seeing that -- you're really seeing that reflected in our numbers. We'll get through it. I don't think it will be anything major. But I think for the next few quarters, we're going to see similar income levels.

[Operator]

Our next question comes from the line of Geoff Kwan from RBC Capital Markets.

[Geoffrey Kwan, Analyst]

I just wanted to go back talking about from the acquisition standpoint. If something came up that was quite sizeable, I wanted to get a sense as to the appetite that you have. And also, too, is whether or not you're at a point with your JV partners that they would be potential partners if there was something sizeable to get you to scale even faster.

[Gary Berman, President, CEO & Director]

Look, we are a consolidator in this business. If a larger opportunity came up and it made sense, Geoff, we would definitely try to take advantage of it. Whether we could do it with our JV partners really depends on the specific opportunity. They have, as I said, they have a very prescriptive buy box. They are looking for cap rates really in the high 5s% and they're looking at specific markets. So it really depends on the acquisition opportunity. It's possible, if it was a large opportunity, maybe some of the homes would go into the buy box and some would stay on our own balance sheet. We'd really have to see. But we certainly have the appetite. We had a great experience with Silver Bay in integrating that. And if something larger came up, we'd love to take a run at it. And obviously, we would certainly offer that to our joint venture partners first, as being good partners. I will add that we don't have to do a strategic acquisition with the JV. The JVs really focus more in kind of onesie, twosie acquisition opportunities. But obviously, as good partners, we would offer it to them if it hit their buy box.

[Geoffrey Kwan, Analyst]

Yes. So that's what I was getting at was like I mean assuming that it fits their box in terms of what they're looking for, that there's, at least from your perception, a willingness as opposed to, say, with either one or both of your partners saying, "Okay, well we want to kind of see how this strategy plays out first and we don't want to necessarily commit a much bigger amount even if there's an opportunity that comes up." So in other words, like you said, that receptivity you think is there.

[Gary Berman, President, CEO & Director]

Yes. I mean look, they are -- I mean it's still early days into the joint venture, but I could tell you that they're very happy with our progress. I mean we're at 1,200 homes, fairly quickly, out of the gate. We'll be -- we expect to be at roughly 2,000 homes by the end of the year. They're happy with the progress. We've been very tight on the buy box for them. I think sometime into next year, they'll have a very good sense of how this is working out. And they've always said to us that really this is the smallest check they could write. So they would love to put more capital to work, but obviously, they need to wait. I think just to be prudent, they probably want to see how this goes for a few quarters before they would really up the ante.

[Geoffrey Kwan, Analyst]

Okay. And then just to clarify, in terms of buying on a quarterly basis, you mentioned 700 to 800 for like Q4, Q1 and then maybe 100 for stuff that wouldn't fit inside their box. So kind of 800 to 900 for Q4, Q1. Is that right? And then for the peak seasons in Q2 and Q3, do you have the feel like you've got that scalability to ramp it up a lot to, I don't know if it's 1,000, 1,200 a quarter?

[Gary Berman, President, CEO & Director]

Yes. Well I think there were a lot of questions after we announced the JV whether we could ramp up our acquisitions. And I think we've shown that we can do that. I mean we've gone from 400 to 500, on average, to 800 right away. So we're very disciplined in what we're trying to do for the joint venture. But we do have to take into account seasonality in the buying. So essentially, once we hit Thanksgiving in a couple weeks, we're going to see MLS really drop off. So I would expect in Q4 we'll probably buy between 700 and 750, Geoff. And then that will ramp up probably -- certainly by Q2 that will start ramping up. But on average, we expect it to be about 800 per quarter. And again, I think we could do maybe up to 100 on our own per quarter. Again, these are onesie, twosies. This is largely off the MLS. It does not take into account anything strategic. It does not take into account any larger portfolios.

[Geoffrey Kwan, Analyst]

Okay. SO that's 700 to 750 for the JV plus the 100 for you guys in the weaker or the seasonally weaker parts of the year and then 800 plus 100? I just want to make sure I'm thinking about this right.

[Gary Berman, President, CEO & Director]

Yes. So 700 to 750 in Q4, but then if we look at 2019, an average of 800 per quarter. An average of 800 per quarter although it will ebb and flow by quarter depending on the seasonality. And then, on average, we would expect to buy up to 100 on our own. But again, that will also ebb and flow depending on the seasonality.

[Geoffrey Kwan, Analyst]

Got it. Okay. And then just my final question. Can you talk about within TH how you're thinking about over the next year kind of expense growth and margins given you've had some prior comments on what you're trying to do in terms of optimizing the repairs and maintenance as well as on the property tax side? Like do you think you can hold the line here? Or is there maybe some opportunities to grind a little bit higher?

[Gary Berman, President, CEO & Director]

Well I mean I don't think we're going to be able to do 8% same-store NOI growth every quarter. I mean we had another great quarter. And I think we've got good visibility into next quarter. I think next quarter will be good too. But let's just assume, for arguments sake, that we can grow our NOI by 5% per annum. I think that's achievable, and I think if we can do that we should be able to grow our margin by up to 100 basis points a year, if you work through the math. So that's kind of what we expect to do. The revenues will moderate a little bit. I mean we're not going to be -- again, we're not going to be able grow revenues at 6.5% forever. We expect to have another good quarter in Q4. It will probably moderate a little bit. But we can't do 6.5% every quarter. But we should be able to hold the line on expenses. Property taxes are the question mark. They do dovetail with HPA. They've been growing at roughly 7% to 8% per annum. I think we've been conservative on the accruals so we haven't seen any surprises there. And then I think of repairs and maintenance, we had a very good quarter, certainly in the same-home portfolio as the internalization kicks in. On maintenance, for example, we're probably doing about 45% of the R&M in-house and we'd love to get that up to 60%. So there's a little bit room, I think, to grind higher there, Geoff. But remember, there's also inflation. So labor and material prices are going to move up too. So I think we'd be happy if we could just hold the line on expenses and continue to grow revenues and aim longer term to hit maybe 5% NOI growth.

[Operator]

Our next question comes from the line of Stephen MacLeod from BMO Capital Markets.

[Stephen MacLeod, Analyst]

I just wanted to just kind of drill down a little bit more on the TAH business. Can you just talk a little bit about how the build-to-rent initiative is going? I mean I know you're still in early days. And then just separate from that, when you think about the overall home portfolio, can you talk about your ability to continue to drive returns? And have housing prices actually gone -- like have your all-in costs actually moved higher recently?

[Gary Berman, President, CEO & Director]

Okay. So the first question on build-to-rent. We're still in the very early days of exploring it. I don't think there is a first-mover advantage to build-to-rent. I think there's certainly been a first-mover advantage to this business, the single-family rental, as you needed to kind of create a platform and the technology around that. But I think build-to-rent reminds me a little bit like apartment building. So we want to take our time and make sure the concept and economics work. With that said, we've just put our first build-to-rent community under contract. It's a community in Southeast Houston. We hope to close at the end of the year. We'll take the homes down probably at 10 a month next year. So we'll kind of -- we'll phase into it. And then we're going to start looking at other opportunities potentially even in our Johnson MPCs because we think there's a niche. There's certainly a niche, even in Johnson MPCs, to provide a build-to-rent community where people can potentially get to know that community better, adjust and then, over time, move up and buy homes within the broader MPC. So we think it potentially could be a great opportunity, but we want to take, I think, a slower approach to exploring it. So I hope that answers your question on build-to-rent. Now that being said, we are buying individual homes, which you could -- I mean it depends on how we define build-to-rent. So I was just talking about build-to-rent communities where there could be 50 to 200 homes in a community. We are buying one-off new homes here and there. We bought about 37 in Q3. So this is really I was speaking more to build-to-rent communities. And then I think I'm not sure I fully understood the second part of your question, but I think you were talking about HPA, our home price appreciation. And look, I mean, similar to my comments previously on rent, we're not going to be able to see 6% annualized home price appreciation forever. I mean that just does not make sense. We're in an ideal environment right now for us, certainly in the single-family rental business, where the new housing market is and the existing markets are tight and the inventory is extremely tight. And obviously, the economy is strong. So that's able to drive both rents and home prices. But we would expect that to moderate. And you are seeing it moderate a little bit in the last month. If you looked at the Case Shiller, for example, it's come down a bit. So we would expect it to moderate over the course of 2019, but still to be relatively strong. We would never underwrite, probably, anything above 3%, but it would not shock me to see home prices next year again be above 3%.

[Operator]

Our next question comes from the line of Lorne Kalmar from TD Securities.

[Lorne Kalmar, Associate]

Just turning to TLR Canada. I saw the costs were up a little bit, I think $2 million from last quarter. Are you guys seeing any substantial cost inflation? Or do you guys expect this to kind of be the budget?

[Gary Berman, President, CEO & Director]

No we're -- I mean we had a noisy quarter, I think, in Q3, as far as TLR went because, first of all, we lost some of the operating income, for example, at 57 Spadina. And so it's a bit of a noisy quarter and there was really no unrealized income from the Canadian projects. So I wouldn't necessarily look at this quarter as an indicator of how we're doing. In fact, I think we're making a lot of progress in TLR in all our projects in terms of hitting budgets and milestones and getting closer to completion. We were making a lot of progress. You just couldn't see that in the numbers in Q3. But specifically on the cost side, I mean we've been, I think, pretty clear in the past that we've certainly seen cost pressures in the U.S. And so this quarter we had a write-up of The McKenzie, but a write-down of The Maxwell, which is in Frisco. And that write-down was partly attributable to higher costs. So we've certainly seen that in the U.S., and that's one of the reasons why we've pulled back on doing new development in the U.S. because the overall cost environment. Here in Toronto, there is definitely -- there's definitely cost pressures. I mean we're hearing about it all the time. But I would say 2 things. Rents are increasing faster, from what we can see right now, than costs. So we're getting a positive spread there. And the second thing is I think, partly because of our relationships with trades, we haven't seen any real impact on our specific projects. 57 Spadina, as an example, is currently under construction. We've tendered roughly 50% of the budget -- 50% of the construction budget on budget. So I think we've been very fortunate with our relationships to be able to hold the line on it. But broadly, we are hearing concerns about costs.

[Lorne Kalmar, Associate]

All right. And then I guess just kind of following up on the rent side of things. What rents are you guys seeing at The Selby and are you projecting now for 57 Spadina?

[Gary Berman, President, CEO & Director]

Well we haven't -- I mean we haven't started -- to be clear, we haven't started leasing The Selby. We expect to do that by the end of the year. We underwrote at The Selby $2.90 per foot and my hunch is -- and you don't really know until you actually get into it -- but my hunch is we'll probably be 20% higher than what we underwrote. So obviously, that's a big win for us. So I would expect for The Selby to be 20% higher. And then at 57 Spadina, if I recall, we underwrote about $3.10, but we're going to be way higher than that. It's just too early. I mean it's a couple of years away, Lorne, so it's early days. But I mean we underwrite these projects in Canada on an un-trended basis to probably get to about a 4.5% development yield. And then on the trended basis, assuming, let's say, 3% rent growth, we could get to maybe 5.25%. My best guess is that both The Selby and 57 Spadina will be closer to 6%, which is obviously big wins for us.

[Operator]

Our next question comes from the line of Himanshu Gupta from GMP Securities.

[Himanshu Gupta, VP & Equity Research Analyst]

On single-family joint venture, you estimated performance fee of around $32 million. So just wondering what are your HPA and same-property NOI growth assumptions here. And what could lead to upside to this number?

[Gary Berman, President, CEO & Director]

John, do you want to take that?

[Jonathan Ellenzweig, Managing Director]

Sure, I'm happy to. Regarding the assumptions, I would say they're fair to conservative. So HPA, as Gary mentioned, is around 3%. And as he noted, we think there could be some upside to that. So if you look for areas of upside. In terms of NOI growth, again it's conservative. The 8% we posted this quarter is extremely strong. It's more in the kind of 3% to 5% range. So we've tried to set out assumptions that we think are conservative and achievable and so it leaves some upside.

[Himanshu Gupta, VP & Equity Research Analyst]

Right. And this on the assumption of deployment of the entire $2 billion? Or is it going to -- and we will see a mark-up in the performance fee expected over the years?

[Gary Berman, President, CEO & Director]

No, that performance fee is based on the deployment of all -- approximately all of the capital. It leaves a small reserve at the end, but it's essentially all of the capital.

[Himanshu Gupta, VP & Equity Research Analyst]

Okay. And now just moving on to the -- and probably a follow-up to the remark, Gary, you mentioned about labor inflation in single-family rental business. And one of your calls talked about pressures on the employee retention in the field. So are you seeing more employee turnover? Do you think there will be incremental amount to be spent to retain the talent in this industry?

[Gary Berman, President, CEO & Director]

We're not seeing that. I mean we are seeing wages grow by roughly 3% to 5%, Himanshu, and that is being absorbed into our numbers. But in terms of turnover, we've seen virtually no turnover over the last year or 2, virtually none. And I think the credit to that really goes to Kevin and his team because we've created such a positive culture at Tricon American Homes. We start by taking care of our own team first so that they can then take care of our residents. And you see that in our numbers, which are, again, very strong, I think, relative to our peers. But I think more than that, when our team really feels like they're making a difference in taking care of our residents, there's much more value to their own job. They love what they're doing and they love working at Tricon American Homes. So we've seen virtually no turnover in a tough labor environment.

[Himanshu Gupta, VP & Equity Research Analyst]

Sure. Sure enough. And just moving on the revenue side of the equation. Revenue growth was -- I mean rent growth was obviously very strong in Q3. How did it progress between August and September and October, if you can shed some light? Just trying to see the impact of seasonality and how should we see on a full-year basis.

[Gary Berman, President, CEO & Director]

Yes. So the rent growth was steady from August to September and actually into October as well. So I think October we're seeing blended rent growth last month of about 6.5% as well. So very strong the last 3 months. But again, I think when we hit Thanksgiving in a couple of weeks, that will start to moderate.

[Himanshu Gupta, VP & Equity Research Analyst]

Got it. And this rent growth, I mean what you posted in Quarter 3, and Quarter 2 as well, is feeling better than the peer group, population peer group. So what would you attribute the outperformance to? Is it the software? Or is it the market strategy or any other reason?

[Gary Berman, President, CEO & Director]

I think there's a number of factors. I mean I think the most obvious one is our revenue-maximization program. And you can see that clearly in our own numbers, where the rent growth is up about 200 basis points over the previous year. So it just goes to show that your algorithms can do this job much better than people that tend to be more compassionate. So the algorithms are really working. So that's a major driver. The other factor, I would say -- there's probably 2 other factors. The other one is clearly the middle market strategy. Our residents, in general, I would say are not renters by choice. And in a strong economy, we're really able to drive rent. And I think the middle market strategy is really working for single-family rental. And we've talked a lot about that in the past. But we think you're seeing the benefit or the benefit of that strategy now with rent growth. And there's probably still some loss to lease as well in the Silver Bay portfolio as well. So I think those 3 factors in total round out. And then there may be intangibles, which is just our customer service and that we've posted tremendous Google ratings. Those have been increasing. I think the vast majority of our residents really like our service and it makes it easier for us to drive rent, particularly on renewals as well.

[Himanshu Gupta, VP & Equity Research Analyst]

Right. And probably I mean rental growth is higher and probably a little light on occupancy. And I'm looking at the spread between stabilized occupancy of 96% and in-place occupancy of 93%. I mean the spread is fairly wide. I mean what explains that spread? And how many days are you taking for a tenant [indiscernible]? And has that increased in recent times?

[Gary Berman, President, CEO & Director]

Well I mean the major factor in the spread in occupancy is just new acquisitions. Remember, we just acquired 800 homes in this last quarter. All of those homes are basically vacant. So that has a major impact on the occupancy. That's why it's always better to look at the same-home numbers. The other thing is, is that in the revenue-maximization program, there has currently been a bias to rent growth over occupancy. So we've been willing to drive much higher rent and, in return, take lower occupancy. So that explains some of it as well. But I think, certainly as we head into the softer part of Q4, I think that will reverse a little bit. We'll probably end up going with more of a -- on the margin slightly more of an occupancy bias. So that's something you should expect heading into Q4. And then what was -- sorry -- what was the other part of the question?

[Himanshu Gupta, VP & Equity Research Analyst]

I mean how many days are you taking for a tenant [indiscernible]? Yes. And has it increased in recent times?

[Gary Berman, President, CEO & Director]

John, do you want to take that? Move out to move in?

[Jonathan Ellenzweig, Managing Director]

Yes, no problem. So Himanshu, there's really 2 metrics. So one I'll just talk quickly about acquisition to move in. So on new acquisitions, it was around 70 days, on average, over the last 12 months, but we really expect somewhere between 60 and 90 days on new acquisitions until we have a tenant in place. And then for existing homes, move out to move in, it ebbs a flows a little bit based on seasonality. But typically 40 to 50 days from move out to move in. We're trying to continually work to tighten that with our in-house turn team.

[Himanshu Gupta, VP & Equity Research Analyst]

And has that changed in the last quarters or so or last year or so?

[Gary Berman, President, CEO & Director]

John, if I could just add to that. It's interesting because that, certainly when we implemented the revenue-maximization program, that number increased. So we were trying to get it at 40 or below 40 and it's now, let's say it's mid-40s. We actually consciously made the decision with our algorithms to keep some of those homes on the market longer in order to drive higher rent growth. So that's obviously -- that's the tradeoff we look at, but within reason. You want to continue to tighten that because that's money in your pocket.

[Himanshu Gupta, VP & Equity Research Analyst]

Right. That's great color. And just touching upon your acquisition. I mean you're doing 700- 800 homes per quarter now, versus 400 homes I mean in the same markets earlier. I mean do you have to tweak -- did you tweak underwriting or relax certain criteria as to make 800 homes work or eligible for your buy box? Just trying to get a sense of how deep is the pipeline for the right kind of product there.

[Gary Berman, President, CEO & Director]

Not at all. I mean the cap rates are right in line from where we've been acquiring in previous quarters. The real issue in the past was just being capital-constrained. It had nothing to do with the opportunity to buy. If anything, I would say in recent quarters we've slightly increased the quality of the homes we're buying. We're seeing higher going-in purchase prices, obviously higher rents. That's partly a reflection of the inflationary environment. But I think the sense I get when I look at that buy report every day, the quality is slightly better than what it was, let's say, at this time last year. So even with slightly better quality and cap rates in line, no issue hitting the volumes.

[Himanshu Gupta, VP & Equity Research Analyst]

Fantastic. And probably just last question a general question. I mean the impact of the higher mortgage rates on affordability. And are you seeing any incremental demand on the single-family rental side? And is there any evidence I mean when you track the reasons for move out, has the reason to buy a home scoring lower than what it was in like recent times or recent years?

[Gary Berman, President, CEO & Director]

Actually, last month it went slightly higher. So I mean you look at that, because it's typically been around -- when we look at the surveys -- and again, I don't know how much value we can really ascribe to these surveys, but we've seen that roughly 15% of our residents have moved out to buy a home. And I think in the last month, it went up to 18%. So that, for me, was strange because I would have thought it would have gone the other way. So again, I think I'm not sure that what we're seeing in single-family in rental is directly applicable to higher mortgage rates because, again, I think the vast majority of our residents either don't have the credit or the down payment to be buying homes. They're not necessarily renters by choice. So I don't think there's a lot of intel to be seen there. Maybe it is affecting our peers that may have higher-priced homes. It could be more of a factor for them. It's definitely been a factor on the home building side, though, because the rates have increase rapidly and that's certainly created some sticker shock with purchasers. And because we've been at this now for the better part of 10 years, we're clearly seeing a bit of a slowdown, certainly in the move-up market, in new housing with higher rates. But we anticipate that that will adjust at some point and the market will go back up.

[Operator]

[Operator Instructions] Our next question comes from the line of Tal Woolley from National Bank Financial.

[Tal Woolley, Research Analyst]

Just wanted to -- you discussed a lot about improving your cost of borrowing and the steps you've taken over the last year since the Silver Bay transaction. I'm just wondering if now you can speak to, within the JV having the backing of a sovereign wealth credit, what we can expect to see going forward.

[Gary Berman, President, CEO & Director]

Wissam, do you want to take that?

[Wissam Francis, Executive VP & CFO]

Given the joint venture, actually our structure is still the same. We're really focused on ensuring that our leverage stays around the 65% LPV for the joint venture. And having -- and remember, most of the credit and most of the debt at TAH is actually non-recourse to Tricon so having them on our list doesn't really necessarily affect us materially in terms of basis points. Having said that, we are looking at lower spread to cost. We used to be at around 325 on the warehouse facility and we dropped that to around 250 now. And we continue to work closer. The real effect is going to be when we do our securitization transaction in the joint venture, once we get to about 3,000 acquired and see how that works. But most of our debt at TAH is now fixed. Approximately 80% is fixed. So the impact of interest rate exposure is actually low for us today.

[Gary Berman, President, CEO & Director]

Tal, if I could just add to that I would just say Wissam mentioned spreads. We would not have been able to get this lower spread without the backing of our joint venture partners. So it's definitely helped us.

[Tal Woolley, Research Analyst]

Absolutely. Okay. And just my next question. I think this is the first full quarter that you're sort of annualizing with the Silver Bay transaction, but it's not in your same property pool. Is the growth you're seeing out of those homes materially different from what you're seeing out of your same-home pool?

[Gary Berman, President, CEO & Director]

No. I mean the revenue growth is very similar. Revenue growth is roughly 6.5% for both the overall portfolio and the same-home portfolio. So on the revenue side, pretty consistent. Cost side, I would say, is fairly consistent. I think over the course of this last year, the same-home portfolio probably would have looked even better. I will say it probably would have looked better if we included the Silver Bay portfolio because there was a little bit more loss to lease in it. And Silver Bay will roll in, obviously, next year.

[Operator]

There are no further questions at this time. I turn the call back over to Mr. Gary Berman.

[Gary Berman, President, CEO & Director]

I would like to thank all of you on the call for your participation. We look forward to speaking with you next year when we discuss our full-year results for 2018.

[Operator]

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