Tricon Residential Inc

TSX:TCN

Earnings Call Analysis

Tricon Delivers Strong Q3 Performance

Tricon reported a robust third quarter, marking same home NOI growth at 6% and blended rent growth at 6.8%, demonstrating operational efficiency and strategic acquisitions. Maintaining steady occupancy at 97.4%, the company acquired 410 homes via their capital recycling initiative. Full-year guidance is upheld with Core FFO per share anticipated between $0.55 to $0.58, and same home NOI growth is projected at 6% to 6.5%. The total acquisitions forecast has been revised down to 1,850 homes. Tricon is geared for expansion with around $60 million in annualized AFFO less dividends, $433 million in liquidity, and favorable interest from institutional investors, which positions them well for raising strategic capital in the current economic climate.

Introduction and Company Culture

In Tricon's third quarter earnings call, President and CEO Gary Berman opened with gratitude for the team's hard work which has been vital to the company's consistent performance. The company's culture, deeply rooted in dedication to residents and communities, is presented as a cornerstone for its success.

Operational Performance and Strategic Focus

The quarter showcased strong operational performance, featuring a 6% growth in same-home Net Operating Income (NOI), NOI margins of 68.5%, high occupancy of 97.4%, lower turnover at 18.8%, and a solid 6.8% blended rent growth. Tricon kept its focus on long-term shareholder value, efficiently controlling overheads, and progressing with multi-family developments in Canada. A disciplined approach toward acquisitions was adopted, with 410 homes acquired, primarily funded through the capital recycling program that involves selling at low cap rates (4%) and reinvesting at higher ones (6%).

Financial and Investment Guidance

Financial guidance remained steady with the full-year Core Funds From Operations (FFO) per share anticipated to be $0.55 to $0.58 and an adjustment in same-home NOI growth from 6% to 6.5%. The company revised its full-year acquisitions downward to 1,850 homes. The strong financial position includes $60 million in annualized Adjusted Funds From Operations (AFFO) after dividends, and a liquidity of $433 million. Tricon is supported by institutional investors who view Single-Family Rental (SFR) as a compelling opportunity, facilitating strategic capital acquisition amidst a higher interest rate environment.

SFR Market Dynamics

Tricon highlighted the strong fundamentals supporting the SFR market, particularly the gap between supply and demand, where demand is driven by the significant millennial demographic reaching household formation age. Homeownership accessibility has declined as evidenced by the rise in the median home price relative to household income over the past two decades, making SFR an increasingly attractive option.

Consistency in Turbulent Times

Despite macroeconomic challenges, Tricon's SFR operating performance remained steady, with key metrics like NOI growth and occupancy showing resilience compared to the period emerging from the COVID-19 pandemic. While the broader U.S. REIT Index declined, Tricon focused on elements within their control such as acquisitions, where they followed a capital recycling strategy and are preparing for the launch of a new SFR joint venture (JV).

Opportunities and Revenue Management

Tricon is focusing on its significant loss-to-lease in its same-home portfolio, which pinpoints to an opportunity to harness $40 million in annualized revenue. By pushing renewal rent growth and responsibly raising rents where there is a considerable difference between current and market rents, the company aims to secure multiyear sustained revenue growth. Tricon's balanced revenue management approach has yielded long-term NOI growth advantageous to shareholder value.

Multifamily Development Milestones

The call concluded with updates on the Canadian multifamily sector where Tricon continues to reach significant milestones, indicating the company's diverse approach and stability in its core markets.

Earnings Call Transcript 2023-Q3

[Operator]

[Audio Gap] [Operator Instructions] I would now like to hand the conference over to your speaker today, Wojtek Nowak, Managing Director of Capital Markets.

[Wojtek Nowak, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Tricon's third quarter results for the 3 months and 9 months ended September 30, 2023, which were shared in the news release distributed yesterday. I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially.For more information, please refer to our most recent management's discussion and analysis and annual information form, which are available on SEDAR, 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 by webcast on our website, and a replay will be accessible there following the call.Lastly, please note that during this call, we will be referring to a 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, and good morning, everyone. Before we start, I want to take a moment to thank our exceptional team who played a critical role in the strong results we're presenting to you today. Our team's unwavering dedication to our residents and the communities we serve is fundamental to our culture, and I believe it's one of the key reasons our company continues to perform well quarter after quarter.Let's turn to Slide 2, so I can share with you our key takeaways for today's call. First, we delivered another great quarter of operational performance with same home NOI growth of 6%, NOI margin of 68.5%, occupancy of 97.4%, turnover of 18.8% and consistently strong blended rent growth of 6.8%. Second, as always, we remain laser-focused on driving sustainable long-term shareholder value amidst the volatile capital markets backdrop by recapturing our SFR loss-to-lease, driving overhead efficiency and advancing our Canadian multi-family developments. Third, we remain disciplined with acquisitions. We acquired 410 homes in the quarter largely through our capital recycling program, where we're essentially selling at a low 4% cap rate and reinvesting the capital at 6 caps.I'm also happy to report that we've now substantially completed the investment programs of SFR JV-2 and homebuilder direct joint ventures and are now gearing up to launch JV-3. In terms of guidance, we've maintained our full year outlook for Core FFO per share of $0.55 to $0.58, tightened our same home NOI growth of 6% to 6.5%, and slightly lowered our full year acquisitions guidance to 1,850 homes. And finally, we are well positioned to grow with about $60 million of annualized AFFO less dividends, $433 million liquidity, and most importantly, strong interest from private institutional capital to invest in SFR.Institutional investors remain enthusiastic about SFR and are increasingly viewing the sector as a core or core plus investment opportunity, which should enable us to raise strategic capital with lower leverage parameters in a higher-for-longer environment.Turning to Slide 3. I want to step back for a minute and touch on the compelling fundamentals that underpin our SFR business. While we are clearly operating in a difficult macroeconomic environment at this time, we believe SFR remains one of the most attractive real estate investment opportunities this decade. The story is very simple. Demand for housing is outstripping supply. Demand is being driven by demographics, and right now, the millennial demographic cohort is in its prime years of household formation.Millennials represent a larger group than the baby boomers and they need quality, affordable homes in good neighborhoods as they form their own families. Meanwhile, the supply of new housing is not keeping up with demand. Ever since the great financial crisis, America has been underbuilding homes and the housing intensity, as measured by housing starts per thousand persons, remains below prior recessionary levels. As a result of this demand-supply imbalance, homeownership has become less accessible, as shown on Slide 4.Over the past 20 years, the median price of a home in the U.S. has grown from 3.9x average household income to a far less affordable 5.2x average household income today. This increase was mitigated somewhat by ultra-low interest rates over the past few years, but now that's no longer the case as the 30-year mortgage rate has skyrocketed towards 8%. In such a distorted environment for homebuyers, the case for rental is more compelling than ever. In fact, what's astonishing is that owning a single-family starter home today costs $1,000 more per month than renting the same home. This is what makes single-family rental so compelling for many American families.So turning to Slide 5. It's no wonder that SFR operating fundamentals remain so solid. Some might ask, why buy when you can rent a professionally managed home for much cheaper? What's interesting is that notwithstanding the turbulent times we are living in, SFR operating performance remains remarkably steady. Key indicators, including NOI growth, occupancy and turnover remain robust and consistent when compared to these same metrics 2 years ago when we were emerging from the COVID pandemic and enjoying extremely low interest rate environment. Whereas, SFR is steady as she goes, housing affordability has eroded significantly and the capital markets backdrop has been dismal.The broader U.S. REIT Index is down by over 30% in 2 years, while the U.S. 5-year treasury yield has more than quadrupled. In this very dislocated environment, we're doing what we always do, focusing on the things we can control.First on the list is acquisitions. As you can see on Slide 6, we're being thoughtful with acquisitions and are focusing our efforts on our capital recycling program rather than growing the portfolio. We've been able to sell older homes in less desirable locations at very attractive cap rates, near 4%, and recycled the proceeds to acquire newer vintage homes in our core markets that address the growing demand for our renters, require less CapEx to maintain and earn going in yields of 6%.So far this year, we sold 533 homes with gross sale proceeds of $191 million and in turn acquired 546 homes for a gross investment of $170 million. And by matching dispositions with acquisitions, we expect to save $20 million in tax expense this year through a tax-efficient 1031 exchange program. We remain focused on external growth over the longer term, but won't ramp up acquisitions again until we officially launch our new SFR JV.In a period of slower acquisition growth, we've been able to focus more on the revenue and expense performance of our existing portfolio. A key opportunity in this regard is the embedded loss-to-lease, which we discuss on Slide 7. Our policy of self-governing on renewals, coupled with longer resident tenure has resulted in an estimated loss-to-lease of about 11% across our total proportion portfolio and around 14% in our same-home portfolio.Most of that loss-to-lease is sitting with residents that have been in our homes for 3 years or more, and represents an opportunity of about $40 million in annualized revenue. We haven't captured much of this loss-to-lease on recent lease trade-outs because these same residents are staying in our homes longer and represent only 1/3 of our turnover in a given quarter.Our plan to recapture the sizable mark-to-market is to push renewal rent growth, which has been trending up post pandemic, and to responsibly raise rents above our self-imposed caps in situations where residents have significant loss-to-lease. We're still being thoughtful in our approach with residents who are seeking to strike the balance when the delta between existing rent and market rent is large. But more importantly, we believe the loss-to-lease opportunity provides a multiyear runway for sustained rent growth on renewals, which is the key driver of overall revenue and NOI growth for Tricon.Looking at Slide 8, I want to point out that the long-term benefits of our resident-friendly approach to revenue management. Over time, our renewals have been below those of our industry peers, but new lease growth has been stronger and turnover has been much lower, resulting in low turnover costs. These factors have combined to produce industry-leading same-home NOI growth over the longer term, which we believe is the crux of what drives sustainable long-term shareholder value.And finally, and thinking about the things we can control, I'd like to share with you on Slide 9 an update on our Canadian multi-family built-to-core portfolio that continues to evolve and achieve new milestones. I'm delighted to announce that the Taylor achieved stabilized occupancy of over 98% in the quarter and 100% occupancy in October, reflecting its resort quality amenities, exceptional living spaces and sustainability leadership among other features.I'm also thrilled to introduce our latest project, The Ivy, which will begin its initial occupancy by the end of the year. And finally, the launch of Maple House continues to be extremely successful with 30% of the building already pre-leased since launching in Q3.Tricon now has 9 projects totaling over 5,000 units in lease-up, preconstruction or active construction, as shown on Slide 10. And as this portfolio stabilizes over the next few years, we estimate that we'll have a gross asset value close to $3.6 billion and annualized NOI of $50 million of Tricon share, creating a lot of strategic optionality as Canada's premier multi-family portfolio with institutional scale. Moreover, the book value of our stake in this portfolio is expected to double from $0.93 to $1.87 per share upon stabilization, creating meaningful value for all of our shareholders.With that, I'll now turn it over to our CFO, Wissam Francis, to discuss our financial results.

[Wissam Francis, executive]

Thank you, Gary, and good morning, everyone. Q3 was a solid quarter for Tricon, and I want to thank our exceptional team who continue to focus on process improvement and cost containment across our business while continuing to deliver a world-class resident experience.Let's start with a review of our key financial metrics on Slide 11. Net income from continuing operation was $81 million compared to $178 million last year, which includes $73 million of fair value gains on rental properties against a strong comp of $107 million last year as home price appreciation has moderated in recent months. Core FFO per share was $0.14, down $0.01 year-over-year. AFFO per share was $0.11 from last year, providing us with ample cushion to support our quarterly dividend with AFFO payout ratio of 46%. And lastly, our IFRS book value stands at $14.30, that is CAD 19.30, just up over 4% year-over-year. And I will note that our book value does not factor in the value of our strategic capital fee streams.Let's move on to Slide 12 and talk about the drivers that contributed to our FFO per share variance. The year-over-year decrease of $0.01 can be attributed to strong NOI growth from the SFR portfolio being offset by higher borrowing costs, lower performance in acquisition fees and the absence of Core FFO from U.S. multi-family portfolio, which was sold in Q4 2022.Specifically, our single-family rental portfolio contributed $0.02 of incremental FFO, reflecting revenue growth of 10.5%.This was driven by a 2.2% increase in proportionate rental home count, 5.9% increase in average rent and 0.5% higher occupancy.FFO from strategic capital had a $0.02 negative impact, primarily driven by lower performance fees from legacy residential development, lower acquisition fees as a result of fewer SFR acquisitions and lower property management fees following the sale of the U.S. multi-family portfolio in Q4 of last year.Our adjacent business added $0.01, reflecting strong results in residential development as housing fundamentals remained robust. Interest expense had a $0.03 negative impact mainly due to higher average interest rates on our debt. And lastly, there was a $0.01 positive impact driven by lower overhead expenses compared to last year.On that note, I want to take a minute and dive into our corporate overhead expenses. Turning to Slide 13. At a high level, our corporate overhead expenses support a world-class operating platform that we have built over the years. This platform is a source of competitive advantage and creates a moat around our business that is difficult to replicate. It means having a strong local market presence to provide an exceptional resident experience through internal property management and maintenance capabilities.Our strong service offerings has earned us an industry-leading Google score of 4.6 stars. It means being a people-first company and fostering a purpose-driven culture so that our employees will go above and beyond to serve our residents, which in turn leads to lower turnover and strong NOI growth. It also means being a leader in innovation in order to drive operating efficiencies, continually improve our resident experience and scale our business efficiently and cost effectively.When we break down our corporate overhead expenses on Slide 14, you can see that they support both our SFR operating platform as well as our adjacent businesses, whose overhead costs are more than offset by fee revenue earned from managing strategic capital associated with these businesses.If we just looked at our SFR overhead and compare it to our largest peer, there's still a delta in terms of efficiency. Recall that we had set our goal of reaching 50,000 homes by 2024 and built a platform to supports such scale, but the goal has been pushed out given the rapid increase in interest rates and the need to pull back on acquisitions for the time being. That said, we continue to see tremendous opportunity in SFR, and we are laser-focused on keeping overhead costs relatively stable so that we could reach a competitive level of overhead efficiency as we grow the portfolio towards 50,000 homes.So on Slide 15, our near-term focus is to drive operating efficiency and reduce overhead expenses where possible in the current lower growth environment. Over the past year, we've made some progress, including a 4% reduction in gross overhead expenses year-over-year.As we look ahead into 2024, you will see 3 main areas that will help us drive additional efficiency by reducing overhead and growing fees. First, we anticipate launching a new SFR joint venture in early 2024 to add scale as well as strategic capital fee streams. Recognizing that the interest rate environment is still challenging, we expect the new joint venture to accommodate buying homes with lower leverage parameters.What changed over the past year or so is that our institutional investors are increasingly open to lower leverage or no leverage joint venture structures with the expectations of Core or Core Plus returns compared to opportunistic return expectations in the past. This goes to show how SFR has matured into an attractive and stable institutional asset class.Next, we continue to optimize our workforce to fit our current needs, which included reducing our staffing by approximately 5% over the past several months and reallocating the operating staff from servicing vacant homes and acquisitions to servicing occupied homes. And finally, we are containing G&A costs by focusing on key growth projects and on essential activities only.Now let's shift gears and talk about our debt profile on Slide 16. We have been proactive with addressing our near-term debt maturities as we said we would, and I'm happy to report that we have repaid or extended all of our remaining 2023 maturities. As we look ahead into 2024 maturities, our 2017-2 securitization is on track for refinancing before it's maturity in January, and we expect to repay or extend our wholly owned portfolio term loan before its maturity next October. From there, we can look ahead and start tackling our 2025 maturities as well.I'd like to end by discussing our 2023 guidance that we've updated on Slide 17. We are reiterating our guidance range for Core FFO per share of $0.55 to $0.58. We've tightened up the expected range for the same-home metrics to 6% to 6.5% for revenues, expenses and NOI. The revenue guidance reflects softer rent growth on new home move-in as well as lower turnovers as turnover tends to skew to residents with shorter tenure, partially offset by gradual increase in rent growth on renewals.The expense guidance is a function of elevated property tax, offset by successful reduction of controllable expenses such as property management, repair and maintenance and turnover expenses. Kevin will provide more insight into these items later on the call.The outlook for the same-home metric is coupled with expectations for ongoing strong results in the U.S. residential development business, which gives us confidence in the overall outlook for the FFO per share.We've also taken the pace of acquisition down slightly to 1,850 homes as investment programs for JV-2 and JV-HD are substantially complete, and we are buying homes purely as part of our capital recycling program. As we head into the end of the year, we remain laser-focused on cost control, balance sheet flexibility and prudent capital allocation while keeping an emphasis on creating the best resident experience possible.And now to give you more insight into our same-home metrics, I'll turn the call over to our Chief Operating Officer. He's just Kevin. Anywhere else he'd be a 10, but for us, he's an 11, Kevin Baldridge.

[Kevin Baldridge, executive]

Thank you, Sam, and good morning, everyone. First and foremost, I want to give a big thank you to our Tricon's operations and customer service teams who helped deliver this quarter's outstanding results. I continue to be so impressed with our extraordinary team and the exceptional care they provide our residents day in and day out.Let's move to Slide 18 to talk about the drivers of our same-home NOI growth of 6% for the quarter. On the top line, revenue growth was driven by a 6% increase in average monthly rent that was partially offset by a 20 basis point decrease in occupancy. This remains well within our targeted range of 96.5% to 97.5% as we balance rent growth versus occupancy through the seasons. Our rent growth remains healthy with blended rents increasing 6.8% during the quarter, underpinned by 6.9% growth on new move-ins and 6.7% on renewals. As we moved into October, demand remained consistently strong with rent growth coming in at 6.8% on a blended basis, supported by 6.6% on new leases and 6.8% on renewals.Our bad debt expense, which is embedded in the revenue numbers has continued to inch down as we thought it would due to the successful collection efforts of our team in the field and is now near pre-pandemic levels of 0.9% versus 1.4% in Q3 of last year.Finally, other revenue decreased by 0.9%, down slightly from last year. This was driven by lower late fees as our collections have improved, coupled with more conservative provisioning for resident recoveries to reflect actual cash collections rather than billed amounts. This was partly offset by revenues earned from services that enhance our resident experience like Smart-home and Renters Insurance, which both saw increased adoption year-over-year.Let's now turn to Slide 19 to discuss our Same Home expense growth of 7.5%. The rise in expenses was primarily driven by property taxes, which were up 10.5% from last year, reflecting meaningful home price appreciation in our markets. To date, we have received 50% of the tax bills for the Same Home portfolio and expect another 25% in November, 19% in December and the balance early next year.So far, we have seen higher-than-expected assessed value increases in Atlanta, Texas and the Carolinas, which account for about 60% of our tax expense. This has been partly offset by millage rates and successful appeals, but not to the extent that we would like. From where we sit today, our best guess is that taxes are up 12% year-over-year, which would put us near the high end of Same Home expense guidance. Yet, if we see favorable millage rates and appeals, we could end up at the low end of expense guidance.Moving on to the other expense lines. Repairs and maintenance expense was up this quarter by 2.3%. This reflects an 8% increase in completed work orders, which was partially offset by our ongoing cost containment efforts. And our turnover expense continues to remain low, a strong testament to our policy of self-governing on renewals and industry low turnover rate as well as cost containment efforts.Next, Homeowner’s Association costs increased by 25%, reflecting inflation in HOA dues as well as a heightened level of violations composed by HOAs coming out of the pandemic, which drove higher penalties. And finally, other direct expenses increased primarily from the upfront cost of providing Smart-home technology to more residents and increased utility costs.I'm also pleased to report that we achieved a 14% reduction in cost to maintain this quarter compared to last year, which includes repair and maintenance, turnover and recurring CapEx. Our team has been proactive and successful in achieving price reductions through our national procurement program, reducing turn scopes where we aim to repair versus replace where possible and driving higher utilization of our in-house team to undertake more work orders versus using outside vendors. We now have over 77% of our available work orders completed in-house and are on track towards our goal of about 80% by the end of the year. Our in-house technicians cost per work order is about 45% cheaper than using a vendor for similar kinds of work.As we head towards the end of the year, we remain focused on the things we can control to offset rising costs, while keeping an emphasis on creating the absolute best resident experience possible. Now I'll turn the call back to Gary for closing remarks.

[Gary Berman, executive]

Thank you, Kevin. It was another great quarter for Tricon, and I want to conclude my prepared remarks by saying that I feel truly honored to work alongside such a world-class team who deliver an unmatched resident experience every single day. As we approach the end of the year and look forward to 2024, we're excited about the numerous catalysts that should drive sustainable long-term shareholder value, which we've talked about on this call and summarized on Slide 20, including launching a new JV, driving overhead efficiency, continuing to deliver strong rent and NOI growth and advancing our Canadian multi-family portfolio towards stabilization.I will now pass the call back to the operator to take questions with Sam, Kevin, Wojtek and I will also be joined by John Ellenzweig and Andrew Joyner to answer questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Brad Heffern.

[Brad Heffern, analyst]

Obviously, the presentation’s out, can you just give your thoughts on their primary recommendations as being quickly marking the rents to market, reducing overhead and exiting the Canadian multi-family business?

[Gary Berman, executive]

Brad, we don't comment on any specific conversations that we have with any of our shareholders. We're always open to constructive feedback from anybody, any shareholder, but we don't comment on any kind of specific items related to strategy. The only thing I can say that at this point that we agree with is that the stock is mispriced and there's significant opportunity for those that are going to be patient, make a lot of money, but that's all I can really comment on.

[Brad Heffern, analyst]

Okay. Fair enough. For the next JV, presumably the partners would want an investment pace that's above what's been being executed of late. Do you think that that's correct, first of all? And then how would you think about funding your capital commitments at faster paces, if needed?

[Gary Berman, executive]

Yes. I mean that's -- we really aren't making much in the way of acquisitions right now. Everything is largely focused on balance sheet and through our capital recycling program. And that's because, obviously, both SFR JV-2 and homebuilder direct are now essentially complete. So yes, as we launch a new JV, let's call it, JV-3, hopefully, early next year, that will increase the pace of acquisitions, and that is what would be expected by our investors. But keep in mind, we typically have a 3-year investment period and once they commit to a fund, there's no pressure to put that money out immediately. We can determine at what pace we want to put out and do so when we think it makes sense. So we may form a fund and take our time to put the capital out.And I think in terms of funding our share, I think one thing you can expect is that the new fund will be sized to the opportunity. Our co-investment will likely be smaller. We will use lower leverage as we talked about extensively on the call and our investors seem to be fine with that. And then we should be able to fund our co-investment with any AFFO less dividends, right? So we talked about that being $60 million a year. That's going to obviously ramp up as we grow our AFFO. And so we should have ample cash to fund our co-investment over the next 3 years.

[Operator]

And your next question comes from the line of Haendel St. Juste.

[Haendel St. Juste, analyst]

My first question is on the January refinancing. This time you talked about fixing on track. Maybe you could give us a bit more color on where you think the refi costs would be, the cost of new debt and what sources you're considering in the likely timing?

[Gary Berman, executive]

So we launched the deal last night. I'm sure some of you might have seen that. And that deal is really to refinance the 2017-1 -- sorry, 2017-2. Right now, I can't really comment on the spread, but I could tell you we're getting indications similar to the last time -- to the last deal we did. A reminder, the last deal we did, the all-in rate was 5.86%, but the spread was about 1.78%.So we're getting a similar indication in terms of spread. And the 5-year mark is sitting at $460 million today. So all in, we're thinking it's going to be between 6.2% and maybe 6.4% depending on the day we price it. But so far, it's all been positive indications, and we feel very confident that this will come through over the next several weeks.

[Haendel St. Juste, analyst]

Great. I appreciate that color. And I think you guys talked about -- I think you'll see to responsibly raise the mills above the self-imposed caps where the loss release is sizable. So can you talk a bit about what portion of the portfolio today broadly meets the threshold and how high you're willing to go on pushing renewals for this?

[Gary Berman, executive]

Yes. So the way we think about the portfolio on proportion residents is essentially 45%, and we outlined this in the presentation. 45% have been with us for 1 to 2 years and 55% have been with us for 3 years plus. And we're going to continue to self-govern across the board, but we'll take 2 approaches to self-governing compared to 1 to 2 years and those that are 3 years plus. And what I mean by self-governing is we'll continue to set rents below market, slightly below market. The idea there is, obviously, to keep our residents in our homes, which lowers turnover and turnover expense and we've seen it drives NOI growth, but to take a more aggressive stance on self-governing with those who have been with us more than 3 years, right? So that will mean we will push through our caps. I'm not going to give any detail as to how that will work. But I think what's most important is we think we've got several years tailwind with us on renewal rent growth, but we'll be able to recapture that loss to lease.So when we talked about that $40 million revenue opportunity, we think we can recapture that over a few years. And it could very well mean renewal rent increases of about, let's say, 6% or 7% per year over the next few years. So that's in the current environment. Obviously, if there's an economic recession, things could change. But we think we could have industry-leading renewal rent growth over the next few years because of the sizable loss to lease that we can recapture.

[Haendel St. Juste, analyst]

And then one quick one, sorry. You mentioned the loss to lease, but do you guys -- or can you provide an estimate of what the earning is for next year?

[Gary Berman, executive]

Yes. The earn-in, as of today, the earnings’ 3%, I think if we factor in Q4 rent growth, it's going to be about 4% heading into 2024.

[Operator]

Your next question comes from the line of Stefan Stephen MacLeod.

[Stephen MacLeod, analyst]

Just a couple of questions here. Just thinking about the acquisition pacing for next year and with having Q4 coming down to that $250 million range, all self-funded. Just wondering if you can give a sort of a starting point for how you expect acquisitions to flow through next year given the timing of the new JV-3?

[Gary Berman, executive]

Yes. I mean we're not going to give guidance -- any kind of formal guidance today, Steve, for 2024, including on acquisitions. And obviously, the amount of acquisitions will really depend on the timing and the size of our next fund. But it's fair to say that once that fund gets formed, we will be able to ramp up acquisitions. And those acquisitions, certainly in the short term, could be funded on an all equity basis or low leverage basis. So I wish I could give you more detail, but just to say that you should expect acquisitions to ramp up next year.

[Stephen MacLeod, analyst]

Yes. Okay. No, that's very good. And then just when you think about -- I'm sorry, underlying organic acquisitions, what do you need to see in the marketplace to sort of unclog, or make the math work for acquisitions? Is it rates stabilizing? Is it rates coming down? I'm just kind of getting -- just trying to get a sense of what the goalposts you're looking for or you would need to see.

[Gary Berman, executive]

Well, I mean, the math already works, right? So it certainly works on a recycling capital program because we've been selling homes at, let's say, high 3 or 4 caps and taking that capital and reinvesting at 6 caps. So that works all day long. We can't do that forever. But certainly, we continue to recycle out older homes with higher CapEx into newer homes. So we're going to continue to do that. You'll see more of that this quarter Q4 and a little bit into next year.And then the other factor, it's not really the size of the market. The size of the market is still huge. Even though it's 25% smaller than last year, the opportunity to buy homes is still significant. The issue is really the cost of capital in an environment where, one, we don't have a fund, right? So we've now completed those funds. And two, when we do have a new fund, we need to make sure that it's a lower leverage vehicle, right? So it's just really the cost of debt. We don't like negative leverage. Our investors don't like negative leverage. But if you can buy homes at a 6 cap, which we're doing, and we think there'll be a significant opportunity to do that next year, and you can put on low leverage or even no leverage in some cases and then grow your NOI at 4%, 5%, 6%, we think that's a very compelling opportunity. So the opportunity is still significant, we just need to make sure that we align the capital structure with the opportunity, and that's the evolution that's taking place right now.

[Operator]

Your next question comes from the line of Mario Saric.

[Mario Saric, analyst]

My question is a broader one and it -- when it comes to Slide 12 of the call deck. And just looking at FFO year-over-year growth variances. And I appreciate on our 2024 guidance today, presumably going to do that with Q4 results next year. But just conceptually, if I look at all the puts and takes on this chart, operationally, things seem to be going as good as they've been in terms of NOI growth. Presumably on the performance fee, acquisition fee side, it can't get much worse on a year-over-year basis than it did this year, based on some of your commentary that I'm hearing in terms of SFR JV-3, the year-over-year comp in terms of the multi-family portfolio sale has gone and we'll see what the residential development operations look like.And then when we look at the interest expense, about 80% of your -- that, I think, has hit over caps. So they come up a little bit given where rates are today, but the $0.03 was quite meaningful during Q3. And then Sam touched on kind of lower corporate overhead expenses and the implementation there, $324 million. So higher level, is that kind of a reasonable way to think about it on this chart, the negatives kind of disappear, the positives are still there next year?

[Gary Berman, executive]

Yes, I think so. I mean I think it's a thoughtful question. I mean there is a lot to unpack there, and we want to be careful not to give any kind of 2024 guidance. But I think, Mario, what you could expect, and this is what's really exciting is that our interest expense profile is stabilizing, right? And if you think about the interest expense, it's basically doubled over 6 quarters. And we think as we head into 2024, that largely stabilizes per quarter. And if you're able to continue your overhead costs, which we talked about and we intend to do, then essentially any NOI growth, and we continue to think that's going to be very robust. It’s going to really drop to the bottom line. So that we think is super exciting. And so we go from a year where we've kind of been running to stand still and dealing with much higher interest expense to a year where it starts to look -- in 2024, things start to look a lot more positive. And I think as you layer on a new fund, that obviously means more -- obviously, more acquisition fees.And I think the other thing I would say is in the Same Home portfolio, we should also start to see more growth in ancillary revenue, right? So overall, I think you're right. 2024 is going to be a year where the positive should outweigh the negatives.

[Mario Saric, analyst]

Got it. Okay. And just my follow-up, just on the overhead on Slide 15 that Wissam was talking about noting the optimization has started happening over the last couple of months. How much of the expected optimization is already in your Q3 run rate numbers?

[Wissam Francis, executive]

I could take that, Mario. Very few are in the Q3 run rate numbers. They're really going to start seeing them come through in Q4 and really next year. Just to give you perspective, the reduction really spend multiple buckets, which is both NOI CapEx and overhead. So even though it's a 5% reduction in force, it's really not all in compensation expense. Part of it could be an NOI and overhead. So you're going to see it come through all the different buckets next year.

[Mario Saric, analyst]

Got it. Okay. That's my one with a follow-up, I'll turn it back.

[Operator]

Your next question comes from the line of Keegan Carl.

[Keegan Carl, analyst]

Maybe first, just wondering if you could provide an update on your plans to exit markets such as California and Southern Florida.

[Gary Berman, executive]

Yes, sure. So in Southeast Florida, we're nearly done. We've got about 60 homes left in Southeast Florida. So that should be done relatively soon. And I'm incredibly proud of the team because we've literally sold 600 homes over time, almost 1 by 1. So it's been a great result. And then in Southern California, probably take the better part of next year to dispose of the homes.

[Keegan Carl, analyst]

Got it. And then I guess maybe specifically on markets. I was a bit surprised with your Las Vegas performance since it was really strong compared to what some of your peers have been saying in the quarter. I'm just curious what would have driven this.

[Gary Berman, executive]

Kevin, do you want to take that?

[Kevin Baldridge, executive]

Yes. I mean, Las Vegas has been a strong market for us. We continue to see good in-migration. And although we took this summer and we felt the strength, and we decided to really push rents, so our lease trade-outs there were close to 9%. So we were able to harness that. Occupancy dropped a little bit, but it's -- now it's come back again. So it's just -- we have a really good revenue management team. We look at trends. We're comping every home. We were -- and then we'll put the house up on the market. We'll look at what's happening with applications, with leads, we'll adjust those rents. And so we're just really attentive to what’s going on with demand, seasonality, availability, and we do it on a home-by-home basis. So I mean, a testament to our revenue management team and how they're looking at the market.

[Operator]

Your next question comes from the line of Eric Wolfe.

[Eric Wolfe, analyst]

You mentioned that the interest expense should stabilize going into next year, just assuming rates stay somewhat flat from current levels. But given that you're able to sell homes at about 4% cap rates, I mean, why wouldn't you just do more then and pay off a significant percentage of your [indiscernible] debt since there's like a 250 basis point spread there. I realize there's going to be some tax implications, but I assume there are also some percentage of your homes with this less capital gain, where it might be efficient to do that. So just trying to understand why not just sell off more at a 4% cap on payout that 6.5%.

[Gary Berman, executive]

Yes. I think you're going to see us do more of that, Eric. That's what we're going to do. I mean we can't do that in perpetuity, right? You can't do that forever because we only really have that kind of 4% cap home in certain markets. It's not in all markets. So you have to keep that in mind. But yes, it absolutely makes sense to sell homes at 4 caps and take that capital and either pay down debt, or by the way, even potentially buy back our stock. So I think we've got a kind of a good cap -- I didn't talk about it, and answering kind of Mario's question. I think there's also a good capital allocation opportunity next year, where we can continue to sell homes at relatively high prices certainly compared to where our stock is trading and buy back stock or pay on debt.

[Eric Wolfe, analyst]

Got it. And I guess you mentioned that it's only available for some percentage of homes. Can you put that in context, sort of which markets are you able to sell at 4%? What's the difference between -- in the other markets, more like in the 5s or I guess, even the 6. Just trying to understand like what percent would sell at 4%?

[Gary Berman, executive]

Yes, it's more the coastal markets, right? So I mean, obviously, in California, we've got low cap rates there. We've got probably some low cap rate opportunities in Nevada, certainly in Southeast Florida, although we've worked through a lot of that. So it might be, I don't know, maybe another kind of 1,000 or maybe a couple of thousand homes, but that's probably the extent of the opportunity.

[Jonathan Ellenzweig, executive]

And I would just -- sorry, this is John. I would just also add, the nature of the dispositions we're making are really, in a lot of cases, homes we bought in 2012, '13, '14. And we might have been buying homes at $100,000 or $150,000 and now they've appreciated to $500,000 plus. So in many cases, the homes that we're selling are not exactly consistent with the type of homes we're buying today, which are more $300,000, $350,000 homes. And so there's been a bit of a shift, I would say, the type of homes we're selling versus what we're buying today, so.

[Operator]

Your next question comes from the line of Adam Kramer.

[Adam Kramer, analyst]

Just wondering, if you don't mind giving kind of the new lease kind of monthly figures for each month in the quarter. It'd be interesting to see how that trends over the course of the quarter.

[Gary Berman, executive]

In the Q4?

[Adam Kramer, analyst]

Q3. I know you disclosed October, obviously, in the full quarter, but just a monthly for Q3.

[Gary Berman, executive]

Kevin, do you have that available?

[Kevin Baldridge, executive]

For each month, I don't have it right now for each. If I can get back to...

[Gary Berman, executive]

Adam...

[Kevin Baldridge, executive]

Back to...

[Gary Berman, executive]

We can get it after the call. Yes. Yes.

[Wojtek Nowak, executive]

We'll get that after the call for you.

[Adam Kramer, analyst]

Yes. Maybe on the guidance. Obviously, you kept the FFO range intact, but there's been a modest lowering in the same-store NOI. I'm wondering if there's something you can kind of comment on that that's kind of the offset below the NOI line that keeps FFO – keeps the FFO range intact, just kind of the color on that.

[Gary Berman, executive]

Yes, absolutely. I mean we are going to get some contribution from obviously, SFR into Q4 over Q3. So that's part of it. But I think the big factor is we're continuing to see real strength in our legacy for sale housing business, and we expect that to continue from Q3 into Q4.And one thing I'll say is that in our master plans, many of them are very advanced. We're seeing higher home prices, higher assessed values, and that results in more bonding capacity. You might remember, Adam, that we use infrastructure bonds. In Texas they're called muds, to really finance and recover the infrastructure costs of these master planned communities. And when the assess value goes up, you get more bonding capacity and that additional bonding capacity essentially drops to the bottom line, it's just cash. So that means more cash coming back. You've seen that in Q3. You're going to see that again in Q4. And that also translates into higher performance fees, which you'll also see in Q4. So that should offset – now, if you're looking at your model, that's where the offset is going to come.

[Kevin Baldridge, executive]

I have the numbers that you asked for. So do you want them – you want the -- so the blended rent growth numbers for July were 72% in July, 68% in August and 65% in September, blended to a 6.8% for the quarter.

[Operator]

Your next question comes from the line of Jonathan Kelcher.

[Jonathan Kelcher, analyst]

Just on the JV-3, do you have a targeted size for that fund? And how much -- you said you're going to be committing less to that one, but how much your total targeted commitment that you're thinking about?

[Gary Berman, executive]

Yes. I can't -- I wish I could tell you that, John. I just can't. I can't share that right now. But obviously, we have an idea of how much we're going to raise. We're just not going to share it at this point. But I'll say this. The fund is going to be likely smaller than what we've done in the past because it's going to be size of the current opportunity, which is also smaller. There will probably be more than one close -- we're certainly going to use less leverage. We've been targeting the past leverage of 65% plus. That could be 50% or lower. So that's going to be a big change. And I would say our co-investment, instead of being in the kind of 1/3, might be closer to 20%, right, or 25%. So that's all I can tell you at this point. And hopefully, we'll be in a position to release details of that at the end of the year or early next year.

[Jonathan Kelcher, analyst]

Okay. And then secondly, just on the ERP system that you guys are implementing and had some costs in the quarter. What's the total cost of the project? And maybe give us some color on the benefits that you expect from it?

[Wissam Francis, executive]

So on the ERP implementation system, it's basically a new system that we're putting in to consolidate all of our GLs. The cost is -- could be, again, depending on all the things that we activated, could be about $7 million to $10 million full cost. You can see that run through. In Q3, it was a little higher. Again, you saw some of that come through in nonrecurring G&A. You're going to start seeing that dugdown probably by Q4, really getting into Q1 next year. Most of the investments has already occurred this year and including some last year, and you're going to see very little on the investment front going forward. What's going forward is really about creating efficiency and creating process improvement in the system. And you're going to see some of that process improvement occur next year as we finish the implementation and really focus on stabilization of the system.

[Jonathan Kelcher, analyst]

Okay. So that will be mostly in the G&A then?

[Wissam Francis, executive]

It could be – yes, partially yes, part of it would be in G&A, part of it would be really in compensation. What you're going to see is you're going to see as the company continues to grow, our overhead remains flat to stable to down. And that's why we're going to create the efficiencies that we talked about. Remember, our overhead is geared and we geared it towards 50,000 homes. And today, obviously, we're short of that target, and we're going to rightsize the company. As the company gets bigger, you're going to see less increases through the overhead line item.

[Operator]

Your next question comes from the line of Jade Rahmani.

[Jason Sabshon, analyst]

This is Jason Sabshon on for Jade. So for my first question, what proportion of your customer base is multi-family a substitute product? Or does the apartment demographic have little overlap? So in other words, although performance has been resilient thus far, are you seeing competition from multi-family supply and slowing rent growth in the Sunbelt?

[Gary Berman, executive]

I'll let John take that.

[Jonathan Ellenzweig, executive]

Yes. Jason, it's a great question. We see actually very little overlap. And as we survey our residents and look at where they're coming from, some of them might be moving out for multi-family, but in many cases, our residents aren't shopping multi-family.And if you think about the nature of both unit sizes as well as locations, for the families that are moving into Tricon's homes, it's not really a perfect substitute. Multi-family is often located in more, let's say, commercial oriented parts of cities or neighborhoods. And also schools tend to not be as strong as the homes that we're buying. And so when we're targeting school scores, let's say, in the 5, 6 or 7, you can't [ often ] find the same for multi-family with similar rents. So our residents are really looking at SFR only when we're shopping.

[Jason Sabshon, analyst]

Got it. And as a follow-up, does it make sense to weigh incremental capital deployment towards self-development communities and targeting a more opportunistic return or to continue acquisitions at a more moderate pace until economics become very attractive?

[Gary Berman, executive]

Probably, the latter. I mean, I think on a capital allocation, the best thing we can do as we talked about right now is our capital recycling program, which we're doing, debt repayment and probably buying back some stock. That's the right thing to do.On the development side, we're just not seeing the yields that make it compelling, right? We're buying homes off the MLS at a 6 cap. In order to make development, I think, [ pencil ] and make it compelling, we probably need a spread to that of at least 50 to 100 bps, and we're not seeing that, right? We're looking at a lot of build-to-rent deals. We just can't make the numbers work. So I think we're in an environment right now where development doesn't make a ton of sense. We have to be patient and acquisitions will be largely focused on existing homes when we raise the new funds, and also probably buying homes from builders.

[Operator]

[Operator Instructions] We'll wait another moment for more questions. All right. There are no further questions at this time. I'd like to turn the call back over to Gary Berman, President and CEO of Tricon Residential.

[Gary Berman, executive]

Thank you, operator. I would like to thank all of you on this call for your participation. We look forward to seeing many of you at the fall NAREIT conference and speaking with you again in February to discuss our Q4 and full year results.