Tricon Residential Inc

TSX:TCN

Earnings Call Transcript 2017-Q4

[Operator]

Good day. My name is Steve, and I'll be your conference operator today. At this time I would like to welcome everyone to the Tricon Capital Q4 Analyst Call. [Operator Instructions] Wojtek Nowak, please go ahead.

[Wojtek Nowak]

Thank you, Steve. Good morning, everyone, and thank you for joining us to discuss Tricon's results for the 3 and 12 months ended December 31, 2017, which were shared in the news release we 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. 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 you that all figures are being quoted in U.S. dollars unless otherwise stated. Please note that this call is available by webcast at triconcapital.com, and a replay will be accessible there following the call. Lastly, please note that during the call we 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, CFO of Tricon Capital Group.

[Wissam Francis, Executive VP & CFO]

Thank you, Wojtek, and good morning, everyone. Our prepared remarks this morning will include highlights of our quarterly results and a discussion of our various investment verticals. Starting on Slide 5 of our presentation, Tricon continues to deliver strong growth in 2017, with assets under management increasing by 55% year-over-year, to $4.6 billion. The biggest driver of this growth was the acquisition of Silver Bay in Q2, which added $1.4 billion to our Tricon American Homes AUM. During the fourth quarter, however, AUM remained fairly stable.On Slide 6 you can see that on an IFRS basis we reported diluted earnings per share of $0.19 for the fourth quarter, up 171%, compared to $0.07 in the same quarter last year. The biggest driver was Tricon American Homes' investment income of $45.7 million, which benefited from the Silver Bay acquisition, and strong fair value gains on the portfolio. This increase was partially offset by $18.7 million of transaction costs related to debt refinancing activities at TAH and a $13.4 million loss relating to the change in the fair value of the derivative embedded in our convertible debenture as our share price strengthened during the quarter. To provide a more normalized view of our performance we present the bridge to adjusted income metrics on Slide 7, which removes transaction costs and changes in the fair value of derivatives, as well as other nonrecurring and noncash items. On an adjusted basis we reported diluted earnings per share of $0.39, representing a 144% increase compared to $0.16 reported in the prior year. Diving deeper into these metrics on Slide 8 you can see that our adjusted EBITDA more than tripled year-over-year to $97 million, representing our strongest quarter since our IPO in 2010. The main driver was Tricon American Homes' adjusted EBITDA of $83.5 million, which includes 2 main components.The first was net operating income of $34.7 million, which increased by 118% year-over-year as a result of more than doubling our portfolio size, along with strong rent growth in the portfolio. TAH reported a record NOI margin of % for the quarter and 62.3% for the year, excluding the impacts of hurricanes. The second component was a fair value gain of $51.3 million for the quarter, driven by new BPOs completed for our 2017-2 securitization transaction, as well as home price depreciation of 1.4% this quarter, or 5.6% annualized, using the Home Price Index Methodology. Approximately 60% of the fair value gain came from BPOs completed this quarter, and most of the Silver Bay homes have now gone through their initial BPO valuations. In our other business verticals, Tricon Lifestyle Rentals saw positive growth year-over-year related to solid fair value gains as a result of increased land values and development milestones achieved throughout the year. This was offset by lower adjusted EBITDA from Tricon Housing Partners as certain active-adult projects underperformed our expectations and investment balances declined as a result of ongoing cash distributions from legacy investments. Gary will elaborate further on this in the call.Moving down the income statement, compensation expense was lower this quarter. We typically accrue annual incentive plan expense based on 15% of EBITDA for bonus purposes. However, the actual amounts paid are based on corporate departmental and individual performance. On a full year basis, AIP worked out to be 9% of EBITDA for bonus purposes, resulting in a true-up in the fourth quarter. Lastly, interest expense increased this year mainly as a result of the incremental debt and convertible debentures used to finance the acquisition of Silver Bay, and our income tax expense was also higher as a result of higher pretax earnings. The overall result was a 216% increase in adjusted net income this quarter to $59.5 million, compared to $18.8 million in the prior year. To wrap up our financial overview I'd like to discuss our leverage and liquidity position, starting with our refinancing initiatives at Tricon American Homes on Slide 9. Given that a large part of Silver Bay transaction was funded with short-term floating rate warehouse facility, our priority was to put in place a series of debt instruments that extended the term structure, reduced TAH's cost of debt over the long term, introduced new sources of financing, and diversified across fixed and floating rate instruments. Following the Silver Bay acquisition, TAH successfully completed 2 securitization transactions and a first-of-its-kind loan in the SFR industry. With these financings in place, TAH extended its weighted average maturity from 2.5 years to 4.2 years and increased the percentage of fixed-rate debt to 63% of the total, with a near-term goal of approximately 80% fixed-rate debt once the remaining Silver Bay debt is refinanced. Also, following the disposition of noncore homes in the fourth quarter, TAH reduced its loan-to-value ratio to 65.8%, a 4.1% decrease since Q2 2017. And lastly, TAH's cost of debt has been reduced by about 60 basis points since the acquisition, to a blended rate of approximately 3.73%. Turning over to Slide 10, from an overall corporate perspective our liquidity position remains flexible, with $203 million available under our revolving credit facility at the end of Q4. In terms of cash flow visibility, at the time of the Silver Bay acquisition we outlined 4 key sources of near-term cash flows intended to further reduce our debt levels. The first initiative was completed last quarter with the disposition of noncore homes at TAH generating $153 million of gross proceeds used to repay TAH's short-term debt. The second and third initiatives are the planned dispositions of TLC this year and TLR US in 2019, both of which remain on track. Lastly, projected near-term cash distributions from THP included approximately $120 million from THP1 US over the next 2 years also remains on schedule. As such, we expect to have significant flexibility to invest in attractive growth opportunities while reducing overall debt levels. Lastly, in terms of our overall capital allocation, in Q4 we reactivated our normal course issuer bid and have since bought back approximately 1% of our stock. We believe that the market price of our shares may not always reflect their true underlying value, and when you see the shares trading at a meaningful discount to our internal value we will take the opportunity to allocate some capital to buying back our stock. We also announced an 8% increase in our dividend, from $0.065 per quarter to $0.07 per quarter, given our strong visibility into cash flows and the increasing proportion of recurring cash flow within our company. With that, I will now turn the call over to Gary to provide additional insight into the performance of our business verticals.

[Gary Berman, President, CEO & Director]

Thank you, Wissam. 2017 was a pivotal year for Tricon as we set out to simplify our business model, make our earnings more predictable and build scale in our core investment verticals. A major catalyst in this regard was the $1.4 billion acquisition of Silver Bay Realty Trust, and so let me provide an update on the progress we've made integrating the portfolio on Slide 12. First, we said we were going to increase Silver Bay's NOI margin by 200 basis points to bring it in line with TAH's margin. Recall that for the full year of 2016 Silver Bay's NOI margin was approximately 58% and TAH's margin was 60%. We've meaningfully surpassed our goal and brought the consolidated portfolio NOI margin to 64.4% for the quarter and 62.3% for the full year, excluding the impact of hurricane-related expenses. Second, we plan on reducing combined G&A expense by $10 million by eliminating Silver Bay's public company costs and other duplicate corporate expenses. These G&A synergies are on pace to be realized by mid-2018 as transitional consulting arrangements roll off. Our third goal was to prune noncore assets that did not fit our middle market strategy or geographic footprint, and in October TAH disposed of 1,500 noncore homes well ahead of schedule and in line with our book value.Lastly, we set out to implement a more efficient capital structure at TAH through a series of refinancing transactions, which is substantially completed, as Wissam discussed earlier. At this point we can safely say that the acquisition and integration of Silver Bay has been a resounding success and the combined platform solidifies our position as one of the leaders in the burgeoning single-family rental industry while making our cash flows more predictable. On that note, let's zoom in on the fourth quarter performance at Tricon American Homes on Slide 13. TAH achieved very strong operational results this quarter, with core FFO of $12.8 million, increasing by 161% from the prior year. Underpinning this figure was TAH's net operating income of $35.5 million, excluding the impact of hurricanes, which increased by 123% year-over-year and was largely driven by revenue growth of 106%, primarily as a result of the Silver Bay acquisition. TAH's NOI margin was a record 64.4% for the quarter, excluding the impact of hurricanes. Although the Q4 margin tends to outperform the balance of the year as a result of seasonal factors, rent growth and cost containment also factored into this metric. Specifically, TAH continued to see very strong rent growth of 4.4% on a blended basis, comprised of 5% growth in new move-ins and 4% growth in renewals. On the cost side in the fourth quarter, R&M and turnover expense as a percentage of revenue decreased by 193 basis points year-over-year, aided by TAH's internalization of R&M, which is now in place across all markets, as well as our effort to more tightly manage the scope of repairs when turning a home. This was achieved while maintaining a resident turnover of 27.6%, or 29.6% for the full year, which remains an industry-leading metric. As we've noted in the past, Q4 is typically a strong quarter for NOI margin as a result of low turnover during the holidays and lower seasonal repair and maintenance expense, in particular air conditioning repairs. In addition, we typically conduct year-end accounting [indiscernible] for items such as property taxes, which are accrued throughout the year based on estimated payments and adjusted when bills are received and actual payments are made. With that in mind, we prefer to look at NOI margin on a full year basis, and for 2017 TAH achieved a margin of 62.3%, excluding the impact of hurricanes, a full 270 basis points ahead of last year.Turning to Slide 14, we show TAH's same-home portfolio metrics, which capture the results for rental homes that have been stabilized for at least 90 days before the start of the prior year. Given the quarterly variations I just mentioned, let's focus on the full year same-home metrics, which are more representative of overall trends in the portfolio. For 2017, same-home revenues increased by 7.2% and expenses grew by 2.2%, contributing to same-home NOI growth of 10.6%. The increase in operating expenses is largely a result of higher property taxes, as property values continue to rise in the Sun Belt markets. The roughly 8% increase in property taxes was offset by a reduction in R&M and turnover expenses as well as property insurance expenses. These factors contributed to a same-home NOI margin of 61.7% for the year, a 180 basis point increase from the prior year and comfortably ahead of our expectation of 60%. Looking ahead, we remain very excited about the prospects for single-family rental as an asset class and TAH as a leader in the middle market space. Let me share with you some of the initiatives we are focusing on in 2018 to grow TAH and further enhance our returns. First, TAH has now resumed its acquisition program, with a goal of acquiring 400 to 500 homes per quarter. Turning to Slide 15, TAH will focus on 10 growth markets where homes can be acquired at attractive blended cap rates of approximately 6% and where we see opportunities to drive operating efficiencies through increased scale. You can see some examples of recently acquired homes on this slide. Second, TAH is positing build-to-rent as another potential avenue for growth. If you flip to Slide 16 you can see some of the benefits that are becoming apparent as we explore this avenue. From an operating perspective, build-to-rent allows us to install a full suite of standardized TAH finishes from the outset, reduce repair and maintenance costs in initial years, and make these homes easier to maintain.Over time we also expect to customize homes to eliminate floor plan inefficiency and improve accessibility for repair and maintenance technicians. On the surface, these homes may be more expensive than what we can currently buy through the MLS in a similar location, but we expect that the rent would be commensurately higher, and as we flesh out the economics we are penciling to launch some returns that come very close to what we achieve from organic acquisitions, with more certainty around operating costs. To date we have piloted this concept by buying a small portion of a new subdivision, but we're also evaluating the opportunity to acquire full communities of purpose-built single-family rental homes in our target markets, an experiment that is still in its infancy, but if proven out could represent a large growth opportunity within this dynamic asset class. To be clear, we are piloting build-to-rent on a very small scale at this point and want to ensure that this concept works in reality before we launch a more comprehensive program. Finally, we are very excited about the numerous technology initiatives being rolled out at TAH as shown on Slide 17. TAH recently hired its first data scientist and is in the early stages of putting together a revenue management tool that will help optimize rent growth, turnover and occupancy. The SFR industry is still in the early stages of implementing revenue management, and if we look to the multifamily sector as a point of reference we should be able to achieve revenue growth that is above the underlying market growth rates. In addition to revenue management, TAH is piloting smart-home technology encompassing a suite of sensors that can be used to monitor, among other things, moisture levels and air temperature. These tools will help us spot potential water leaks and air conditioner breakdowns as soon as they occur and fix them before the problems exacerbate. And lastly, TAH is exploring the use of drones to monitor roof conditions as well as 3D imaging as a surveying and marketing tool. In summary, 2018 should be another exciting year for TAH, with ample runway for growth, operational improvements and technological innovation. Let's now turn to Tricon Housing Partners, or THP, our land and home-building business, on Slide 18. THP generated investment income of $1.2 million this quarter and $18.2 million for the year, which translates to a 7.4% annualized net return on invested capital and is below our expectation of 9% to 11% annual return. As a reminder, our investment income under IFRS accounting is a function of realized cash flows as well as changes in fair value that are largely driven by discounted cash flow models or annual appraisals, typically refreshed at year end. In the fourth quarter investments in 3 active-adult community developments recorded fair value losses as a result of budget updates that reflected reductions and delays in future cash flows. These unfavorable updates are primarily a result of slower absorption due to increasing competition in the active-adult segment. A second factor is labor cost pressures, which we've spoken about in the past. We continue to work with our development partners to fully reflect these dynamics in their budgets. The last contributing factor was a delay in the opening of the amenities and clubhouses within our communities, which typically help to drive sales. Following the grand opening of amenity centers and clubhouses at Trilogy Lake Norman and Trilogy at Verde River in late 2017, both communities have experienced stronger traffic and sales volume so far in 2018, which increases our confidence in the future performance of these investments.We also took a downward vision on the Arantine Hills budget this quarter as a result of delays in permitting, lower lot prices and slower absorption assumptions given current market trends in the Inland Empire, which has taken longer to recover than the Coastal California markets. These 4 projects had a negative impact in Q4 THP investment income, as reflected in the side-car separate accounts and THP2 US investment vehicles.At the other end of the spectrum, our Texas communities are performing very well and are more reflective of strong underlying fundamentals in the broader U.S. housing market. On Slide 19 you can see third-party home sales as an indicator of consumer demand for our Johnson-managed communities reflecting a 16% increase for 2017 as a whole, whereas the Q4 year-over-year increase was 25%, including some catch-up activity following the hurricanes. While this is not necessarily apples to apples given the changing mix of communities, we see year-over-year sales remain directionally positive, with 2018 getting off to a good start so far. We believe Johnson's results, driven by strong local market fundamentals as well as thoughtful product segmentation and compelling builder programs. Notwithstanding the poor performance of our active-adult communities, we feel good about the housing fundamentals across our target U.S. markets and the overall prospects for THP. This vertical will continue to be a major driver of cash flows for Tricon, as it has been in the past. In 2017 THP distributed approximately $35 million of cash back to Tricon, and we expect approximately $600 million of net distributions from THP over the next 8 to 10 years. Moving on to Tricon Lifestyle Rentals, our multifamily development and rental vertical and formerly known as Tricon Luxury Residences but still called TLR, at TLR we continue to make progress on the development of 3 Canadian and 2 U.S. projects. If you flip to Slide 20 you can see the construction status at The Selby, which is officially topped out, with brick and window installations tracking ahead of schedule. The project is expected to commence leasing in the second half of 2018. The Bloor East noted some strong leasing activity, and the average rent is tracking around $3.50 per square foot, well above our underwriting assumption of roughly $2.90 per square foot.At our second development, 57 Spadina, design development is substantially completed, and onsite demolition commenced last month. Our third development at Scrivener Square remains in the design stage.As we advance these projects there is much work being done behind the scenes on the consumer-facing brand and service offering. To start, we are proud to introduce Tricon House, TLR's consumer-facing brand umbrella for individual projects. Take The Selby as an example. The renderings on Slide 21 give you a sense of the customer experience.The Selby's reimagined rental lifestyle includes a modern main floor lobby meeting space with concierge services, an elegant outdoor swimming pool with a lounge deck on the second floor, a full-service bar and bistro in our beautifully restored historic mansion, and a welcoming games from the home theater on the second and third floors, as well as an outdoor kitchen and lounge area with barbeques on the fourth floor. Our mandate is to invest in communities and to build diverse neighborhoods that put people first and foster lifestyle that inspires comfort, connection and a sense of longing. This is the Tricon House brand promise that we plan to deliver on each of our TLR projects. Looking forward, our focus remains on building out a leading Class A multifamily portfolio in Canada under the Tricon House brand. We're tracking an active pipeline that includes 3 to 5 large opportunities that will give us a meaningful path to scale. While competition from counter-developers remains intense, we are pursuing sites that are designated specifically for rentals by the municipal and provincial government as well as sites owned by private investors wishing to partner with experienced developers like Tricon to develop underutilized sites. Given our in-house expertise in multifamily development, we are very well positioned to execute on our growth plan for TLR, and given the strong demand for core assets by institutional investors we expect third-party capital to play a meaningful role in TLR's growth strategy. Lastly, let's take a look at Tricon Lifestyle Communities, our manufactured housing land lease business, on Slide 22. We reached total occupancy of 86.5% in 2017 and a record occupancy of approximately 90% in January 2018. We've recently launched a sales process for the portfolio with a broker, reaching out to approximately 100 potential buyers. To date we've received 40 signed confidentiality agreements and are in advanced discussions with numerous bidders who are participating in our final round process. The level of interest gives us confidence that we can achieve a sales price above our carrying value and also validates our decision to exit the business, given the highly competitive environment for assets. To sum up, 2017 was a transformative year for Tricon, as the acquisition and seamless integration of Silver Bay, coupled with strong operational execution and support of housing fundamentals propelled the company to record results. I'd like to conclude with Slide 23, which gives you a holistic view of how we think about our diversified housing brand from a risk/return perspective and how we position our business verticals when speaking to third-party investors. Private funds and advisory has always been a core aspect of our business, allowing us to gain scale by leveraging third-party capital, and we intend to use this strategy to proactively grow all of our business verticals going forward and to create shareholder value with efficient use of our balance sheet. A diversified platform allows us to offer institutional investors a suite of opportunities ranging from opportunistic to value add to core plus, which would not have been possible without first proving out these investments using our own balance sheet, as we've done over the past few years. And so as we set our sights on a target of $10 billion of AUM within the next 5 years, we expect third-party capital to play a meaningful role in getting us there. The strong market fundamentals continue to serve as a backdrop for our housing-centric investment strategy, and we see tremendous opportunity to add scale in all of our core verticals. With that, I will pass the call back to Steve to take questions, and we'll be joined by other members of our senior management team, including Jonathan Ellenzweig, Andy Carmody, Andrew Joyner, and Kevin Baldrige.

[Operator]

[Operator Instructions]Your first question comes from Dean Wilkinson, with CIBC World Markets.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Gary, on the TLR vertical, the gain that came in the quarter, was that just largely around a mark-to-market adjustment on the underlying land value of The Selby?

[Wissam Francis, Executive VP & CFO]

Dean, it's Wissam. No, it wasn't just The Selby. It was actually all 3 properties contributed. Remember, what we do is we do year-end appraisals for active projects. That's 57 Spadina and The Selby. 57 Spadina and The Selby, for 57 Spadina it increased because of land value, but The Selby increased because of cost to complete, so meaning as we get closer to completion you expect the value to go up over time based on actual costs incurred.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

So could we infer from that, perhaps, then, that when you hit substantial completion on that there is actually going to be a larger markup that's probably coming in that vertical?

[Wissam Francis, Executive VP & CFO]

Yes, we can.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Would that come on completion or lease-up?

[Wissam Francis, Executive VP & CFO]

It's 2 different stages. So you'll get a small chunk of it on lease-up, because as you de-risk the project. Then you'll get another piece on completion as you further de-risk the project.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay. Makes sense. And then just turning to the SFR business, the 64% margin obviously very strong. Was any of that impact as a result of the assets that you sold, sort of the lower rent properties? And when you look forward and you sort of roll those out, roll technology in, do you think that that's probably a sustainable annualized margin, or do you think you could maybe even get it better from there?

[Gary Berman, President, CEO & Director]

I think the sale of the noncore assets definitely helped the bid, but it was clearly not the major driving factor of the margin, Dean. The other thing I would say is that 64% is a terrific print that, remember, this is a seasonal business, and we would really guide you more to look at the full year, where the margin was 62%, not 64%. So look, we feel great. We don't provide guidance on the margin. We feel great about the business. We feel we can continue to drive revenue growth. We're seeing very strong demand for all of our products. So I think we've got very good visibility into being able to continue to increase rents, and I think we can continue to get a little bit better on our cost containment. I mean, remember, property taxes have been a major drag. When those start to come more into line, it'll help the margin, and we continue to get better and better at R&M. So I think we're optimistic about our ability to drive higher margin in the future, but we're not guiding it specifically.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Okay, fair enough. That's helpful. Last question for me, Wissam, on the derivative liability loss, the $13.4 million, does that, like the mechanics of that, would that reverse on sort of a flat stock price or a down stock price, or can we think of that basically like the Peterman one, that once that ball's gone it's gone?

[Wissam Francis, Executive VP & CFO]

Yes, so you could think of it as your stock price increases your derivatives becomes a negative, becomes a loss. And as your stock price decreases your derivative is a positive. It will revert to the mean at the time of when the convert actually matures. So over time it'll start converting towards the price floor down to zero over the maturity period.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

Right. So we could expect that to ebb and flow, kind of. It's going to be pluses and minuses over the course of [indiscernible].

[Wissam Francis, Executive VP & CFO]

It's 100% correlated to the change in share price from quarter to quarter.

[Dean Mark Wilkinson, Director of Institutional Equity Research]

And there's not an asymmetry that it only goes one way.

[Wissam Francis, Executive VP & CFO]

No, I hope so, but no.

[Operator]

Your next question comes from Jonathan Kelcher, with TD Securities.

[Jonathan Kelcher, Analyst]

Just going back to the property taxes, 8% is a pretty good jump year-over-year. What sort of -- what are you expecting for 2018 on that front?

[Gary Berman, President, CEO & Director]

Jon, do you want to talk to that?

[Jonathan Ellenzweig, Managing Director]

Sure. So regarding property taxes these are really correlated to home price appreciation. So if you saw this quarter and this year, we benefited significantly from the HPA, but as an offset to that you see a growth in property taxes. So I think it's really going to be based on what you assume home price appreciation will be in 2018, and you'll see similar property tax growth. I would also note that we have a property tax advisor that we use to monitor and challenge and help forecast property taxes, and they've been very successful this year. So we're making every effort possible to contain those, but really it's going to be based on the market and where homes go.

[Jonathan Kelcher, Analyst]

Okay. Now would that be your biggest noncontrollable cost for the TAH business?

[Jonathan Ellenzweig, Managing Director]

Yes.

[Gary Berman, President, CEO & Director]

Yes. Yes. That's right.

[Jonathan Kelcher, Analyst]

Okay. And then just sticking there and looking at the FFO on that, there's been a lot of transaction and nonrecurring costs, I guess almost all related to Silver Bay, the last 3 quarters. When do you expect that to really settle down and get a real good run rate there?

[Gary Berman, President, CEO & Director]

Yes, I think it's probably the second half of the year, Jon, because remember we have another securitization transaction coming up, which will probably be a Q2 event, and there'll be more transaction costs related to that. We'll be largely through Silver Bay, as we said, in the first half of the year. So I think run rate, you'll start to get a better sense of run rate probably in Q3, Q4.

[Jonathan Kelcher, Analyst]

Okay. And then just lastly on the THP, what's the pipeline there for any new projects? What are you hoping to do this year?

[Gary Berman, President, CEO & Director]

Yes, I mean, we're remaining opportunistic. I think it's a business. We would say if you grow for growth's sake you could really run yourself into a wall. And so we feel no pressure to grow the vertical. We really only want to take on opportunities that are incredibly compelling. We looked at a couple this last quarter where we bid on, I think, what were compelling master plans, but we lost that on the bid process. So those, again, we remain disciplined in terms of return requirements, and we're looking at a couple of others, but it's hard to say whether we'll hit them or not. We've got about 3 or 4, I would say, large MTCs in our pipeline, but it's just hard to know whether we'll be able to acquire them based on the process.

[Jonathan Kelcher, Analyst]

Okay. And 9% to 11% would be fair for this year, back to that?

[Gary Berman, President, CEO & Director]

Yes, we think so. Yes, I mean, we had a disappointing quarter this year for the active-adult projects on the mark to market, but we're off to a very strong start of the year. In fact, our sales at those projects are nearly double our budget. So we're hopeful that we'll get back on track in 2018.

[Operator]

Your next question comes from Stephen MacLeod, with BMO Capital Markets.

[Stephen MacLeod, Analyst]

Just looking at the securitizations you have planned for Q2, is it fair to say that the fair value gain would be more modest than what we've seen over the last couple of quarters? Like is it -- did I understand correctly, are all the Silver Bay homes now done?

[Gary Berman, President, CEO & Director]

No, yes, yes, I think that's a fair assessment. I mean, we've got roughly -- and the next securitization will be roughly 2,500 homes, and of those about 900 are Silver Bay. So we still have about 900 Silver Bay homes to come. So we do expect another increase, but it should be more measured than what we've seen in the past.

[Wissam Francis, Executive VP & CFO]

Correct, and then I just want to add to something Stephen said. Even though we're targeting a securitization transaction, we're also looking at other options around financing as well. But from the BPO perspective it will be the remaining homes that haven't been financed yet.

[Stephen MacLeod, Analyst]

And then just on turning to the THP business, did some of those challenges that you highlighted in Q3, did those really deepen in Q4? I'm just wondering if you can give a bit of color around what some of those headwinds were and whether they have continued into the first quarter of 2018.

[Gary Berman, President, CEO & Director]

Yes, sure. Well, look, I mean, I'd say this about active adult. It's become a bit of a crowded bet. And I think we understood why we made the investments. We thought demographically it looked very positive for the active-adult sector. We also felt that if we focused on the more premium product with more affluent baby boomers we'd do well there. And part of that proved out. If you actually look at the metrics, active adult has taken a higher percent of the overall new home sales market share post-Great Recession than pre-Great Recession. What we didn't recognize or appreciate is how much competition would ultimately come. And so essentially everyone had the same idea. And so we continue to see more and more competition. I mean, just to use a high-level example, when we underwrote these deals we probably thought we might have 1 or 2 or 3 competitors. In some cases we have 8. And all the big public builders have launched into active adult. And so in the case -- if we thought, let's say, we were going to achieve 125 sales or 150 sales, they ended up being, let's say, closer to 100. And that just means that it takes longer to sell through the project and therefore you have to take -- the way we report fair value and through our appraisals you have to take a write-down. So it's very much a time-based metric. We've known, Steve, obviously for a few quarters that our sales were lower than what our budget was. But because of the valuation process for some of these separate accounts and side-cars they only get done through our year-end appraisal, where you can have a big change positive or negative. I think going forward we'd like to have appraisals probably a couple of times a year so it's steadier. I mean, no one likes surprises. I mean, we could deal with positive surprises, but really no one likes negative surprises, especially us. And so we're going to try to find a way to kind of steady the valuations for some of those side-cars and separate accounts. Having said all of that, we're off to a very strong start to the year. As I said in my last comments, our sales at these 3 active-adult communities are probably double what our budget has been. It's hard to know exactly why that is. First of all, I think the housing market in general has got off to a good start of the year, maybe on optimism around the economy and tax reform. It's also quite possible that in completing our major amenity centers, which were delayed, that's also -- and these are state-of-the-art amenity centers have really started to drive sales and provided the consumer with more visibility and confidence of the projects. So we're off to a very strong start. If this were to continue, and by no means does 2 months make a trend, we could see ourselves writing up these assets in the future.

[Stephen MacLeod, Analyst]

And then just finally, just turning back to the TAH business, you've had very strong NOI margin performance over the last, well, through 2017 clearly. Are you comfortable giving sort of an outlook for what your next target might be, or what your next aspirational target might be?

[Gary Berman, President, CEO & Director]

We don't really believe in guidance. I mean, we guided the market to 60% on TAH largely because of the Silver Bay acquisition and trying to allow the market to understand the integration and how to model it on a pro forma basis. But apart from that, I mean, we prefer not to provide guidance. I would just say that the fundamentals for the business are excellent. They seem to be continuing. We achieved 62% for the full year, excluding the hurricanes, and obviously we feel very good about that. And if I had a bias I would say it's to the upside rather than to the downside on margin.

[Operator]

And your next question comes from Mark Rothschild, with Canaccord.

[Mark Rothschild, MD & Real Estate Analyst]

Most of my questions have been asked already, but maybe you could just talk about you clearly have some plans of being active in growing the SFR business and buying homes and developing. Could you talk about the availability of homes to buy and of whether it's smaller portfolios, even larger portfolios in the market? How easy is it to find assets at prices that would be accretive?

[Gary Berman, President, CEO & Director]

It's easy is the quick answer. I mean, we're buying 400 to 500 homes per quarter. We're actively buying those today. We bought 116 Q4 to start getting ready. We're buying at 6% cap rates. We have no issue. I've always said it's not difficult to acquire homes. It's much harder to manage them. And so in the volume that we're trying to buy, we don't have any issue hitting those targets, and even in a relatively tight MLS market we think we can continue to do that for many quarters to come.

[Mark Rothschild, MD & Real Estate Analyst]

So would there be portfolios, as well, that you're able to buy? Like could this just be a more active year?

[Gary Berman, President, CEO & Director]

Yes, I mean, we always look at portfolios, but I will say that our acquisition pipeline really just focuses on onesie-twosie acquisitions. If we're able to buy portfolios, that's really gravy. There are situations where sometimes we can buy 10- or 50-unit portfolios, but, again, the 400 or 500 per quarter metric is based on onesie-twosies. And so if we can go faster we certainly will look at it. There are other larger portfolios out there. There are many private equity companies that own 1,000 or 2,000 or 3,000 homes. Those will ultimately come to the market, and if those opportunities make sense we'll look at them as well.

[Mark Rothschild, MD & Real Estate Analyst]

Okay, great. And my only other question, you finished off your presentation talking about the goal of getting to $10 billion of AUM, with a lot of that being third-party capital. You have parts of your business such as the Tricon American Homes, I don't know if you'd consider that third-party capital. You're really using your own capital. So which areas do you see the biggest opportunities to grow dramatically using third-party capital? Is it in THP?

[Gary Berman, President, CEO & Director]

It's all the verticals, but in order to get to the $10 billion of AUM we'd have to bring third-party capital into TAH or SFR. And we've been educating the pension plan community on this asset class for a couple of years. I think it's starting to become increasingly accepted by institutions. And so we think it's just a matter of time before ultimately institutions will start to embrace this as an asset class. And so the goal really is, I mean, we've been bringing third-party capital into the development verticals, but we'd really like to bring third-party capital into every business we're in in order to leverage our own capital and generate higher returns for our shareholders.

[Operator]

[Operator Instructions]And your next question comes from Himanshu Gupta, with GMP Securities.

[Himanshu Gupta, VP & Equity Research Analyst]

Gary, you mentioned that home building has been off to a good start. How is the single-family rental business doing? What are your thoughts on the spring leasing season? Any data points on demand in January or February, if you can share any data points in terms of content or volumes or any other website inquiries just to get a sense of the activity in the year so far?

[Gary Berman, President, CEO & Director]

Sure. I'm going to hand it over to Kevin. Kevin, can you take that for Himanshu?

[Kevin Baldridge]

Sure. Yes, we've seen renewed activity. Usually the demand falls off, obviously, in November/December because of the holidays. And so what happens is we see generally in January and February a pent-up demand that comes out. And so we've -- occupancies have remained robust, but we look at availability as a sign for future occupancy. Our availabilities in the stabilized portfolio are still in the mid-5s, 5.5, 5.7, which shows our occupancies will remain strong going into the next couple of months. And our rent growth continues to be robust. We're going to -- the first couple of months, and even in January rents continue to meet or exceed what we experienced in the fourth quarter. And our website, the demand is back up to where it was late in the third quarter. So we've seen the seasonality starting to come around as we have in the prior years.

[Himanshu Gupta, VP & Equity Research Analyst]

On the single-family rental business, do you track same-property NOI growth for the Silver Bay portfolio? I mean, is the performance very similar to Tricon, 10% year-over-year? And have there been any surprises since your acquisition or any areas of opportunity for margin expansion here?

[Gary Berman, President, CEO & Director]

Yes, I mean, we don't track it per se, and if we did we probably couldn't tell you what it is. But what I would tell you is that if you look at the rent growth, and, remember, the rent growth for the quarter was 4.4% blended, 5% on new move-ins, 4% on renewals, the numbers on our TAH legacy portfolio were slightly lower. So if we were 4.4% blended maybe we're 4.2% or 4.3% for TAH and higher on the Silver Bay portfolio. And so that reflects certainly some loss to lease. That is closing a bit, but one of the reasons we're able to continue to drive strong rent growth is because of the loss to lease on Silver Bay. And as Kevin alluded to in his last -- in his remarks, that is continuing.

[Operator]

And there are no further questions at this time. I now turn the call back over to the presenters.

[Gary Berman, President, CEO & Director]

Thank you, Steve. I would like to thank all of you on this call for your participation, and we look forward to speaking to you in May when we discuss our first quarter results for 2018.

[Operator]

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