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Tricon Residential Inc
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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 results analyst call. [Operator Instructions] Wojtek Nowak, Managing Director of Capital Markets, please go ahead.
Thank you, Steve. Good morning, everyone, and thank you for joining us to discuss Tricon's results for the 3 months and year ended December 31, 2018, which was shared on the news release distributed yesterday. I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. For more information please refer to our most recent management discussion and analysis and annual information form, which are available on SEDAR and our company website. Our remarks also include references to non-GAAP financial measures which are explained and reconciled in our MD&A. I would also like to remind everyone that all figures are being quoted in U.S. dollars unless otherwise stated. Please note that this call is available by webcast at triconcapital.com, and a replay will be accessible there following the call. Lastly, please note that during this call, we will be referring to a supplementary conference call presentation posted on our website. If you haven't already accessed it, it will be a useful tool to help you follow along during the call. You can find the presentation in the investor information section of triconcapital.com under Events and Presentations. With that, I will turn the call over to Wissam Francis, EVP and CFO of Tricon Capital Group.
Thank you, Wojtek and good morning, everyone. 2018 was a year of many accomplishments for Tricon, both financial and operational. From a financial perspective, we had a strong fourth quarter as seen on Slide 3, with diluted earnings per share of $0.23 compared to $0.19 for the same period last year, an increase of 21%. Our IFRS results, as usual, include nonrecurring and noncash items that had a significant negative impact on last year's figures, including expenses related to our 2017-2 securitization transaction and a $13.4 million derivative loss related to our convertible debentures, compared to an $8.6 million gain in the current period. After removing these items as you can see on Slide 4, we reported adjusted diluted earnings per share of $0.30 compared to $0.39 last year. We also reported adjusted EBITDA of $80 million compared to $97 million in the prior year. The main reason for the negative year-over-year variance was a fair value gain at Tricon American Homes, which was $25 million this quarter as compared to $51 million in the same year -- in the prior year period. This alone accounts for the majority of the year-over-year variance in Tricon's adjusted EBITDA. You will recall that after the acquisition of Silver Bay, TAH recorded a significant fair value pickup in Q4 of 2017. With that said, Home Price appreciation in Q4 2018 was approximately 1.4% for the quarter, which remains strong and ahead of long-term averages. A second, albeit smaller factor, was the remover of TLC manufactured housing vertical from our result, as the portfolio was sold in mid-2018. If we exclude the TAH fair value gain and the disposed TLC operation, our adjusted EBITDA was actually up 24% year-over-year. Driven by record results of Tricon American Homes, Tricon Lifestyle Rentals and Private Funds and Advisory.Let me highlight a few positive factors: The first was strong growth in Private Funds and Advisory revenue, which increased by 39% year-over-year to $9 million. This was driven by incremental fee revenue from TAH joint venture and additional development fees from TLC -- from TLR related to new development projects started during the year; the second factor was a $7 million or 19% increase in net operating income at TAH, driven by increased home count, strong rental growth and improved cost containment across the portfolio; the third was higher adjusted EBITDA from TLR, which increased to over $11 million versus $9 million last year. This reflects higher fair value gains for TLR Canada projects driven by The Selby nearing substantial completion and The Taylor achieving its development milestones; lastly, adjusted EBITDA from Tricon Housing Partners increased year-over-year to $2.5 million versus $1.4 million as a result of smaller fair value losses compared to the same period last year. This business vertical continued to face challenges from higher construction costs, delayed timelines and lower-than-anticipated sales volumes throughout 2018. Moving down the income statement, our corporate overhead expenses were generally similar to last year with some puts and takes, including lower compensation expense under a new bonus structure as more of the conversation is now deferred, as well as higher G&A and interest expense as the company grew in size. Let's turn to Slide 5 to discuss our balance sheet and cash generation. Our corporate leverage as measured by debt to assets is currently 11% excluding convertible debentures. This leverage ratio is an important metric as we -- that we track as it captures the recourse debt of the parent company. Aside from this, we have primarily nonrecourse debt within our various business verticals, most notably at Tricon American Homes. At TAH, the current leverage ratio is 59% net debt to assets, this is significantly lower than the 66% reported at the end of last year, reflecting more active efforts to reduce leverage following the Silver Bay transaction. In addition, since last year, the proportion of fixed-rate debt has also increased to 73% from 63%, aided by a fixed rate securitization transaction completed in early 2018. This has greatly reduced THS's sensitivity to interest rate swings. For example, over the past year, the one month LIBOR has increased 79 basis points, whereas THS weighted average cost of debt remained flat for the course of 2018. Going forward, we continue to have strong visibility into numerous sources of cash flow across our businesses. This include the expected sale of TLR U.S. multifamily assets in 2019. Cash from THP1 US for projects are largely in harvest mode as well as more highly predictable operating cash flows from Tricon American Homes and our recurring contractual fee streams. Also starting in 2019, we are -- we expect to see initial cash flows from The Selby, followed by contributions from other TLR buildings as they come onstream in the years ahead. Using these internal cash sources, we believe we are well positioned to execute on our current growth initiatives, including the acquisition of new homes through the TAH joint venture and new TLR core investments, while gradually reducing corporate debt levels. With that, I'll now turn the call over to Gary to provide additional insight into our accomplishments over the past year and our future growth plans.
Thank you, Wissam. Two years ago, when we acquired Silver Bay, we mapped out a plan to simplify our business model and focus on housing businesses, where we can build scale and maintain a leadership position. Let me start with the summary of what we've achieved since that time on Slide 7. Since the beginning of 2017, we've doubled our AUM from $3 billion to almost $6 billion today, the growth in AUM was mainly driven by the acquisition of Silver Bay in 2017 and formation of the first TAH joint venture with 2 leading institutional investors, which we announced last year. With the addition of more third-party AUM, our contractual fee revenue also increased by 19% compared to the prior year. Our operational scale and exposure recurring rental revenue sources has also grown significantly. Within TAH, the number of managed homes increased by over 125% since the beginning of 2017 from approximately 7,800 homes to nearly 17,500 homes today. Within TLR, we started 2017 with 3 purpose built rental buildings, totaling a thousand units in Canada. We've since tripled that count to 3,000 units across 6 projects, including a recently announced mix-use development at Labatt and River Streets in Toronto. We're now one of, if not the most active developers in new multifamily apartment projects in the city. Greater scale and operational improvements have brought considerably stronger financial results including a 217% increase in adjusted EBITDA and a 150% increase in adjusted EPS over the course of 2 years. And most importantly, as you can see on Slide 8, from a shareholder value perspective our book value per share ended the year at 10.88 per share in Canadian dollars, an increase of 23% per annum since entering a single family rental business in 2012. our stock currently trades at a discount to this figure, which is an anomaly, particularly given that our reporter book value does not capture the present value of contractual fee revenues, which totaled $30 million in 2018 and increased by nearly 20% from a year ago. Tricon's strong track record of growth comes from focusing on a singular business, Housing. And finding the very best opportunities within the residential investment landscape and then harnessing a dedicated and talent team of investment and operational professionals to execute, execute, execute. We're extremely proud of what we've achieved over the last year and thankful to our hardworking team for their commitment and to our shareholders and private investors for all their support. Let's now take a closer look at the performance of our individual business verticals starting with Tricon American Homes on Slide 9. The consistency theme with TAH continues to be operational excellence, relative to its historical figures as well as to comparable industry metrics. Let me highlight a few of these metrics for you. For the total portfolio, rent growth continue to be very strong. Rents in Q4 increased by 6.4% on a blended basis, which included 7.9% growth on new leases and 5.6% growth on renewals. These results demonstrate the impact of the revenue management initiatives, which commenced last year as well the strong demand for institutionally managed single-family rental product. Meanwhile, resident turnover remained at a low of 23.6% in Q4 and 26.8% for the full year. TAH has consistently reported industry-leading turnover metrics, which we view as a testament for a focus on customer service and our middle-market strategy. It is also worth noting that TAH has the highest google review rating for customer satisfaction and highest Glassdoor rating for employee satisfaction among large SFR companies. Needless to say, we view culture as the core competency of Tricon American Homes. Net operating margin was also very strong at 64.5% this quarter, which is a record for TAH and slightly above last year's level. Given the impact of seasonality, which tends to reduce turnover expense during the holiday months, we view the full year margin of 62.7% as a more accurate reflection of TAH's performance and hope to drive us higher in the years to come. The same home portfolio benefited from similarly strong rent growth and turnover trends, which led the same home NOI growth of 8.6% this quarter, building on a trend of industry-leading performance that was driven by revenue growth of 6% and expense growth of only 1.9%. On the acquisition front, we bought over 800 homes this quarter, which is slightly above our target acquisition pace in a seasonally soft Q4 period. We remain focused on acquiring 700 and 900 homes per quarter at a cap rate of approximately 6% and are comfortable that we can continue delivering at this pace. Within our Tricon Lifestyle Rentals vertical on Slide 10, the highlight of this quarter was the official launch of The Selby at Bloor and Sherbourne Street in Toronto. The Selby is TLR's first development project and serves as an excellent case study for our team's ability to deliver a building on time and on budget. The Selby opened its doors in December 1, and in its first month of leasing had 18 units under signed lease or approved application, despite opening during the slow holiday period. Subsequent to year-end, we've seen leasing velocity accelerate to 24 units in January and an additional 43 units in February, for a total of 85 units today. Importantly, we're seeing a strong conversion of tours to leases. And for those of you who've toured the building, you can probably understand how potential renters are drawn to its impressive amenities and quality finishes. We expect leasing to ramp-up more significantly as upper floors become available for lease and as we complete the spa amenities and open the bistro operated by Oliver & Bonacini within a historic mansion at the foot of the building. The Selby was voted as strong as favorite new high rise by Urban Toronto, a leading industry news site, which we're tremendously proud of. As an investment, we expect The Selby to be nothing short of a home run. In the Bloor East Market, note average rent is tracking at roughly $3.75 per square foot, which is well above our assumption of roughly $2.90 per square foot at the time of underwriting. Meanwhile, we had locked in a majority of construction cost much earlier in the development process. As a result, you can see a positive income pick up related to the appraisal of the building this quarter, which guides The Selby to approximately $300 million compared to an all-in development cost of 200 million in Canadian dollars. We remain bullish on the outlook for rental apartments in Toronto, where fundamentals remain exceptionally strong. 2019 saw rental growth above 10% and vacancy remained very constrained at less than 1% according to urban rental. You can see on Slide 11 that we currently have a pipeline of 6 development projects located in various areas of the downtown core. Other than The Selby, the majority of these projects will begin construction in the next 12 months and start leasing in the next 2 to 4 years. Given our in-house multifamily development expertise and our Tricon house branding initiative, we're well positioned to take advantage of the current economic trends that favor rental housing and expect to continue adding 2 to 3 new projects per year. In the U.S., on Slide 12, our 2 development projects are on track to be sold in 2019, both the McKenzie and the Maxwell are in the lease-up process and are 43% and 35% leased, respectively. We often get asked the question, why are we exiting the multifamily development business in the U.S. To be clear, we like the business but the risk return profile of new development is less compelling than it was a few years ago due to market constraints, including rising labor and material costs. That said, we see very compelling fundamentals for U.S. multifamily sector, particularly in the Sun Belt states. I believe, that we would do well on the sale of our 2 assets.Multifamily is the largest investable asset class in housing in the U.S. As we evaluate our housing-focused investment strategy, and determine how to attract more third-party capital, we remain open to evaluating multifamily more broadly, including buying existing income producing assets. Moving on to THP on Slide 13, we present some key metrics for our third business vertical which is focused on for sale housing. The business continues to face headwinds in the form of higher labor and material costs and longer development timelines affecting the broader home building industry. Demand also slowed in Q4 with higher mortgage rates and increasing concerns over affordability. This is causing our investment income as a percent of invested capital to be lower than expected. Notwithstanding these challenges, THP continues to project distributions of nearly $600 million to Tricon over the next 8 to 10 years.We remain laser focused on managing the existing assets and distributing cash flows to both Tricon and its investors. We're also working to add third-party AUM to the business. In fact we're seeing a high level of interest from institutional investors as the for sale housing sectors increasingly starve for private capital and now represents more of a deep value play. Not all is glum, however. I want to highlight the success of our Johnson Development business. As you can see, Johnson communities experience a 16% year-over-year increase in third-party home sales in 2018, following a similar increase in 2017. These underlying trends demonstrate that Johnson is successfully pivoting its mix of products towards smaller starter homes, and we expect Johnson's lot sales to follow suit as homebuilders replenish their lot inventories. Johnson's reputation for developing high-quality master-planned communities is further evidenced by its status as the only developer in the United States to have 6 MPCs ranked in the Top 15 2018 according to RCLCO and John Burns Real Estate Consulting.This is a good segue to our Private Funds and Advisory business on Slide 14, where Johnson is a major contributor to our contractual fee revenue. In 2018, contractual fees increased by 19% to over $30 million, the additional $5 million of fees was mainly from the TAH joint venture launch in 2018, development fees from new projects in TLR, as well as $2.8 million of performance fees. As legacy investments in THP mature and distribute their final cash flows, we expect performance fees to accelerate over the next few years. In aggregate, we expect to earn $92 million of performance fees across all verticals over the next 8 to 10 years.Let's finish with the summary of our future growth plans on Slide 15. We currently have $5.7 billion of assets under management, if we simply finish what we started, we will get to $8 billion in the next few years by deploying the capital committed to the Tricon American Homes joint venture and executing on TLR Canada's development pipeline of 3,000 apartment units. As we grow, you should expect to see 2 changes to our asset mix. The first is an increasing proportion of AUM managed on behalf of third-party investors, which is intended to generate management fees and performance fees. When we went public, we were primarily an asset manager focused on for sale housing, which we refer to as Tricon 1.0. We subsequently added rental housing businesses by tapping into our balance sheet, that was Tricon 2.0. The next phase in our evolution is adding third-party capital around all of our business verticals which we refer to as Tricon 3.0. In the near term, we plan to attract more investors to Tricon lifestyle rentals, multifamily and Tricon Housing Partners, for sale housing businesses and ultimately, to add more third-party capital to Tricon American Homes. The second change you should expect to see in our asset mix is a shift towards recurring rental income streams. Approximately 68% of our AUM currently generates recurring FFO, largely through our single-family rental business. As we complete the pipeline of TLR multifamily investments, those assets are also expected to contribute recurring FFO. Meanwhile, we intend to decrease our exposure to episodic cash flows from THP by de-emphasizing our balance sheet investment in this business. This will come from proportionally higher growth in TAH and TLR as well as harvesting existing THP investments. We're also looking at ways to accelerate this shift by possibly syndicating a piece of Trinity Falls, which is one of our larger balance sheet exposures. If we combine the shift to asset management with greater exposure to businesses with the current cash flows, over time Tricon should morph into a simple story, fees and FFO. We believe that this will further simplify our business model, make our valuation metrics more comparable with other publicly traded companies, and will hopefully narrow the persistent discount we see between our share price and the consensus NAV at the analyst community. 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: Jon Ellenzweig; Andy Carmody; Andrew Joyner; and Kevin Baldridge.
[Operator Instructions] And your first question comes from Mark Rothschild with Canaccord, please go ahead.
Gary, maybe just picking up on something you said quickly on the call, I'm not sure if I heard correctly. But did you say something about buying existing multifamily and if you did, maybe expand on what exactly you meant by that. Where, what markets you would look at and what extent you see that as a bigger business for Tricon?
Yes, sure, I mean, I was saying we get asked the question of why you're exiting multifamily development or build to core in the U.S. and yes, we wanted to -- I mean, first of all, we wanted to clarify that. It's not -- I mean, we may go back into development one day or build to core in the U.S. We just think today that the risk return fundamentals do not pay for development. It probably makes more sense today to buy existing assets because you're not getting paid for the development risk. I think with that said, I think we'll do well on the sale of both The McKenzie and The Maxwell. But we're also saying, look, if we're going to be an investment manager focused on increasingly rental housing, I mean, we ultimately need to be in multifamily, particularly in the U.S. It's the largest investable asset class and I think if we were to go into that, I could see us again focusing on the Sun Belt because that's where we have a lot of expertise and market focus. And, I mean, who knows, but it could potentially be anything from core to value added, and maybe one day we continue with build to core as well.
Okay, great. In regard to The Selby, obviously you're in leased-up now. Would you anticipate refinancing the property this year and do you have any guesstimate on how much you could pull out of the -- that asset?
Mark. Yes, we're actually looking at refinancing it, we need to stabilize leasing a little bit more. So we need a couple more months, and would be looking to refinance it sometime around June, July. How much we could pull out of the asset, we could probably pull out all of our cost and a little bit more above that.
Okay, great. And then just lastly, with regards to TAH. To what extent should we expect there to be a move up in occupancy over the next couple of quarters from maybe the properties that haven't been stabilized and, on that point, would that impact same store NOI? Is that in the 5% or so that you're guiding to, or is it those assets that will not necessarily be in same store.
Well, I mean a couple of points there. I mean, the first one is the same store count is going to increase to roughly 14,400 homes, it's going to include Silver Bay as of Q1. So you're going to see a much larger same home portfolio, which will be roughly 83% of the total portfolio. So that's a big change and then I think the second part of your question is referring to the fact that we're acquiring roughly 800 homes per quarter which is obviously putting pressure on the in-place occupancy. Obviously, I think that the metric that makes -- that is more important to us is the stabilized occupancy, because we're going to continue to acquire roughly 800 homes per quarter, Mark, so they -- the in-place occupancy will always be a little bit lower. The more important metric I think for us is stabilized occupancy which is hovered around 96%, it's down about 60 bps year-over-year and that's really a decision based on our revenue maximization program, where we've decided to sacrifice a little bit of occupancy in order to drive more rent. And I think you should continue to see that those trends in the next few quarters. I would guess that our stabilized occupancy remains fairly steady.
And your next question comes from Jonathan Kelcher with TD Securities.
Yes. First, just on the fee streams. Is the $1 million you've booked for the JV on TAH, is that a good run rate or does that grow as you continue to grow that, grow the JV?
Yes, for modeling purposes, I would assume it's a good run rate.
Okay. And then how -- and just on the TLR business, how should we think about the fee stream on that one going forward between development fees and I guess asset management fees as The Selby leases-up.
Well, the development fees on The Selby are obviously going to burn off because the building's complete, so that will move into asset management fees. The development fees that we're charging on a building tend to be in that kind of 4% to 5% of cost range. It does exclude land, so it might be hard for you to figure out exactly maybe something you take offline, but the point is, is that as we add a project, right? We've added West Don Lands, we're adding the Gloucester project, LaBatt, you're going to see an increase -- a steady increase in fees. There'll be run off from The Selby, but there'll be overall increase from the new projects we're adding. And as we continue to, say, let's say we add 2 new projects a year, we'll continue to see those fees, I think, trend up.
Okay, fair enough, and then you mentioned that you are seeing increased or a lot of demand from institutional investors. Are you -- on sort of the flip side of that, are you seeing much in the way of opportunities for new THP investments?
Yes, we are. I mean, we're seeing both because the industry at this point, I mean it's been a tough couple of years and the industry is just starved for private capital and at the same time, there is home builders are also starved for land. So we do see an opportunity to work with our Johnson subsidiary to find more master plans that are well-located and to work with third-party capital to finance those. So we do see good opportunity right now, and it's interesting because we've always had the most success funding and raising third-party capital for THP, at the time when the industry is at a more kind of difficult phase. It tends to be kind of a countercyclical capital raise, and so we are actively out there looking for both opportunities and capital.
Okay, so would you say that THP should be a busier year for you guys this year?
Yes, I think it will be on both the investment and the capital raising side, we're also hopeful that maybe in the back half of the year that some of the existing assets start to stabilized as well, so it should be a busy year for THP.
And our next question comes from Stephen MacLeod with BMO Capital Markets, please go ahead.
Just to follow up, actually, on the THP line. So sounds like there could be some upside opportunity in THP in terms of new projects coming online as you flow through the year, if I understood that correctly. Could you just talk a little bit about, do you expect that investment income rate to sort of trail down a bit lower from where it is or do you think 5 is roughly a good stabilized number to use?
Yes, I think, again, for modeling, I think it's a good number, I think it's a good stable number. We just don't have enough visibility, I mean we're not into the spring selling season, so we just don't have enough visibility to where sales are going to be. And that's also why a lot of the homebuilders now are obviously not giving any guidance. It's something I think we can probably clarify next quarter in Q1 or Q2, but at this point in time, we're kind of more comfortable with that 5% of cost level.
Okay. That makes a lot of sense. And then when you look at the TAH business, so the net number of homes bought in the quarter was a little bit lower than what I was looking for, and I'm just curious, do you expect -- was that because of an accelerated amount of dispositions in the quarter? Or do you still have sort of, a tranche of homes that you're looking to sort of slowly divest of over time?
Yes, no. Thanks, Steve. This is Jon Ellenzweig. That's a great question, we sold about 126 homes this quarter, I'd say it's a little bit higher than some of the future quarters but really that's going to be a little bit lumpy, just depending on whether we're selling those homes in one-off or portfolios. If we end up selling a small portfolio, it might result in a bit of a spike. And I'd point more to the kind of top line, which is where we acquired 800 homes this quarter, which was right around our target and guidance, actually a little bit low.
Yes. Steve, I would just add to that, I mean Q4 and Q1 are seasonally soft periods for acquisitions because obviously, less people are going to list their homes in let's say, December, January. So you should always expect to see acquisitions lower in Q4 and Q1 and then ramp-up in Q2 and Q3. So we're basically guiding to 800 acquisitions per quarter, but it could be 700, let's say, in Q1 and it could be 900 in Q2, just as an example.
Okay, that's helpful, seasonality color, thank you. And then, I guess just finally on TAH, are you seeing any changes in the demand profile for your buying opportunities by market and then I guess just secondly, can you talk a little bit about what your HPA expectations look like over the next couple of quarters.
Yes, so we're seeing no change, I mean it's really hard to, I think, kind of notice or observe trends in this kind of slow season of the year but we don't notice any meaningful trends in terms of, let's say, cap rates. Acquisition volumes are basically right in line or maybe even a bit above of what we expect. We have, again, a very prescribed buying box with our JV, as to what we're trying to accomplish quarter-to-quarter. So it's essentially right -- it's right in line and, really, the buying is largely dictated by our capital. I mean, the amount of capital we have is -- allows us to buy roughly 800 a quarter and that's the plan. If we had more capital, we could clearly go faster. We have been talking to our joint venture partners about adding a couple of markets, and so we could potentially enter Raleigh and Nashville which are very strong southeast markets where we think we could buy maybe organically 10 to 15 per month and then maybe hopefully layer on portfolios later. So that might be, I think, one change that you could look for on the buying side. And then I think with respect to HPA, I mean, HPA is definitely trending lower nationally, but remember, in the Sun Belt markets where we're focused, it's definitely stronger than the national average. Obviously, in Q4, the HPI was 1.4% for the quarter, so let's say 5.5%, nearly 6% for the year. I think that's going to trend a little bit lower but I still think certainly if mortgage rates stay low, I think we'll have another -- I think 2019 will be another good year for home price appreciation. And if I'm wrong and it ends up being worse than that, given the demand we're seeing on the rental side, we might see higher cap rates.
Your next question comes from Geoff Kwan with RBC Capital Markets. Your line is open.
When I take a look at the NOI margin at TAH and if I take a look at last year and adjust for, I think, some of the proper tax recovery and I think that there was the other R&M recovery last year, the margin was somewhere around 62.5%. You guys had 64.5% in Q4 '18. I know you are always a little bit careful talking about the margin because of mix issues, but was there much of a mix impact, if you look at the year-over-year? And just trying to understand the other factors at play as to what got you to the Q4 level and thinking about it going forward.
Yes. No, I think -- I mean in Q4, 64.5% was really driven by very low turnover, obviously, it's always -- that's -- we're always going to see the lowest turnover in Q4, so based on that fact alone, we should -- on the margin -- we should certainly see a higher margin, so -- and that's typically been the case. That's why we always say it's probably better to look at the margin on a full year basis and if you look at the margin for that full year, for 2018, it's about 62.6%, 62.7%. So that is, I think, a more accurate view of what the margin should be and hopefully, we can continue to build on that but we're always going to have -- we should typically have a strong Q4 and a weaker Q3.
Right, okay. And just within that, on the R&M side, how much more, I guess, savings or improvement or efficiency do you think you can get from bringing it in house or are you already there?
No, I still think we have a ways to go and I also think if you look at our R&M as a percentage of revenues, it's still high compared to our peers and so I think as we get more scale, as we get more efficient, we can continue to improve that. I mean, one specific example, we're not -- even though we're internalized, we're not really doing a lot of the HVAC repairs ourselves, I would say a very small percentage of that and our goal is to address all HVAC calls to diagnose the problem and then probably repair, I would say, 60%, that's our kind of longer-term goal. And today, we might only be at about 15%, 20%, so we've got a ways to go on -- I think working on HVAC and so I think you can expect to see that we continue to get better, continue to get more efficient. The only offset to that is that if we're in a inflationary environment, we'll obviously incur higher material costs and labor costs.
Okay. On the rent growth side, sequentially it came down but, I mean, you guys are coming off some really good year-over-year increases. Do you have any thoughts as to where that could look like heading into 2019?
Yes, I mean, so we're above 6% let's say, in Q3, Q4 that -- like my best guess is that would trend down to roughly 5%, maybe 4.5% to 5%. And that's not because -- it's not just lowering ex -- this is not just about lowering expectations. In fact, I would say the demand is off the hook. I mean we're getting roughly 7,500 leasing inquiries every week for roughly 250 vacant homes. It's just it's -- the demand is insatiable. We can continue to drive 6% rent growth, the issue is more we're concerned about renewals and we're going to think about self-governing, I think a little bit on renewals. Rather than have renewals be above 5%, we probably prefer them to be at or below 5% and really take that loss to lease over a longer period of time. We just think that's the right thing to do. We'll end up getting to where we want just over a longer period of time and I think it's more -- I just think it's the right approach for the business, given it's a very politically sensitive arena. So that -- so I would expect to see renewals a little bit lower, Geoff. But still very strong and at roughly 5%.
Okay and if I can sneak in one last question, again, on the TAH side. Can you talk about maybe success state dealing with some of the property tax assessments you had, or is it is it still too early to kind of comment?
Sure enough, it's a good question. We -- as we mentioned before, we brought in a third-party tax consultant last year that has helped us in really challenging or keeping taxes stable. I think what we find is we don't expect that to be an area of receiving kind of lumpy savings. It's more keeping some of these taxing authorities in check. So for example we might think that homes have gone up by 5% in municipality and we get a bill that shows an increase of 10%, we're then able to fight it back down to 5%, which is what we accrued. So I would think about it that way, more about keeping taxes in line than about something that's going to generate significant savings.
The other thing I would add to that is that at the beginning of 2018, our tax consultant said that -- expect increases of roughly 7% and 9%. We ended up being at 6.7% on the same store portfolio. So we ended up being really the low end of that range and this year, they're guiding us to 6% to 8%, so hopefully, we can bring it in, in that range. The only caveat there, Geoff, is Charlotte. Charlotte is going to through a major reappraisal, they do that every 7 years, and roughly 10%, 11% of our portfolio is in Charlotte, so that's one thing to watch out for. But hopefully, we start to get some relief on the property tax side because it's obviously -- we've been doing great, but that's obviously been negating some of our gains.
Your next question comes from Mario Saric with Scotiabank.
Maybe just sticking to TAH, as you mentioned, kind of 4.5% to 5% expected rent growth, hopefully, margin expansion as well. So in terms of same store NOI guidance, is it fair to say kind of 4% to 5% is the target range, with 4% being fairly conservative?
Yes, it is. I mean we don't give guidance, just to be clear but, I mean, if you do the math and you think that we can grow our revenues by 4%, which I think is conservative, then we can hold the line on expenses, let's say those grow by 2% and we should be able to increase our same store NOI by roughly 5%. And then the other thing I would add is that if our same home portfolio would have been bigger, and if it would have included like the 14,000 or 14,400 homes, we probably would have done even better than with the 6,000 same home portfolio. So I think that's fair, Mario.
Yes, okay. No, that was going to be the next question, so that's helpful. In terms of TAH buying, so TriAD, [ any buying ] of homes during the quarter, in terms of the evolving kind of purchase algorithm with -- that you're monitoring or that drives the buy decision, without giving away too much information, are there any variables that are becoming more or less important in that decision to the extent that there are any notable changes?
No, I would say things have been kept basically the same since we really instituted in and focused on TriAD. And really, the things that we're prioritizing are almost the same things we thought about when we got into this business at first in 2012, which is buying homes where there are good schools, relatively easy proximity to major job nodes, low crime and places that are attractive to families. So we did that originally in 2012, I would say, less technically and more through boots on the ground, and now we've just tried to use computer modeling and AI and algorithms to help refine that and rate all of the neighborhoods, so it's really just been an evolution, but over the last year, let's say, it hasn't really dramatically changed what we're buying.
Got it, okay. And then just on the turnover, it was down 320 basis points, annualized 26.8% in TAH. Where do you see that going in 2019 given the environment that you're seeing?
I mean, I think we'd probably say -- look, it's been 30% or lower for years now and I think that we probably see it's going to continue to be at 30% or lower. I don't expect it to go below 26%. I think we'll be in that kind of 26% to 30% range.
Got it, okay. Maybe switching gears to THP. The AUM decline, $94 million quarter-over-quarter to $886 million, there's a $35 million reduction both in THP2 US and then THP3 Canada. Are those simply distributions, or was there a bit of a write down in the asset values?
It's both. Definitely distributions. I mean, Mahogany made a big -- a very large distribution, that's the master plan in southeast Calgary that benefited THP3. But on THP2, our investment in a public company did very, very poorly in Q4 so there was meaningful write-down there. And then our project in southern California, Arantine Hills, is definitely struggling. We've seen very tepid demand upper housing in southern California. The market feels about as weak as it's been since the financial crisis. And so we did take a meaningful write-down on that project in Q4, which affected THP2 and it also affected our side-cars. So I think we took a pretty substantial hit and so, hopefully, we're kind of well positioned moving forward on that asset, but that explains some of the reason why the AUM lower.
Got it, okay. And then, you noted that THP was 15% of your kind of book value. And then -- and taking into consideration a potential syndication at Trinity Falls, how do you see that 15% evolving over the next 1, 3, 5 years, assuming that you're...
Well, yes, so THP as a percentage of assets has come down from like 100. I mean, a couple years ago it was probably 25%, today, it's roughly 15%. I can easily see it going to 5% to 10%. And it's not to say -- like, I mean, this is a core competency for us, it's a business that we can make a lot of -- we can generate huge cash and, I mean, we've got a lot of cash still coming as we talked about in the call. But from a public market perspective, as you know Mario, it's just -- it's a very lumpy business, a lot of episodic cash and so we want to be in the business but we'd just rather be in it with more third-party capital and less balance sheet. So I think the right mix is 5% to 10%.
And in terms of the decision on Trinity Falls, what's the timing like there?
So we're running a process, we just started a process to syndicate Trinity Falls. It's -- I would say it's still early days but we have 3 or 4 interested parties. I would say it's going to take roughly 6 months, just because it's -- these are complicated assets. I mean, it's not like the only -- buying an apartment building. I mean, someone's basically buying a town. And so it just takes a lot of -- the diligence periods are much longer. So I would guess, this is a later back half of the year event.
Got it, okay. Two more really quick questions, one on TLR, and then one on leverage. Just on TLR, kind of the strategy in terms of getting into U.S. multifamily income producing, what are the keys in the other verticals as really a market leader position within -- so far and within land home development as well, including the relationship with Johnson? How do you think about the ability to attain a market leader position within the U.S. multifamily space, which, no doubt, is probably a bit more competitive overall.
Yes. Yes, absolutely. Look, we don't -- our mantra has always been to relatively go where the capital isn't and that's where you're going to make a higher return over time. So I would say the one area we would definitely probably avoid is the gateway cities. So those are extremely competitive and we're much more likely to focus on what I would say are kind of Tier 2 or Tier 3 cities, places like Phoenix or Atlanta, or Tampa. Those markets don't have the same amount of competition and because of the same trends we're seeing in for sale housing and single family rental, very strong population growth, household formation, job growth. Those are markets that need workforce housing of all kinds, single family, multifamily. And so we think the fundamentals for multifamily in the Sun Belt on the whole are very, very good long term. We would just -- I mean just to say, I mean, we would not probably go -- if we did something, we'd probably want to make sure that we can do it in a way where we've got scale and we can obtain a leadership position. It's not, I think, interesting to us to kind of buy one asset at a time and build scale over a very long period of time because I think you're right, if we do it that way, we just really have no competitive advantage. Getting scale in all these businesses is key. And then I would say long term, there's also property management synergies, if we were to eventually get into multifamily, there's the property management and asset management synergies with TAH. Our leadership at TAH, [ Kevin ], comes from multifamily background. We know multifamily really well. We use the same technology infrastructure. So for us, it just seems like a natural fit, but we've got to find the right opportunity.
Understood. And is the conversation that you're having with institutions about increasing fee [ doing ] third-party capital, are you already having those conversations on the multifamily side?
Not really. I mean, we're seeing a lot of, I mean -- and it began because we're really focused on pitching private investors what we're currently doing and where we have, kind of, product to sell. So we're seeing, I would say, rejuvenated interest in THP, probably the most we've seen in a few years. The demand to invest in build to core multifamily here in Toronto is extremely strong. So we see a lot of opportunity there. There's lots of opportunity in TAH but we've got to kind of get through our joint venture. But I think at the appropriate time, I think if we did have a business in U.S. multifamily, we would have success also raising third-party capital there. Because that -- I mean, to be candid, that's the business which is always the easiest to raise third-party capital for because it's the one that institutions know the best and it's performed really well.
Okay, no, I just wasn't sure if the plan would be to kind of establish that presence and then seek partners, or do you establish the presence and...
Yes. No, our plan always -- if you look at our track record, our plan's always to establish a presence. I mean look what we did with Johnson. We bought Johnson and then we raised a lot of capital around that platform. TAH, we built up a whole operating platform, proved out the business ourselves, then raised capital. That's typically -- on income producing, that's typically what you should expect us to do. Let -- we'll establish a beachhead ourselves, prove it, feel really good about what we're doing and then, over time, bring in third-party capital.
Got it, okay. Maybe one last really quick question for Wissam on Slide 5, the leverage slide. The pie chart there, where you have the overall leverage profile by vertical, are there targets or goals that we can think of in terms of where those numbers go within the next whether it's 12 months and 4 months, 5 years? How should we think about the transition in those leverage metrics over time, assuming inflationary fair value gains in TAH.
Yes. No, absolutely. What we try to show there is highlight and split them up by verticals, simply to show you that the recourse debt at Tricon itself is actually 19%, or 11% if you exclude convertible debentures. And then nonrecourse is by vertical. We actually look at leverage. We don't really look at target by vertical. We look at an overall holistic approach. Today, if you look at -- look through leverage, where it'd be closer to 58% and we'd like that number to be between 50% and 55% on an overall basis and on a holistic approach. It makes sense to have more leverage at TAH, which is income producing and it also makes sense for us to have no leverage on land at THP because it's just higher, riskier profile. So we'll pick and choose where the leverage goes by vertical, but overall, we'd like to target 50% to 55%.
And what would the time line be between -- to getting to 50% to 55%?
Our time line that we have, like we mentioned before, if you look on the right side, one more to add to that is obviously Trinity Falls now, but we said we were going to de-lever over time. When we did Silver Bay, it was a leverage buyout by choice. When we said we're going to de-lever over time and we've done everything that we said we're going to do so far, which is selling homes from TAH, which is selling TLC. We're in the process of disposing of our TLR projects in the U.S. We're in the process of collecting cash from our THPs 1 US. And we continue to collect cash for some Tricon American homes and our private funds and advisory business. And now TLC is another stool that allows us to continue to de-lever and grow at the same time. So we're targeting, obviously, 50% to 55% over the next 3 -- 2 to 3 years. That's assuming nothing happens and we don't see any opportunities and you know how we are about seeing opportunities and we never sit still.
And your next question comes from Himanshu Gupta with JMP Securities, please go ahead.
So in terms of new home acquisitions, so what markets are you currently buying? And are you seeing opportunities outside your existing market that you can buy for Tricon and may not be for JV?
Yes. No, thank you, Himanshu. So our 2 biggest acquisition markets this quarter and really over the last year have been Atlanta and Charlotte, and then to add on a handful of other markets where we're seeing great opportunities, Dallas, Houston, Tampa, Indianapolis, Columbia, South Carolina, Phoenix. So there's a number of markets out there that we're already in where we continue to buy homes. And as Gary mentioned, we've been evaluating and looking to dip our foot into Raleigh and Nashville, which really have very similar employment and population growth characteristics to some of those other markets in the southeast as well as there's similar home prices. So those would be the 2 markets I would say that we've been evaluating and are likely to enter.
Right. And I guess in terms of the acquisition sourcing, mostly is from MLS. So are you competing with some of the iBuyers like Opendoor and Offerpad, and there are like a few others? And do they have any influence in terms of the market? I mean, are you competing? Are they impacting the price?
Well, it's actually really interesting. We're not competing. They're actually a source of homes for us. So really, the iBuyers are competition for the MLS. So a homeowner, instead of listing their home on the MLS, they just sell it directly to an iBuyer. Once the iBuyer owns the home, they're looking to sell it. So we actually have great relationships with the iBuyers, in particular Opendoor, where we're getting direct feeds of all of the homes that they're buying and we're buying off of them. So we really look at iBuyers as a supplement or complement to the MLS channel versus competition. Because at the end of the day, they're just buying homes and reselling them and we're happy to buy them from them versus buying them from a homeowner.
Right. And is there an opportunity down the road maybe to provide like property management services to some of these players, who doesn't have a platform like you guys, but they have an intent to buy for some time?
I would say we have built a great property management business but given the growth that we've had at TAH and our JV where we're continuing to buy homes, our real focus is just managing our own homes. There's a lot of time and effort that Kevin and his team put in to building up our TAH platform and managing our assets, so really, at this point in time, we're just focusing on managing our own assets versus third party.
Right. And Gary, you mentioned that you're now buying -- or the intention is to buy around 6 [ caps ], so how much CapEx, capital expenditure, are you underwriting and has that changed in the last year or 2 years given the cost inflation?
No, it hasn't changed dramatically, we're still underwriting $20,000 to $25,000 per home and I would say if you look at the mix of home over the last few years, we've moved towards certainly newer vintage. And so there's probably been inflation in the cost, but by shifting a little bit to slightly newer vintage, we're offsetting that by the age of the property.
So Himanshu, just to give you a little bit more color there. The average age of our legacy portfolio is closer to 30 years and the average age of the homes that we're buying in the JV box are about 18 years.
Right, okay. Okay. And maybe one final question on the demand side. So the mortgage rates have recently pulled back and I know it was a seasonally period for you to compare, but have you noticed any changes or do you expect any change in terms of demand patterns for rental product or for sale housing product, say, from October to like in March?
Well, on the rental side, on the TAH side, I mean we just see insatiable demand, it just seems like it just does not stop. There's obviously a number of factors driving that. It's not just mortgage rates or affordability. I just also think that we have a very, very compelling product. The ability to move into a new home and have a maintenance free lifestyle is really a new concept and it's very, very compelling. So like the demand for the rental business is off the hook. We've seen no change now for quarters. This really speaks to why we need more scale. We just don't have enough homes to rent people. So it's important for us to continue to scale up our Tricon American homes business. On the for sale side, I mean, definitely things slowed down at the back half of last year. I mean, that's been widely reported. There's been success. Our Johnson business, though, has done well, and a lot of it speaks to the fact that Johnson also has a bit of a middle-market strategy, right, where we've pivoted to smaller lots, try to bring down the cost of the home to the consumer, and so that's one of the reasons that Johnson sales have been strong. I mean, third-party home sales up 16% year-over-year, that is very strong after a good '17. So if you have the right product in for sale, you can sell it all day long. The real challenge for the industry is delivering that product and it is challenging. I mean, I talked earlier about Arantine Hills. That's a case in point where we really need to get cheaper product in order to drive sales and it's hard to do that. So it's -- to me the issue of demand is really, it's not -- the demand is there, it's just that the industry is not producing the right product.
Right. No, that's very good color, Gary. And maybe just a final question on multifamily development in Toronto. You announced a seventh project, clearly, gaining scale in the business. How many more projects do you think you can handle with the same team or without adding much G&A or human resources there? And also from a balance sheet risk profile perspective, risk/reward perspective, how many more projects or as a percentage of your portfolio, you'll be comfortable with?
So we're looking to add -- I think our team can handle another 2 or 3 projects per year, because remember, from a development perspective, some of those projects roll off. So like now our development team's not really that focused on The Selby anymore, they're going to be focused on new projects. So there is this kind of cycle of new projects coming on and then rolling off. We have been adding to our team. We hired a new head of development in Andrew Gray, he used to be at Concert. So he joined our team in 2018. We have been building up the team but it's accretive for us to obviously add projects, the fees, the revenues, definitely exceed what we're going to have to do -- what we're going to have to add in terms of G&A. Typically, a project manager, senior project manager, can probably handle about 3 projects, so if we ever found ourselves in a position where we're short, we will obviously start to add more project managers. So that's on the development side. Obviously, on the asset management side, you want to continue to add projects, because you need to scale to be profitable.
[Operator Instructions]. And your next question comes from Dean Wilkinson with CIBC World Markets.
Keep this to one question, Gary. Did I hear you say $300 million valuation on The Selby?
You sure did.
How does that compare to cost?
The cost is roughly 200. That's been grossed up a little bit in our books, it's kind of 180 to 200, but it's -- like I said in the prepared remarks, it's a home run. I mean, we're at 300 versus the cost of, let's say, 200. It's a huge increase. And that's why we've been talking about the fact that we're not getting the value for the TLR, the build-to-core side of the business. We're just not...
No. That's $0.60 a share.
Yes, and we're going to see that on the Taylor as well. I think the Taylor -- I mean, again, we never like to get ahead of ourselves, because anything can happen but I would say, from what we know today, the Taylor, that's [ 57 benign ] and will be even higher development yield than what we're going to generate at The Selby. So...
So that's $1.50 in value on those 2 deals alone?
Yes. I mean, these deals are -- both of these deals are home runs and, obviously, good timing on them. But there's a lot of value there and we believe, in ultimately, we've got to see it. Because at some point in time, the FFO or the NOI is going to be undeniable, and the market's got to get its value for that. And, Dean, don't forget that most of these assets where you have third-party capital already involved, so we would own up to 30% of the entire portfolio that we have today.
And there are no further questions at this time. I will turn the call back over to Gary Berman for closing remarks.
Thank you, Steve. I would like to thank all of you on this call for your participation and we look for to speaking to you in May, when we discuss our Q1 results.
This concludes today's conference call. You may now disconnect.