Tricon Residential Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 10, 2021

There are 9 speakers on the call.

Operator

Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Residential's 3rd Quarter 2021 Analyst Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks.

Operator

There will be a question and answer session. I would now like to hand the conference over to your speaker today, Wojtek Novak, Managing Director of Capital Markets. Thank you. Please go ahead.

Speaker 1

Thank you, Sarah. Good morning, everyone, and thanks for joining us to discuss Tricon's 3rd quarter results call for the 3 9 months ended December 30, 2021, which were shared in the news release distributed yesterday. I'd like to remind you that our remarks and answers questions. 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.

Speaker 1

Call. For more information, please refer to our most recent management discussion and analysis and annual information form, which are available on SEDAR, EDGAR and our company website. Remarks also include references to non GAAP financial measures, which are explained and reconciled in our MD and A. Call. I would also like to remind everyone that all figures are being quoted in U.

Speaker 1

S. Dollars unless otherwise stated. Please note that this call is available by webcast on our website call and a replay will be accessible there following the call. Lastly, during this call, we will be referring to a supplementary presentation that you can follow by joining our webcast or you can access it directly through our website. You can find both the webcast and presentation in the Investors section of triconresidential.com under News and Events.

Speaker 1

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

Speaker 2

Thank you, Wojtek, and good morning, everyone. Thank you for joining us to discuss another successful quarter for Tricon. Before we get into the details, I want to thank our exceptional team who are the real drivers behind the strong results we're presenting to you today. Our team's unwavering dedication to our residents and the communities we serve is fundamental to our culture, and I believe it's a key reason our company continues to perform well quarter after quarter. This is a team that I'm incredibly proud to work with.

Speaker 2

Let's start on Slide 2 and talk about the key takeaways we want to emphasize for you today. First, our single family rental business continues to deliver solid operating performance. With record high occupancy and rent growth on new movements north of 20%, demand for SFR is clearly off the charts and we expect it to remain this way for some time. 2nd, in Q3, we saw a meaningful contribution from fee revenue earned from the syndication of our U. S.

Speaker 2

Multifamily rental portfolio and the formation of new SFR joint ventures earlier in the year. 3rd, as you all know, we are laser focused on growth. This quarter, our acquisitions team achieved a new milestone by purchasing a record of nearly 2,300 single family rental homes in a very competitive housing market using our sophisticated technology platform. And going forward our growth plan is supported by $2,000,000,000 of third party equity capital commitments announced year to date. With the capital platform in place, We are on our way to doubling our portfolio to roughly 50,000 homes in the next 3 years.

Speaker 2

Finally, we've achieved significant growth while remaining disciplined with our balance sheet, substantially exceeding our deleveraging target a year ahead of schedule. Let's now turn to Slide 3 for a summary of our results. We reported earnings per diluted share of $0.92 compared to $0.21 in the prior year, which included strong fair value gains driven by near record home price appreciation. Our core FFO per share was $0.14 up 17% compared to last year. Our results were driven by consolidated NOI growing 21%, but also by private funds and advisory fees, which grew by 120% as we launched several new investment vehicles this year in partnership with 3rd party investors.

Speaker 2

We also announced a number of new strategic accomplishments, including the launch of our largest JV to The 5,000,000,000 SFR JV2, which is the capacity to acquire approximately 19,000 homes over 3 years. And most recently, we listed our common shares on the New York Stock Exchange and closed the U. S. Marketed offering and private placement for gross proceeds of $570,000,000 which strengthened our balance sheet and brought our performing net debt to assets of 34% and performing net debt to EBITDA down to 7.6 times. Moving to Slide 4.

Speaker 2

In our single family rental business, we saw strong growth from new and existing assets as Tricon's proportionate share of NOI increased by 13 and same home NOI grew 6.5% compared to last year. We achieved a near record same home NOI margin of 66.6% driven by consistently high occupancy, record low turnover and strong rent growth of 9.1% on a blended basis. In our adjacent residential businesses, U. S. Multifamily rentals recovering nicely with same property NOI up 15.5% year over year and is now solidly above the pre pandemic levels driven by strong lower turnover and rent growth.

Speaker 2

Wholesale housing delivered another strong quarter distributing nearly $14,000,000 of cash to Tricon and Canadian multifamily is progressing on its development pipeline with over 1,000 apartment units on track to be completed in 2022. Let's now turn to Slide 5 to discuss our exciting and very successful dual listing in U. S. IPO completed in early October. Our transaction was one of the largest real estate IPOs in the U.

Speaker 2

S. In recent years and was significantly oversubscribed. This IPO was the culmination of a decade long journey to transform our company from a small asset manager invested in for sale housing to a tech enabled rental housing company focused on single family rental. And given our Sunbelt middle market focus, It made perfect sense to provide an opportunity for U. S.

Speaker 2

Investors to participate in our growth, many of whom we've had conversations with for years. We were thrilled with the response and the stock performance afterwards. I want to thank our Canadian investors for their ongoing support and give a warm welcome to our new U. S. Shareholders.

Speaker 2

Let's turn to Slide 6 to refresh you on our strategy. We may be the smallest of the 3 public SFR companies, but our strategy is differentiated and we believe it can provide investors with significant upside. The old adage in real estate is location, location, location. Tricon's adage is growth, growth, growth and it's our first point of differentiation. With the capital and platform in place, we intend to double our portfolio to roughly 50,000 homes in 3 years.

Speaker 2

SFR is one of the largest asset classes in the world and is incredibly fragmented. Think of SFR as a classic roll up. There's a golden opportunity to acquire high quality homes, 1 at a time and drive synergies in the process. Our unique approach to acquisitions is powered by technology and enables us to build a highly targeted portfolio focused on the middle market demographic and U. S.

Speaker 2

Sunbelt. Our second point of differentiation is our strategic capital platform. Over time, Tricon has developed deep relationships with some of the largest private investors in the world. These partnerships allow us to scale faster, drive efficiencies, raise capital when the public market window is closed and take development off balance sheet. Our third point of differentiation is our tech enabled operating platform, which is the backbone of our business and allows us to enhance the resident experience and improve our operating metrics.

Speaker 2

It is one of the key reasons that Tricon has leading operating metrics in SFR without nearly the scale of our peers. So how do we grow our SFR business? Let's zoom in on our acquisition program on Slide 7. Today's SFR market includes over 16,000,000 homes valued at approximately 3.4 Tricon. It is a huge market and any one player or frankly all institutional players combined remain a drop in the bucket.

Speaker 2

We are playing in the sandbox of about 1,300,000 annual home sales in our target markets. And in the Q3, we processed 264,000 MLS listings. About 1 in 3 of these homes here are acquisition buy box, which automatically filters homes based on a 90 point criteria, including age, size, bedroom count and neighborhood quality. This left us with roughly 92,000 homes for our acquisition team to screen in order to find high quality rental housing for our residents at an accessible price point. We were then able to quickly and efficiently kick out homes that are below our target returns or lack the aesthetic qualities we are looking for.

Speaker 2

In the end, we generated about 30,000 offers during the quarter, winning about 1 in 13. I should note that the vast majority of the homes we offer on but don't acquire are purchased by traditional homeowners. We've continued to ramp up acquisitions over the course of this year and have moved from 800 homes in Q1 to over 1500 homes in Q2 now almost 2,300 homes in Q3. Historically, our acquisition program has always been constrained by capital, not opportunity. And with the new joint ventures, we are finally in a position to take advantage of what we believe is a massive and evergreen opportunity to acquire homes.

Speaker 2

Our expanded buy box enables us to buy homes in 21 markets compared to 12 previously under SFR JV1, including cities such as Phoenix, Las Vegas in Greenville, South Carolina, while still remain focused on our middle market demographic. Let's move to Slide 8 for an ESG update. ESG is a top priority at Tricon as evidenced by our continued commitment to self govern on rent renewals and prioritize our residents. This quarter, we engaged in several new initiatives in support of our broader company wide commitment to ESG. I'm pleased to report that we secured our green loan to fund construction of West Don Lands Block 10, a LEED Gold Level certified rental apartment building within a master plan that includes Ontario's first purpose built indigenous health and education hub.

Speaker 2

We also rolled out a diversity, inclusion and belonging strategy for our team, Which provides a roadmap to fostering genuine inclusiveness across our organization. I'm proud to report that we've made significant progress and in nearly a year, we've increased our percentage of women in leadership positions from roughly 35% to more than 45%. Although there's still lots of work to be done, diversity, inclusion and belonging remain a priority for our organization and a key aspect of our hiring plans for both leadership and non leadership positions. At Tricon, there's a genuine purity in our mission. We care deeply about our employees and we know that a diverse organization will position us better to serve our residents and the communities they live in and ultimately drive consistently strong results for our business.

Speaker 2

And finally, we committed to the United Nations Principles of Responsible Investing, a leading global framework that integrates ESG considerations into investment and Ownership policies. This is another important step in furthering our commitment to ESG. That concludes my opening remarks. I would now like to pass presentation over to Wissam to discuss our financial results.

Speaker 3

Thank you, Gary, and good morning, everyone. Q3 was another tremendous quarter for Tricon, I'm proud of what our team has accomplished so far this year. We've achieved exceptional results, launched significant vehicles to support our growth of our business key priorities that we set out in 2019. These include growing our core FFO per share at a compounded annual rate of 10% over 3 years through 2022, Raising approximately $1,000,000,000 of third party capital over 3 years, growing book value per share by reinvesting our free cash flow into accretive growth opportunities, reducing leverage and improving our reporting. As you can see, we are well on our way to achieving and in most cases exceeding these goals well ahead of schedule.

Speaker 3

You can see here we appraised over $2,000,000,000 third party capital compared to our target range of 1,000,000,000. This is one of our key drivers for doubling in size over the next 3 years. More importantly, as well as this year's equity offering and U. S. IPO, which have been instrumental in reducing our debt.

Speaker 3

We plan to refresh this dashboard with new targets for 2022 when we report year end results. Let's turn to Slide 10, where we provide highlights of our key metrics for the quarter. First, our net income from continuing operation grew almost threefold year over year to $202,000,000 This included approximately $76,000,000 of NOI from our single family rental portfolio, representing a 21% year over year increase. We also had a $362,000,000 fair value gain on rental properties in Q3 compared to $60,000,000 in the prior year, reflecting significant home price appreciation in our Sunbelt markets. 2nd, our core FFO per share increased by 17% year over year to 0 point 14 dollars quarterly dividend.

Speaker 3

Finally, we reported AFFO of $0.12 per share. This provides us with ample cushion to support our quarterly dividend with an co payout ratio of 40%. You will note that this quarter we changed our dividend from CAD0.07 to CAD0.058 to better match our functional and reporting currencies. At the current spot rate, this represents a 3% increase quarter over quarter. Let's now move over to Slide 11 and talk about the drivers that contributed to our FFO per share for the quarter.

Speaker 3

On the whole, core FFO grew by 46% from last year to $38,000,000 in the 3rd quarter. On a per share basis, the year over year increase of $0.02 or 17% can be attributed to strength across several aspects of our business. First, our single family rental portfolio, which makes up 90% of our real estate assets, delivered 13% growth on Tricon's proportionate NOI. This was driven by 9% increase in the number of homes coupled with a 6% increase in the average monthly rent. This was offset by higher direct expenses associated with a larger portfolio, net of savings from lower resident turnover and less marketing and leasing spend.

Speaker 3

Our private funds and advisory fees contributed meaningfully this quarter with 120% increase in revenues, driven by an incremental fees from new investment vehicles in SFR and U. S. Multifamily, along with higher development fees generated from our Johnson subsidiary. In our adjacent residential businesses, U. S.

Speaker 3

Multifamily rental FFO reflected an 80% syndication of portfolio earlier this year. And as Gary mentioned, this portfolio is doing very well. This is coupled with solid results from our for sale housing business. And on the corporate side, we had higher corporate overhead, partly offset by lower interest expense as well as the impact of higher diluted share count reflected common and preferred equity financing. Let's turn to Slide 12 and talk about significant increase in fee revenue, which I just mentioned.

Speaker 3

The fees we earn from managing third party capital not only allow us to scale faster and improve operational efficiency, but also allow us to offset a large portion of our corporate overhead expenses. These fees include asset management fees, property management fees and development fees, which together covered about 73% of our total recurring overhead costs this quarter. Now granted, this was a particularly strong quarter for Johnson Development fees and SFR acquisition fees, But over time, we expect our fee revenue to eventually cover the bulk of our overhead expenses. This means our shareholders will essentially get our platform for free And we'd reap the benefits of strong NOI growth contributing directly to the bottom line. Let's talk about our balance sheet on Slide 13.

Speaker 3

We have shown a successful track record of reducing balance sheet leverage, coupled with a significant growth in the business while navigating a global recession and a pandemic. We have decreased net debt to adjusted EBITDA by 5.5 turns in the past year and a half to 9.8 times in the 3rd quarter. And with the proceeds from the U. S. IPO, our pro form a leverage comes down to 7.6x.

Speaker 3

This translates to 34% net debt to and manage our leverage generally with a range of 8x to 9x EBITDA as we deploy significant capital into growing the SFR portfolio. Turning to our debt profile on Slide 14, we have also made meaningful progress in addressing near term debt maturities. At the end of Q3, we had $1,300,000,000 of debt maturing in 2022. Since Then we have repaid the 2017-1 securitization of 455,000,000 with the proceeds from our U. S.

Speaker 3

IPO. And more recently, we refinanced the final tranche of our short term debt in SFR JV1 with a fixed rate debt financing at 2.49 percent with maturity concurrent with a JV term. This leaves a $221,000,000 term loan as the only remaining maturity in 2022, which we aim to refinance early next year. Our liquidity profile is also strong, dollars 637,000,000 in available cash and credit facility to fund our growth. On the whole, this was a very strong quarter and we're going full steam ahead into the next quarter.

Speaker 3

On that note, let me pass the call over to Kevin to discuss the operational highlights of the quarter.

Speaker 4

Thank you, Sam, and good morning, everyone. 1st and foremost, a big thank you goes out to our Tricon operations and customer service teams Stay out to make the lives of our residents better. Moving to Slide 15, it's our focus on a superior resident experience that sets us apart and allows us to continue to deliver consistent, predictable and scalable results quarter after quarter. To think in context, if you look at our metrics over the past 6 quarters, we've historically reported rent growth on new move ins that is higher than our public peers reflecting the strong loss to lease embedded in our portfolio. Meanwhile, rent growth and renewals has been tempered by self governing and our commitment to ESG, but strong demand for our homes is allowing us to slowly adjust that metric upward, While continuing to be sensitive to our residents' financial circumstances.

Speaker 4

Our same home NOI growth has similarly exceeded that of our peers over time, driven by top line growth, disciplined expense management and industry low turnover rates. And we think our industry low turn rate is a function of our middle market strategy, our diligent underwriting and self governing on renewals and unmatched customer service. In the 3rd quarter, we continued to deliver solid same home results, 6.5% same home NOI growth compared to last year. Let's talk about the drivers of same home NOI growth on Slide team. The left side of the slide depicts the underlying components that made up our year on year same home revenue growth in the 3rd quarter.

Speaker 4

While strong by historical standards, we expect this number to remain robust and possibly improve in the quarters to come. We expect high single digit blended rent growth to continue. Blended rents were 9.1% in the quarter, supported by an impressive 20.8% increase on new move ins and 5% growth in renewals. Since we've been self governing on renewals for the past 3.5 to 4 years. We conservatively estimate that our we have an accumulated 15% to 20% loss to lease in our portfolio, creating a runway for significant rent growth ahead.

Speaker 4

Our ancillary fees and other revenue Also grew meaningfully, up 18% from last year. We see a path to increase this number by another 40% as we continue to roll out programs such as smart home and renters insurance, but also from future programs like telecom concierge services, appliance upgrade, solar panels and more. Lastly, our bad debt has come down from a high of 2.8% of revenue Let's turn to Slide 17 to discuss some of the key expense variances this quarter. Property taxes continue to trend higher in line with the massive home appreciation we are witnessing in our markets. With the benefit of successful appeals, we have managed to keep property tax growth to 4.5% this quarter, expenses were higher this quarter as we returned to pre COVID levels of maintenance activity, whereas last year we cut back on any non essential work during the pandemic.

Speaker 4

Conversely, our turnover expenses is much lower as our turnover rate decreased by 6.60 basis points from last year. Across both of these line items, we're seeing inflation materials and labor expenses, but we are mitigating these to some extent and Suppliers. Property insurance costs have also increased driven by rising premiums across the industry, pressures to continue in the near term, we remain focused on what we can control, harvesting operating efficiencies through technology and process improvements, providing superior resident service and driving economies of scale. You can see the results in our cost to maintain at the bottom of this slide, which has dropped meaningfully over the past 3 years from 3,200 per home to 2,600 currently, while our NOI margin has increased for an update on more recent leasing trends. I continue to be blown away by the consistent insatiable demand for our product.

Speaker 4

We're getting approximately 5,000 calls per week by people inquiring to lease 1 of only say 300 homes available at any one time. And we registered higher call volume in October than we did in September. When we consider online leads, that number increases to 9,000 leads per Since the beginning of our business, our challenge has not been with lead generation, but rather with lead management. And we've addressed these challenges through technology such as our proprietary CRM system, automatic outbound dialing and intelligent virtual assistant. This strong demand funnel coupled with significant loss to lease is allowing us to continue to push rents on new move ins by over 20% quarter with strong demand trends continuing, coupled of course with our team's excellent execution.

Speaker 4

I want to truly thank our operations team for pouring their hearts into what they do as the purity in our purpose continues to translate into exceptional results. Now I'll turn the call back to Gary for closing remarks.

Speaker 2

Thank you, Kevin. Let's spend a few minutes discussing our adjacent residential businesses on Slide 19, which account for less than 10% of the balance sheet, but represent a meaningful source of value for shareholders and a potential source of cash to supercharge our SFR growth. These businesses include our Canadian multifamily built to core business, a 20% interest in a high quality multifamily portfolio located in the Sunbelt and legacy for sale housing assets. Using conservative current valuation metrics, we believe these assets have the potential to be worth 2 times our IFRS carry value over and represent $1,000,000,000 of value for our shareholders. Should we monetize these assets over time, we would use the proceeds to pay down debt And so let's conclude on Slide 20.

Speaker 2

If there's one thing you should take away from our story, it's our focus on growth. By partnering with leading global real estate investors to form 3 complementary SFR joint ventures. Tricon has a clear path to doubling its SFR portfolio to 50,000 homes in the next 3 years. We have the balance sheet, operating platform and 3rd party capital in place to achieve this target with confidence and believe favorable tailwinds in our industry should drive strong operating performance for years to come. That concludes our prepared remarks.

Speaker 2

I will pass the call back to Sarah to take questions. With Sam, Kevin and I will also be joined by John Allenzweig, Andy Carmody and Andrew Joyner to answer questions.

Operator

First question comes from the line of Richard Hill from Morgan Stanley. Your line is open.

Speaker 5

Hey, good morning guys and congrats on your first earnings call as a public U. S. Company. I'm pretty comfortable revenue side of the equation. We feel pretty good with where you stand.

Speaker 5

I did want to maybe unpack a little bit more about your same home expenses that you provided on 2017. I think this is a great slide. 2 things I wanted to focus on. The repairs and maintenance looks like it increased Somewhat significantly year over year. Maybe walk us through that.

Speaker 5

And if you think about the property management, which is another big line item, how do you think about that in the year?

Speaker 4

Full work and we're doing All the work orders have come our way. So it's a little bit of a noisy comp comparing to Q3 of last year. Really the more meaningful reason is that it depends quarter to quarter month to month on the mix of the work orders we So Q3 of this last quarter, we got more bigger HVAC

Speaker 2

work orders,

Speaker 4

landscape repair work orders, escape repair work orders and that made up between 13% to 15% of that 20% year over year growth you see. And then there were some of the material and labor cost pressures, call it 5% to 7% of that 20%. And we're doing more preventive work now than we were before. But I'll tell you in October, we already have our numbers. We have visibly the October numbers and they've come in lower, meaningfully lower

Speaker 5

Got it. And I said that I

Speaker 2

was pretty comfortable through revenue side

Speaker 5

of the equation, but I can't help but ask a question. Your new lease spreads of 20.8%, I think I got that right, are pretty consistent with what our projections were for your new leases. And frankly, it looks like your new lease growth is fairly unabated here. Can you maybe talk through those demand drivers and if there's an ability to push new lease rate growth even further? Know some of your Sunbelt cousins in the apartment sector are doing even higher than that.

Speaker 5

Their comps are easier than yours. But maybe think about maybe talk walk us through where you could go in the new lease rate growth or is this sort of the new normal 20% is as good as it's going to get?

Speaker 2

Yes. So Rich, I'll take that. I don't think we're going to go much higher than 2020. Obviously, we're in line in October, as you've seen. The markets range Hot, hotter and hottest.

Speaker 2

But for us to guide you that we're going to be beyond 2020 on a blended basis just seems unreasonable. Look, there are markets that are closer to 30. Phoenix, For example, it's red hot. Our Atlanta market is extremely strong. We've got some markets that are beyond 'twenty, but you have Also look through and look at some of the laggards, which might be markets like Houston or San Antonio, where we've had to deal with pandemic emergency restrictions in Northern California.

Speaker 2

So I think you have to take all of that together. And I don't think we feel comfortable thinking

Speaker 4

we're going

Speaker 2

to be on 20%. Really, at the end of the day, the blended growth matters. And it's been 8% to 9%. And I think we feel pretty confident it can continue that way. We are edging up, as we talked about, we do self govern on renewals and we are edging that up a little bit as the economy opens and we We've seen significant wage inflation.

Speaker 2

We're always trying to be sensitive to our residents, but they're doing better and we are edging up that renewal growth. And so we should be able to continue with very strong blended rent growth as we go forward.

Speaker 5

Yes. And Gary, thank you for that. And sorry for the annoying sell side question. I recognize that we're

Operator

question comes from the line of Jade Rahmani from KBW. Your line is open.

Speaker 6

Thank you very much. In the wake The recent news about Zillow Offers, I wanted to ask about Tricon's ability to achieve its growth outlook. Specifically, with your plans to double the portfolio over 3 years. What do you see as the major constraints in achieving the growth outlook? Do you believe that it's supply of homes?

Speaker 6

Is it pricing in the marketplace, competition, availability of labor, conversion timelines? And what are your plans to address those constraints?

Speaker 2

So, Jade, good to talk to you. This is Gary. I'm going to start and then I'll pass it on to John to maybe talk more specifically about Zillow. But I mean, really, we don't see any constraints. I mean, as we talked about, this is kind of a massive evergreen opportunity.

Speaker 2

The operational difficulty for us is not Acquiring homes, it's really and by the way, in the past, the only reason we didn't acquire more homes was because we were capital constrained. But now that we've got the capital From these larger joint ventures, you've seen that we've ramped it up. We've gone from 800 homes in Q1, 1500 in Q2, now 2,300 in Q3. It is the proof is in the pudding. There are no constraints on the acquisition side.

Speaker 2

This is a massive market. It is unbelievably fragmented and we're being incredibly disciplined and targeted about what we buy, right? So we could obviously be buying a lot more homes if we weren't being as based on our buy box. The only thing we have to make sure of is that we hire and anticipate any growth. So that's obviously a key thing because there's one thing to make the acquisitions, but then also we have to renovate those homes and then ultimately turn a larger portfolio.

Speaker 2

So we do need to make sure that we ramp up hiring in order to match an elevated acquisition pace, but it's a difficult environment to hire. Obviously, there is some wage pressure. We're reading all about that. We're seeing that in

Speaker 4

our own business, but none

Speaker 2

of it's insurmountable. So I would say there's nothing that we see that makes us feel like we can't hit our long term target of getting the 50,000 homes. And we're doing that, I would say, by being incredibly disciplined. John, maybe you could talk about how the iBuyers play into this. Just one thing I would say, Jade, We do not depend on buying portfolios or even buying homes from iBuyers.

Speaker 2

We're literally buying one home at a time. The 2,300 homes we bought this quarter essentially all came off the MLS. So I'm going to turn that off to turn it over to John.

Speaker 4

Sure. And thanks a lot, Gary, and good morning, Jade. Yes, and so as Gary noted, the iBuyers are one of our buying channels, and

Speaker 2

we really look at them

Speaker 4

in many ways as a supplement or a replacement for MLS If you think about a home seller in Phoenix or Dallas, they can choose to list their home on the MLS or they might instead sell it to an iBuyer to expedite sales process, and we underwrite our iBuyer homes the same way as we would an individual retail home. More specifically, with regards to Zillow, we have definitely seen an uptick In the volume of homes we acquired from Zillow in late Q3 and Q4 as they've announced their distress and begun to liquidate Homes. So when you think about our Q4 target of 1600 homes, which reflects lower listing volume as we approach Thanksgiving and Christmas, we've been picking up a lot more homes than normal from Zillow, which may allow us to beat that targeted number. So thinking about how that would impact us, we're just seeing a little bit more listing volume at Obviously, as they clear out their homes, it should help us in our Q4 and Q1 numbers.

Speaker 6

And just to follow-up, in accelerating the growth, Can you talk about risk management and how you aim to mitigate that, the risk of overpaying and managing quality control as well? Zillow has admitted Their algorithms, their data analytics and they're one of the largest in the housing market. We're not predictive in terms of accuracy of home prices. So how do you plan to mitigate that? I know you have a lot of boots on the ground and I think that local presence is critical.

Speaker 2

Yes, I mean, look, I think we remain incredibly disciplined. We have a whole number of parameters in our buy box that get audited by our joint venture partners. And obviously, one of the key parameters there is the cap rate, right? So this is not growth for growth sake. It's not growth at all costs.

Speaker 2

It's based on hitting predetermined parameters in a buy box, including the cap rate, and we're buying homes on a nominal basis between cap rates of 5% to 5.5%. So this is all about discipline. The risk management in terms of them to operate the homes, as I talked about before, it means that we have to have boots on the ground, as you We need to have we need to ramp up our operational workforce so that we have the ability to actually then renovate and turn those homes. So again, it's just making sure that you get ahead. You're going to Acquire more homes, you have to get ahead of that and hire in advance.

Speaker 2

That's the key way to mitigate the risk. But we're making sure that we observe the natural speed limit of our business, right? And remember, we've always been a real estate company where we're applying tech to allow us to operate better. We haven't gone from a company to them being a real estate company, which is a much more difficult transition, and we can understand why Zillow probably struggled with it. This business model has been built slowly over time and we just continue to push the growth as we get more confident with the systems and people in place.

Speaker 6

Thank you very much and congrats on the dual listing.

Speaker 2

Thank you, Jade.

Operator

Your next question comes from the line of Stephen MacLeod from BMO Capital Markets. Your line is open.

Speaker 7

Thank you. Good morning, guys.

Speaker 3

Hi, Pete.

Speaker 7

Just a couple of questions to follow-up here. On the single family rental business, I know that your acquisition price sort of ticked higher quarter over quarter. I'm just wondering if that's more attributable to the markets you're buying in or is it the You're buying in or is it the channels you're buying in? Wondering if you can get some color there.

Speaker 2

Yes. I mean, it's partly attributable to home price appreciation, right? I mean, That's the thing. I mean, if home prices last year were 300,000, you get 20% home price appreciation, now you're 360, right? And It's amazing how fast prices have moved across the Sunbelt.

Speaker 2

So some of it is just the underlying inflation in the market. Obviously, we've been able to offset that with the rent inflation. We talked about that on new lease growth. So it's allowed us to keep the kind of cap rates that we're buying at fairly constant. I would say some of it's just underlying inflation in the market and some of it to your point is mix, right?

Speaker 2

Because in SFR JV1 as an example, We were not buying in, let's say, Phoenix or Las Vegas. And now we're buying in those markets. We're also starting to buy in Austin. And those markets do have higher home prices. And so it's a little bit of mix.

Speaker 2

We're also activating our homebuilder direct program where we are buying new homes and those new homes also are at slightly higher prices. So I think all of it together is leading inflation. But again, what's important is the cap rate. Even though the home prices are moving up, the cap rates are staying the same.

Speaker 7

Okay. That's great. Thank you. And then just when you think about the SFR business going forward, you've had an occupancy bias Through the pandemic, but still have been able to drive strong rent growth. Is that sort of a strategy that you expect to continue to anchor to or will you sort of move away from As the market the demand the pandemic subsides, demand remains strong going forward.

Speaker 2

Kevin, do you want to answer that for Steve?

Speaker 4

Yes. You're talking about our occupancy bias versus rent growth. Is that what the question is about?

Speaker 7

Yes. And just with respect to the outlook in maintaining occupancy bias through the pandemic, and I'm just wondering if that shifts at all With the pandemic subsiding and demand and growth remaining strong.

Speaker 4

Yes. I think that And I've mentioned it before, this is an incredible business. I've never been in a business like this in my life. And the amount of demand that we have is Since I started 6 years ago has not abated. We were a little bit worried what might happen during the pandemic and it cuts stronger And it continues to be robust.

Speaker 4

Our leases per rent ready home in this last quarter were up 12 percent year over year. We're getting upwards of 9,000 leads per week on anywhere from 300 plus homes that are available. And we still today, we're still denying anywhere from 48% to 52% of applicants. I mean, that's how confident we feel in our ability To really drive a good rent roll because the demand is just so high. And what's interesting also is while our rents new on new leases, we're pushing rents 20%.

Speaker 4

Our rent to income ratios have remained static. They're still in the 22%, 23% rent to income rate. And our FICO score has improved. So We remain very, very robust. I think that we can continue to have an occupancy bias and push rents at the same time.

Speaker 4

I mean, I think that this business and the state that we're in is as strong as it's been, and I don't see that abating for a while. Does that answer your question? Yes.

Speaker 2

Kevin, I just want to build on that for Steve. It's interesting because when Kevin joined us And Kevin and a lot of our senior operating team came from a multifamily background because there was no single family rental management obviously back in the day. And the prevailing view in multifamily was always once you hit 95% occupancy, that's when you start driving rent. And we apply that for a while to our single family rental business. I think the one thing we've learned coming through this pandemic that we're actually better operated higher occupancy to have more of an occupancy bias.

Speaker 2

And so I can see us over time, even in different conditions offered in closer to 97%. And the reason for this is it's such an intense business. There's so many moving pieces. And we think of it almost like a machine or an apparatus. Keep it quiet.

Speaker 2

I'd just like to keep your body quiet as an analogy. You'll probably perform better over time. And so we think it's a key learning that's come out of this pandemic and I suspect we'll continue to maintain for that reason a very strong occupancy bias going forward.

Speaker 7

Okay. That's great. And then maybe just one last final one. When you think about your goal to double the size of the SFR portfolio, Does that do you need to have do you need to raise more third party capital to do that or is that based on what you have committed today.

Speaker 2

Yes. No, it's based on the capital we have in place in the SFR joint venture. So That's what's so incredible. I think about our story for shareholders is that we've got all the capital, 3rd party capital balance sheet and the operating platform in place to hit that target with confidence. In place to hit that target with confidence.

Speaker 7

Great. Thanks, Gary. And I'll say it as well. Congrats on the U. S.

Speaker 7

Listing.

Speaker 2

Thank you, Steve. Appreciate it. Thanks for all your support.

Operator

Our last question comes from the line of Jonathan Kelcher from TD Securities. Your line is open.

Speaker 8

Thanks. Good morning. Just on the SFR acquisition fees that you highlighted as being a strong quarter. Is that a function record acquisitions you did in the quarter or were there any one time fees with the new JV in there?

Speaker 2

No, that's a function of the it's a function of the acquisitions, right? It's paid when we acquire a home. So If you want to think about the fees, I would say on the whole, they're largely run rate. The fees are largely run rate. I think where there is some one time, I mean, certainly the performance fees are always out and flow, as you know.

Speaker 2

On the development fee side, we did have a big commercial land sale in Johnson, which generated nearly $1,000,000 of fees. So I would say that's probably not run rate. And then the only other thing related to the acquisitions, we did a big vend in. So what we did is we acquired a lot of the homes on balance sheet And then we vended it into the joint venture when it closed. And when we vended those homes in, our limited partners or private investors paid us a preferred return.

Speaker 2

So that preferred returns nearly $1,000,000 that's included in the FFO number, John. And so that is one time. But I will say that the offset to that is we incurred higher interest expense, which is also an FFO in order to warehouse those assets. So it's a bit of kithkith, but if you're just trying to model out the fee revenue, That is about $1,000,000 high.

Speaker 8

Okay. That is helpful. And are you still I guess the limit is Really on operations in terms of taking on new homes. Are you still targeting roughly 2,000 a quarter on average?

Speaker 2

Yes, yes, I think we're going to I mean, we're a little higher this quarter and I will say that it is seasonal. I mean, as John talked about, acquisition volumes will typically be lower in Q1 and Q4 when less people list their homes. So you're going to see higher acquisition acquisition volumes generally in Q2 and Q3, but the goal is to get to roughly 8,000 homes over the course of the year.

Speaker 8

Okay. That's it for me. I'll turn it back. Thanks.

Speaker 2

All right. Thanks.

Operator

We have a follow-up question comes from the line of Sheik Ramani from KBW. Your line is open.

Speaker 6

Thank you very much. With the turnover ratio around 20% and new lease rent Growth above 20%. Do you believe that the remaining 80% of the portfolio has rents that are 15% to 20% below market? Granted that would be realized over time, but is that your current belief? Yes.

Speaker 2

I mean, we'd say that's conservative. It's probably closer to 20%, if not higher. That's a lost release.

Speaker 6

Thank you very much.

Operator

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

Speaker 2

Thank you, Sarah. I'd like to thank all of you on this call for your participation. We look forward to speaking with you again in the New Year to discuss our Q4 and full year results.

Operator

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

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Earnings Conference Call
Tricon Residential Q3 2021
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