Q2 2020 Tricon Residential Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the try kind of residential second quarter 2020 analyst calls.
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No likes to have a conference over to a speaker today, what tech Novak managing director capital markets. Thank you. Please go ahead.
Thank you wouldn't need good morning, everyone and thank you for joining us to discuss try comes results for the 306 months ended June Thirtyth 20 twice, which were shared on the news release distributed yesterday.
I'd like to remind you that our remarks and answers to your questions may contain forward looking statements and information.
This information subject to risks and uncertainties that may cause actual events or results to differ materially for more information. Please refer to our most recent management's discussion and analysis and I know insulation form which are available on SEDAR and our company one type.
Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our Indiana I.
I would also like to remind everyone, but all figures are being quoted in U.S. dollars unless otherwise stated.
Please note that these calls available by webcast at track on residential Oklahoma.
A replay will be accessible they're following the call.
Lastly, please note that during this call we will be referring to a supplementary conference call presentation posted on our website.
Having already accessed 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 truck on residential Dot com.
Under events and presentations with that I will turn the call over to Gary Berman, President and CEO of triangle.
Thank you Boyd tags, good morning, everybody I hope everybody listening in and is doing well and we're starting here on page two and I'd like to start by saying as we transitioned from being a pure play asset manager focused on for shale housing to a major owner and operator rental housing we deliberately set out to key.
Great a defensive business, one that would perform well in good times in bad times.
And while we could not have foreseen this pandemic and we certainly would never wish it upon any of US we really needed to test our business and I'm proud to say that we have reason to that challenge. The results in Q2 are compelling and illustrate how defensive and resilient. Our business has been during cold that you look at AAP AFFO per diluted share.
Sure 11 cents or 15 cents in Canadian dollars that top 175% year over year, that's on a larger single family rental portfolio strong single family rental operations, but also the inclusion of full quarter inclusion of U.S. multifamily portfolio, which was weaker this quarter, but I'm a whole given that we were able to issue equity.
Forward price about price, 30% higher than where we're trading today. This transaction has been accretive at its contributed to the strong AFFO per share growth year over year.
Our analyzed 77 million is up two and a half million over Q1, so obstacle eventually two and a half million and not includes dot dot, which is double still low by industry standards, but double where we were in Q1, we also lowered our cost of funds by issuing a 553 million security.
Position and our single family rental joint venture out a weighted average interest rate of 2.3, or 4%, which is close to a record low and really matters that are dot. We also this quarter had been busy with our integration plan changed our name to try to Nonresidential Inc.
And behind the scenes were quietly working on combining tried on Colossus your investment entity structure to create one unified company. So we can speak internally and externally with one voice.
Moving to a single family rental business, which accounts for up to 75%, 65% I should say ever Apoquel contribution about 75% of our assets. The results were very strong this quarter on a relative basis, but I'd like to remind everyone that we are trying to balance the needs of various stakeholders. We are trying to take a compassionate approach to our ROE.
Residents during this difficult time, and so weve halted evictions, we've we've late fees, we for went rank growth.
Renewals and and we're not trying to maximize profits in any given specific quarter as strong as these results are with 5.1 same store NOI growth and 4.7% planning growth blended rank growth. They would have been much stronger if we hadn't taken some of those initiatives to help or residents.
Multifamily rent on the U.S. This this quarter, 17% of African contribution has been weaker us multifamily does tend to be more cyclical business as resins tend to be singles and couples and can double off during tougher times also with the pandemic with there are many shuttered. Obviously this offering is not nearly as compelling as it.
Tends to it loses its kind of social where community aspect, we did see occupancy drop about 100 basis points year over year and negative lease trade outs of about 2% on the whole we do still feel good about this portfolio. We think there's a lot of embedded growth and will perform well as we get through the pandemic in both single family run.
No and multifamily rental we had no issues with collections, we were concerned about this going into the pandemic, but when an collecting 99% of rents build in single family rental and 90% of rents built in multifamily.
Moving along to residential developments.
In our Scribner project, we called out the change in the softest Summerhill, we perfected the entitlements in the quarter, which is a big milestone for US. It took about three years to do that I am glad that that the previous developers couldn't accomplish it in 25 years and with the entitlements in place our partner being in a limited life on their an opportunity presented to buy them out and so we acquired.
The remaining interest in both the development site, the remaining 50% interest and 75% in the adjoining shops and so now we control hundred percent of what I would see is arguably the most coveted most valuable residential development site in Toronto.
On the for sale housing business on our legacy business, we continue to bring cash home.
We distributed we received about 7.3 million of cash in a quarter.
Largely from the sale of full sure farms, which is a separate account with the sovereign wealth fund.
Your Cross Creek Ranch.
Able to bring back about 4 million to try to on on that and also able to retain management. We sold is to consortium of private investors Johnson will remain on as the developer. So we'll continue to receive fees going forward.
Let's move onto page three.
So in the pandemic a lot of the trends are factors that have supported our sunbelt middle market strategy are strengthening.
And we can if we start with sunbelt migration, we've always been a demographic demographic based investors, we look to invest in the markets and overtime, how the strongest household formation job growth because in those markets you tend to have more liquidity more rank growth more home price appreciation and that's why the vast majority of our of our portfolio.
It is invested in the Sun belt.
And what we're seeing in the pandemic and during this how crisis is those trends are accelerating people families are seeking out suburbia and single family housing for safety and I'm, not just talking about or single family rental business. The entire single family housing because everything from single family rental to for sale is strong in fact in our Johnson business in.
June over a four week stretch our sales were probably the best they've been in four decades give you sense of how strong the strong the trends have been and have de urbanization trends are taking hold and it's not just the urbanization were also in the time were a powerful work from home trends is taking place.
And when you think about it the technology that was available to allow working from home was once available before we had zoo webex before but it just wasn't socially acceptable now that Ceos are working in the hamptons or Muskogee or my case in old Phil now would be times it becomes much more acceptable to work.
From home and that's going to change the way, we work and we think it's going to have an impact on migration patterns.
We think about it is that the time and speaks of the traditional workday starts to blur. The traditional idea of a nine to five workday is really dead and now with technology. You can think about it this way the so called worker and plant become untethered. So someone can work almost anywhere.
And I'm not I'm not implying here that we think theres theres less demand for fiscal office space I could tell you try to on that we believe in our culture I said before that I think cultures, Peter Drucker said each strategy for breakfast.
But we really believed that our culture is is manifested and strengthened by being together in a physical office and so we will try to go back to that when we can but for many other companies that maybe don't prioritize culture back office workers, who just can't find the talent in a particular locale now they can access talent anywhere to reward.
From home arrangements and if you can access talen anywhere by extension why not live anywhere and if you can live anywhere why not live in the sunbelt, whether whether it's better the taxes are lower and it's more affordable and that we're seeing that again, when we talked about affordability. That's a segue into the final point here on the slide.
Is that in a pan and a pandemic an economic crisis affordability is paramount and so we're seeing more and more people move to the Sun belt, where there is a lower cost of living I'd also add and the Congress right now is to being the stimulus, but with all the stimulus that we're seeing.
That's also that is coming into place through record money printing and we've been to this movie before after the great recession, we're likely to see asset price inflation and also higher home prices and so if we see higher home prices again, we'll have more affordability challenges and all of this reinforces our son Sunbelt strategy and middle market strategy.
Affordability is driving our key trends.
And on page four you can see how these trends are observed by analyzing U haul data and this is just really interesting anecdotal information on migration trends you all uses pricing algorithms to determine the cost to rent a truck to move it from eight to be in migration markets. It's more expensive theres a premium those are the.
Green circles and in the out migration market. There is essentially a discount is there's less competition to rent those trucks and so if you've taken as an example, let's say to Tampa for instance, you can see there's a premium a $750 premium to take a truck in versus take it out but what's really interesting is that increased 44.
<unk> percent year over year, and 15% in the quarter. So direct evidence for U haul data that we're seeing this migration and if we look at an all the markets all the all the in migration markets and those are largely sunbelt markets. We're we're investing those are up 35 premium is up 33% year over year and 11% in the quarter.
Another way to observe this is to look at slide five.
And analyze a rita public apartment reap data and you can see here the year over year occupancy trends between urban centers in suburban markets and is quite pronounced in the urban centers, New York, San Francisco, Boston occupancy is down about 2% to 4% and the more affordable suburban market.
Occupancy is down about 1% to 2% and to be fair. We've included probably to the hardest hit suburban markets in Houston in Orlando in this comparison Orlando for instance loss has lost about 200000 jobs in the last several months as you can see how these de urbanization trends are taking hold with the apartment REIT data. If we then move over to slow.
Hi, six we try to look at this on more of an apples to apples basis between the suburbs and we're not only seeing I'd be urbanization trends were also seeing a deed densification trend the.
The garden style or multifamily suburban properties occupancy is down 1% to 2%, but single family rental by comparison occupancy is up roughly 1% and is proving to be a place during the pandemic again, where families are seeking safety and also affordability. If you look at this on a per square foot basis single family rental is more.
Affordable in suburban.
And I would say that these demobilization trends are probably longer term de densification unlikely. We do think that as we get out of the pandemic. When we have a vaccine that we will see stronger demand for suburban single family because of the social aspects of those communities.
Let's move on to slide seven.
As the pandemic rules on we wanted to give you an update and talked about how our approach is change to our employees our residents and the way we think about investments as we have emerged from the dark days of me when we're all in the lock down to a period today, which I would say is less restrictive were social distancing remains in force in August and I, and we would really describe where.
We are to the in August is probably being a new normal for some time, so starting with our employees everyone was working from home beginning in March.
And now as we look to August we're gradually going to reopen or office, particularly in Toronto on a volunteer basis and again as I said before.
We do believe in bringing everyone together thats, how we drive recall churn as soon as it's safe to do so and were permitted in different locales.
By the municipalities are governments, we do want to bring our employees back to a physical physical setting.
In terms of our.
Workers were in the front lines or maintenance tax as an example in may we really wanted to ensure that there was complete separation between them and our residents and in many cases, we use specialized third party vendors to perform maintenance will now in August everyone pretty much everyone is comfortable going back or maintenance sex are comfortable going into our homes and apartments.
And we're increasingly using our own team to perform essential and non essential maintenance in Q2, only about 45% of work orders were performed in house and as we move through the year and into next year that will move back up to about 65%, where we were in Q1.
Our approach with our residents as I said has been one of compassion. We recognize this is a challenging time and we very much operating in the quarter in Q2 for strong occupancy or retention bias and so we halted evictions weve late fees, we for when rent growth.
But in single family rental particular, as we now move into August and we see such strong growth such strong demand. We're now trying to balance occupancy and rent growth. So we are layering in now late payments, although with a longer grace period, and we are going to gradually increase renewal renewal rents to too.
To take into account that much higher demand on the multifamily side in Q2 or amenities were largely close that definitely affected our leasing.
But now in August we're gradually opening up those amenities and again given that these are social environment that should help our leasing activity over time.
With respect to our investments in May we just didnt have certainty as to where this was going into pandemic economies hadn't really opened up and we wanted to be very conservative conserve cash, we essentially pause all acquisitions or investments as we got to the ended the quarter and we can see things were opening up we became more confident I would say we moved into more of a.
Risk on mode. We resumed we resumed investments and actions we talked about Scribner square and we've also now resumed acquisitions in our single family rental joint venture we expected by about 400 homes in Q3 about 500 in Q4, and then ramp up probably at about 800 per quarter and 21.
We've also now advanced discussions on the syndication or us multifamily portfolio.
We're dealing with two sovereign wealth funds to sell a two thirds interests in the portfolio and we're hoping to be able to announce something later in the year and with respect to Capex, we halted all non essential capex in the quarter, but now we're gradually facing that back in and even looking at value enhancing capex, especially if we think we can drive.
Rent growth.
Let's move on to slide eight and talk about an SG update and and I recognize this has been very difficult very challenging time for all of US munis. Three months is has really felt like three years move what we've witnessed the sample senseless murder George Floyd.
Police protests in U.S. cities in really all around the world and it's been a time for self selection and soul searching and we wanted to take this time and take our position a privilege and responsibility to see what we could do how we could do more for our employees. Our residents in the communities, we serve and so weve unveiled three new initiatives as part of.
Our MSP program, which I'm very excited to share with you. The first is what we call living wage and this is spearheaded by my father, David in our founder and is essentially we're establishing a minimum base salary for US employees of 36000 446000 in Canadian dollars for our for our Canadian employees to put this in.
In context in the U.S. This is about a hourly wage of $17.50 and that compares to minimum wage in states are anywhere from about seven to $14. So it's been really important for us to make sure that our frontline workers are getting paid a little bit more that they have enough money not only for basics, but up but little bit left over.
To save for retirement, an unforeseen expenses. So they can live with dignity and we know that if we treat our frontline team and workers properly. They will do a much better job taking care of our residents and when our residents are fulfilled.
There are going to stay with us longer they're going to treat our homes like their own and they're going to refer us to other residents and all of that is good for investors.
We've also beefed up our diversity policies.
And taken action to acknowledge encounter systemic anti black and other anti minority racism, including indigenous racism in Canada and this is a very sensitive matter for me.
Jamie Canada as a young boys from South Africa under Us under apartheid redeem and in my parents and Jeff Minas as well or our co founder less South Africa for Canada to go to a more diverse society. One that was certainly more tolerant of differences and while that's largely true a lot of work still needs to be.
John and I have learned more about this in the last few months and it's incredibly unfortunate the systemic anti black races, and still exist today and we've got to we've got to do everything we can to fight that and eliminate it and so I try to on a number we've done a number of things, but the for the first time, we observed June team.
To 19 to June teens holiday, which marks the day in 18 65 point anti slavery laws were enforced by the government of Texas. We also.
Provided resources to all our employees to 11 to learn more about block history into talked about some very uncomfortable things like the legacy.
Slavery.
We've made significant donations to black girls code and Black boys.
Boys, Cobiz or Canadian and us organizations that help young black girls and boys men and women learn about computer science, so that one day, they could potentially have careers intact, our business and hopefully can become business leaders and help rise up in their communities and support their communities and I'm also proud to say that we sign.
The black North sealed flash along with other companies in Canada, which commenced a diversity target such that 3.5% attract an executive and board rolls are held by block leaders by 2025 is very important that our senior leadership overtime reflects the communities that were serving.
And lastly, I want to talk about an initiative in the west on lands on block 10. This is in the east side of downtown in Toronto, We have a partnership there with dream and Kilmer and now we're going to be developing block 10 in partnership with the Ashwin Navin people.
We're going to be doing a rental project, but that'll help unlock the broader site and allow us for nabil to create a first of its kind purpose built indigenous hub and this indigenous hub will include a health center and community Gardens and.
In addition, as employment education training centers, so it's going to be Steve the aren't regrettably excited about this initiative.
And with that I'm going to turn it over to with Sam to shift gears and now talk about our financial priorities.
Thank you Gary and good morning, everyone.
Let me start with slide nine and reiterate the five key priorities, which we introduced last here. These include growing our core FFO per share of compounded annual rate of 10% over three years through 2022.
Raising approximately 1 billion of third party capital over three years.
Growing book value per share by reinvesting, our free cash flow into accretive growth opportunities, reducing our leverage and improving our reported.
You can see these priorities presented in graphical dashboard on slide 10.
Well, we reintroduced.
Our three year flow targets last here.
We didn't expect to pandemic or assumption of this magnitude, but despite the current economic challenges. We still believe we can hit these targets over the next two years.
We had a very good quarter on posted 11 cents of AFFO per share, which brings us the 24 cents AFFO per share year to date or 33 cents in Canadian dollars.
If our business continues to perform as well as it has we're confident that we can achieve the ethical target range.
In terms of raising third party capital our plan is to raise another billion dollars a fee bearing capital over the next two years.
In Q2, we resumed discussions with potential investors that we're interested in our U.S multifamily portfolio before the pandemic.
And we believe we are on track to syndicate two thirds of this portfolio by early next year.
Also.
As we resumed acquisitions that are single family rental joint venture business, we should be back on track to complete this investment in 2021.
And we expect to raise additional third party capital for subsequent joint venture to continue our growth.
One of our main priorities is reducing leverage which we believe as one of the key ways to close the gap between our share price and analyst arms.
We currently set a 61% net desktop assets and we believe the syndication of the us multifamily portfolio can reduce our leverage by up to 5% while remaining for neutral.
Since we will be able to use of proceeds to pay off corporate debt and save on interest expense.
Even though our near term target is 50% to 55% we will continue to work to bring it lower over the long term.
Our last priority was to improve our reporting which is substantially complete with the transition to consolidated accounting last quarter as well as adopting like mdna disclosure, such as AFFO and AFFO per share.
We also issued a comprehensive he is cheap plan and we are on track to provide annual update at the beginning of next year.
Let's turn the call to slide 11, where we provide highlights of our key metrics for the quarter.
First.
Our net income grew 62% year over year to 17 million compared to $11 million last year.
Net income includes 10 million a fair value came from rental income properties compared to 27 million in the prior year. In addition, with 4 million of transaction costs. This year versus 25 million last year.
If we were to ignore those two items, our net income increased 9 million dustier to $11 million. This here.
Second our core FFO per share increased by 175% to 11 cents showcasing the resiliency of our portfolio.
Third we reported AFFO of eight cents per share, which translates to 11 cents Canadian.
And provides us with ample cushion to support our quarterly dividend of seven cents Canadian per share.
This equates on AFFO payout ratio of 58%.
Lastly, a more importantly, if were to annualize, our FFO or AFFO per share in Canadian dollars, you can see about our stock price is trading at a relatively low multiple compared to our peers.
Moving on to slide 12, let's highlight the drivers that contributed to AFFO per share growth this quarter.
First.
Our single family rental business delivered 15% growth and at a wide driven by a larger portfolio strong rent growth and higher NOI margin.
Second.
Are you us multifamily portfolio, which was acquired in June of 2019 contributed another three cents compared to prior year.
Third Jenny decreased by approximately 1 million compared to last year benefiting from the cost saving measures implemented at the beginning of the pandemic.
Furthermore, we believe that we can continue growing our rental business meaningfully without growing corporate M&A, which should drive strong AFFO growth.
On slide 13, I wouldn't want to walk you through our asset mix and reiterate our focus as a rental housing company.
Our consult.
Solid balance sheet is dominated by rental housing with approximately 96% of total assets generating recurring income with a defensive middle market profile.
The remaining 4% represents our development exposure, which is expected to create meaningful value for shareholders over time.
Our for sale housing business, which makes up less than 3% of total assets generated 7 million of cash in Q2 and is projected to generate approximately 330 million of cash to track on over mid to long term.
In addition, our Canadian multifamily developments, which makes up 1% of our total assets are projected to generate 30 million of analysts foot traffic on a bump stabilization.
If we're to apply cap rate of 4% to that figure and assume 50% that you would arrive at a value of two to three times, our current book value for these assets.
Let's discuss our depth on slide 14, you can see that our balance sheet is well positioned to weather near term uncertainty in the economic environment.
As of June Thirtyth, we had a total liquidity of over 200 million comprised of 170 million of Undrawn capacity on our credit facility.
And 30 million of unrestricted cash.
Lists liquidity profile was further improved after quarter end as we completed a securitization transaction refinance our us apart subscription line and warehouse credit facility.
With the proceeds from this transaction, we're able to reduce our us apart near term debt maturities from 864 million to 383 million through 2021.
We plan to refinancing standing amount of another securitization by early next year.
Beyond that we have one credit facility of 114 million related to our us multifamily portfolio that will mature in December of this year.
Were currently in active to stop discussions to extend this facility for another year and intend to pay it off with the syndication through us multifamily portfolio.
Let's take a closer look at the recent securitization transaction on based on slide 15.
This was try caused largest securitization try and financing to date.
The transaction was negotiated and executed during one of the most challenging economic environments of all time.
The at our team at our capital partners, we're able to achieve incredibly attractive terms.
First the weighted average fixed rate of 2.34% is one of the lowest interest rates price in single family rental securitization history.
Recall that we're currently buying homes of 5.9% cap rate so the spread versus our funding costs is extremely compelling.
Second this deal attracted 40 investors, including 21, new investors to try club.
It was approximately five times oversubscribed the pricing.
Underscoring strong demand for our product and confidence in our operating platform and operating performance from institutional investors.
Third the six year loan reduce our near term maturities significantly and extended try comes overall debt maturity schedule by seven months.
And lastly, the net proceeds of $62 million received from this transaction will provide sufficient equity to acquire approximately 900 homes, which was our acquisition target for the rest of 2012.
With that let me pass the call over to Kevin Baldrige, Chief operating officer to discuss the operating highlights for the quarter.
Thank you very much with Sam Hello, everyone.
Focus on the operational performance of our metals businesses, starting with single family rental on slide 16.
Exceptional demand trends, we're seeing a single family rental business earlier this year accelerated during the cold 19 pandemic interruption to.
As Gary mentioned earlier, the pandemic has made health safety and key priority for many people, which increased desire to move dense urban areas detached single family homes in the suburbs.
And we believe renters are choosing tricon because of our strong product offering and customer service.
Looking at our same home annualized performance, which captures over 15300 homes you can see that we were able to deliver strong same home and why growth of 5.1% compared to last year. We break this down or Sable revenues grew 4.2% driven by an occupancy increase of 110.
Basis points as well as averaged.
4.1% and this rent growth consisted of 8.3% growth on new leases and 3.2% growth in renewables.
Yes.
From the expense side were 42.7% increase same hold expenses largely driven by a 4.8% increased property taxes as our homes appreciate in value.
We also saw 6.1% increases property insurance driven by higher premiums across the industry.
On the plus side or controllable operating expenses, including our NIM and turnover as well as property management and other direct costs actually decreased by 1% year over year.
During the pandemic weak compressor delegation of authority and turn scopes and further refined is standardized maintenance procedures.
Variants lower turnover costs as fewer residents moved out.
Reported an annualized turnover rate of 22.7% in Q2 2020, that's of 760 basis point decrease from Q2 between 19.
It's a record low turnover rates for us in the summer season.
With a strong results in revenue growth in controllable expenses, we've posted impressive underlying margin, 66.1% in Q2, so highest save momenta wide margin. We've we've achieved in a single family rental business to date and all the while during pandemic.
The positive trends in this business continue into July results.
Moving to slide 17.
In July occupancy continued to track above historical average sainvil portfolio appears to be stabilizing at 97.4% close to 1% higher than the average occupancy in the past two years.
On the right side, you can see our rent growth.
More than doubled since April in July we were able to shards, 12.2% war, the new leases underscoring extremely robust demand for single family homes.
We have however, as Gary is talking about we moderated rent growth on wheels for two reasons to keep in occupancy bias for the time being until we can see the future with more clarity and to be sensitive to resins financial position. During these uncertain times.
However, due to the continuing strong demand we have begun to gradually raise rents.
Beginning in July and continue to August and September.
Our strategy of moderating rent growth.
As a reflection of our commitment to our residents, which is one of our yes cheap priorities.
And along those lines since April we've introduced several options to help our resins, which city answer difficulties, including offering rent for our plans and waving late fees.
To date around 2% of resident supply.
Plans, we agreed to a payment schedule, which is typically composer up to six monthly installments that started in June for most recipes.
We have also offer early terminations to select residence in which case, we apply their security deposit to their outstanding rent payment and we waived Blake, although the move up the early termination fees.
We believe that are carrying approach to our residents are proactive approach pandemic and the effectiveness of our property management are the key reasons that contained our bad debt expense, while helping to residents navigate through this challenging time.
The demand, we're seeing for loans is stronger than we ever but.
Let's turn to slide 18, where we illustrate our leasing funnel updated for July statistics.
We have seen a tremendous local activity either call center and web site in the past month as typical seasonal leasing trends continue despite the pandemic environment.
The challenge we face was on the supply side, we simply don't have enough taken who.
Unleased vacant homes, especially after we file as acquisitions for one quarter.
We had a total of 720 homes become available to lease during the month of July and that number fell to 193 by the end of a month in the meantime received an average of 3500 calls per week from prospects interested in leasing home and that doesn't count on a weekly.
Online leads we received.
The increasing demand coupled with limited suppliers are resulting in fewer days in the market for vacant homes as well as at 33% increase in the ratio of leases per available year over year.
We have not offered any meaningful concessions and our yet still able to achieve double digit rate growth on new leases.
In contrast to single family rental by US multifamily rental business is experiencing somewhat weaker trends.
As shown on slide 19.
The business experienced softness in demand due to spend at mic and recorded a 4.9% decrease is same property NOI in Q2.
Our focus continues to be on driving occupancy.
Q2 occupancy decreased by 120 basis points compared to last year.
Crease by 120 basis points to a level of 93.5%.
We adjusted both new and renewal prices downward in some markets to maintain occupancy, which led to a slight decrease the average monthly rent.
Revenue was further impacted by higher bad debt expense, which stabilized at 1.8% of revenue in Q2 versus just under 1% pre pandemic.
Operating expenses remained relatively stable as we were able to contain the controllable expenses such as our net material over leasing other direct costs.
Which increase with increased use of in house personnel in terms of non controllable expenses, we had a 3% decrease in property tax expense as the comparative quarter included some true ups for final 2019 tax assessments.
This was offset by materially higher property insurance premiums market wide, where their property insurance costs rising by 27% year over year.
Let's now turn to slide 20 to discuss more recent trends, we continue to work towards striking a balance between stable occupancy and modest rent growth in the current environment.
Our occupancy nudge down to 92.5 in July as fewer leases were signed previous funds during the pandemic environment.
The average effective rent was down by 3.8% on new leases in July as we continue to see elevated concessions across the industry. However, this is a significant improvement from the negative 9.4% rent growth reported April.
At the same time resins, who have remained in place of accepted positive rent growth.
In June July and as another a silver lining we saw a 19% expansion in the number of leads in July which bodes well for occupancy going forward.
Moving to slide 21, as we work through some of the headwinds in multifamily I wanted to highlight how we're making use of our integrated operating platform to improve our performance into payments picture of the opportunities that lie ahead.
We are the first public company to combined these two asset classes significant way.
We're already seeing synergies play out let me highlight a few areas on which we are focusing.
First from leasing front since the pandemic started in March or as tours have been fully self guided.
Using our existing technology, we were able to quickly set up self guided tours at all 23 multifamily assets starting in May.
Our business also have sophisticated technologies for lead generation applications leasing and rent underwriting.
We plan to deploy those across our multifamily assets as well.
Prove operations and the resident experience.
Second on repairs and maintenance over the past few years, we had built into our lives property maintenance management platform for single family rental with the capacity of processing over 75% of work orders and helps.
Ultimately internalized property management, probably multifamily portfolio.
The more immediate opportunities to save cost by using strict expense management protocols and national procurement programs that are already in place.
Business.
Third on collections and property management, we are already sharing resources across both rental portfolios in Q2, we deployed our insofar team to be collection calls on underperforming assets in multifamily as we had spare capacity to do so.
We also deployed maintenance personnel field to help assess capital improvements with select multifamily properties.
And lastly, the geographic allocation that.
Sure.
If you line up all of our markets in single family multifamily rental you could see a very strong geographic overlap.
However, the multifamily business is not quite as opposed to slide and has relatively high exposure to Orlando, Houston, which are seeing more challenging trends as resulting pandemic.
Overtime. However, we have an opportunity to diversify and grow this portfolio through acquisitions and we have the infrastructure already in place to my existing seal offices to accommodate this expansion.
As we continue to grow and diversify our combined rental business should become not only more efficient, but also more resilient.
That concludes our prepared remarks with that I will pass the call back to the operator to take questions and Gary with sound myself will also be joined by Jonathan Ellen's why Andy Carmody individually to answer those questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound.
Please standby will be compiled the culinary roster.
Your first question is from the line of Jie Han K with Stifel.
Hi, Good morning, I'm, just wanted to dig in a little bit deeper on the really strong rent growth you're seeing on new leases.
Could you talk to little what regions I mean is it going across the board our words, which reason regions are performing the best in specific we can you give us a sense of what kind of employment that these new renters are coming on that are willing to pay.
As such large increases and rent any trends and employment.
On that front as well.
Hi, Jane and good morning, Kevin can you take that question.
Sure. So I mean really we had a number of markets.
That have experienced high rent growth.
I will have its across the board I mean, a highlights we know we had 25% rent growth on new leases.
At Atlanta, 16.6% now talking about.
Our July I'm getting up to date numbers, but for the month of July 25% in Reno SaaS, 18% in Atlanta.
14% rent growth.
In Charlotte.
One.
Yes.
Jacksonville, another 15%. So it is really across the board some of our lower rent growth markets. We had a Houston, we still had 5.2% rent growth on new leases.
San Antonio 7.3%. So it really have has been across the board its agents and the pent up demand.
I don't I cant specifically talk to.
Employment gains in each of those markets, but.
I think the biggest trend for us as how it's been pretty much across the board even in the weakest markets.
Yes.
Thanks, Thanks for the color there.
Just moving over to the syndication of the multifamily portfolio.
Looks like now the percentage, that's potentially up for sale or for syndication is 66% that's up from 50% where you guys talked about previously.
Could you talk about Gary maybe why that's gone higher has it been increased demand from potential partners or just what are the dynamics there and.
In the looks like a pretty sizable increasing percentage are willing to.
To give up.
Yes, I mean, there's theres significant demand for anything today that we call beds and shed some beds being the residential component of that whether its single family or multifamily.
And so even though we're in the pandemic and multifamily.
The fundamentals are a little bit more challenging we're still seeing really really strong demand from private investors and so as a result of that.
We think it's a great opportunity to sell a higher interest at two thirds and the major reason we're doing this we still really liked this portfolio. The major reason we're doing this is for de leveraging purposes, and so we can repeat read more cash.
Pay off the credit facility at the portfolio level level, and then pay down our corporate credit facility, that's I think really important.
So we're trying to strike the balance there, but again the major goal is to de lever and this is this is the best way for us to do that today.
And then the other thing I would say I just to add to that is that we're also working with the sovereign wealth funds on dry powder vehicle.
Later in the year as well. So we would then be able to go and buy assets one D to C and start increased Kevin talked about this in his remarks, but starting to increase our diversification.
In the portfolio as well and continue to grow so we're pretty excited about this initiative.
Thanks, Gary maybe just one more question if I can sneak one and on the single family acquisition front.
So it looks like you're talking about 900, new homes for the balance of the year.
Which is little bit behind where you guys Mona on a per quarter basis previously.
When these things and we can get back to that did or 900 homes per quarter level.
Going forward.
We're hoping we can do that in 21, right I mean, theres a couple of things it takes time to restart or machine.
So were little bit behind in Q3 for example.
The other thing is just that if you if you look at listings.
Down 20% to 30% closings are down 10% it was already tight going into the Pandemics a supply is tight so it's going to take us I think a little bit longer to ramp up to where we were.
So, we maybe a little bit conservative with those numbers, but I.
I think we're going to guide to about 900 homes. The balance of this year and then go back to 800 in in Q1 Q2 21.
Okay.
Great Thats it for me thanks for taking my questions.
Thank you.
Your next question is from the line of Jonathan Culture with TD Securities.
Thanks, Good morning, just just going back to the.
Multifamily portfolio as seat as the write down.
You took in Q to Q2 their reflective of.
For the ballpark price and expect to see on the on the syndication.
Yes, yes, it's very much in line with the price we're talking with the sovereign wealth fund investors is very much in line with their current carrying value.
Okay and then.
Just switching gears on on a single family portfolio, you are running north of 97%. The markets are obviously very strong, especially on on new leasing you thinking like as you start to push rents.
What what occupancy level or are you targeting.
Well I mean, we typically we typically target about 95% right I mean, it's yes, you don't want to answer it's a nuanced it's a nuance to answer because we really use revenue maximize Asian program to determine and we kind of toggle between rank growth and occupancy really to drive revenues, what's more important went on.
Trying to seize was more important as your revenue growth in the underlying sub components. So.
That's really what we're trying to drive as revenue, but I think given demand is so strong.
My hunch is that the occupancy will stay above 95%, it's going to be in that kind of 96% to 97% range. We're getting from we're going to be as we continue to push rent obviously on new leases. We we go to we go to market and that growth has been exceptionally strong and on renewals you seen a downward trend for March through to July but.
Thats, probably going to reverse starting in August and start moving back up we're going to self governed will continue to self governor renewals, but I think given the demand is so strong what we'll start to ratchet up renewals a little bit more.
Okay. That's just all other renewals.
Given that you didnt put through any increase it does little surprised that it didnt get.
Closer to zero, how did the mechanics of that.
Work.
You have to put notices out so thats why admitted and go all the way down.
Yes, no I mean in in June for example, we had many.
Many residents TEG zero percent rent increases, but really what we do as we give them we give them a choice right. So the choice could be a flat increase but in return for flat increase we're looking to increase the term of the lease or we're looking to really smooth that our exploration schedule. So we're getting something back in return.
Otherwise if they don't want to flat increase then there is a smaller increase but but with a with a shorter lease. So really that's why the renewal increases higher than is higher than zero, it really depends on whether whether choosing.
Okay fair enough. Thanks, I'll turn it back.
Your next question is from the line Stephen Macleod with BMO capital markets.
Thank you good morning, guys.
Steve Hey.
I just wanted to circle around here on the quickly on the multifamily side.
We've had.
You talked a little over the last couple of quarters of having.
From an occupancy bias.
Can you just talk a little bit about what you need to see in order to shift away from an occupancy occupancy buys is it really just.
Demand and reduce competitive pressures.
On the newest multifamily side.
Yes, Thats correct, yes, yes, it would be getting that occupancy closer to 95% and were falling short of that today, we were very close to that pre pandemic and then obviously, we've faced some kind of more challenging times, especially in markets like or land on Houston, So were below that threshold, but I think once we kind of push back up to 95, then we prioritize.
Guys rent growth.
Okay. That's.
That's great.
Then Kevin talked little bit about sort of filling in the gaps are diversifying the portfolio a little bit on the multifamily side.
When you look at Orlando in Houston that 17, 15% of the overall portfolio.
Do you have a target of where you where you want to get those higher.
Proportion markets down too.
Yes going to pass it onto John.
Sure, Steve and good morning debt regarding that regarding diversification. If you look at somewhere like Orlando, where we have four assets. In contrast, we have other locations like Denver in Phoenix that we have struck strong conviction and but only have one asset. So really our goal is to grow the other markets around you know to the size where we are in.
Orlando or Houston, So, we'd love to get to three or four or five assets in the near to midterm in all of our markets before we continue to grow Orlando in Houston, So that would drop down the concentration in each of those markets.
The below 10%.
Okay that makes sense and then would you do that through that that's sort of shadow vehicle that you were talking about or dry powder vehicle they were talking.
Exactly that's again Quinn.
Yes.
Okay. That's that's great. Thank you very much.
Your next question is from the line of Matt Logan with RBC capital markets.
Thank you and good morning.
Hey, Matt.
Just wondering if you guys could give us some context for how the discussions for the multifamily sale are trending and maybe we can expect the timing for that sale.
Yes sure. So we're in advanced discussions with two sovereign wealth funds either these are the same groups were talking to pre pandemic, they're very familiar with the portfolio.
Both received preliminary approval.
And we're now it's really subject to I would call confirmatory due diligence and documentation.
That always takes longer than we liked but it is the process and so we're hopeful we'll be able to announce something later this year, but the one thing to remember as we do a Freddie Mac debt on this on these properties and that we need consent. It's just an administrative item, but I can send can take many months. So thats why were little bit unclear as to whether this is ed.
For the year into kind of Q1.
But we have made significant progress with our joint venture partners in the last month or so.
So likely late 2020 early 2021.
Correct.
And when you think about allocating capital going forward do you see better opportunities and single family space or the multifamily space or do you have any sort of preference between the two.
Well I think today I mean, given that the fundamentals for single family rental are meaningfully stronger I mean, we want to allocate more capital SFR and Thats really what we're doing I mean, if you think about the investments, we're making right now.
The bulk of the capital going forward is going for single family rental joint venture. So we are prioritizing SFR.
Overtime, we do want to grow both we do have conviction and from a property management perspective, and in bringing single family and multifamily together and.
We'll see I mean, we'll see what the conditions look like in time again I talked about in my remarks that I think the Densification trends, we're seeing right now which are hurting multifamily those will go away as we get herd immunity or there's some sort of vaccine and so.
Hopefully in time, we'll see much stronger growth in the us multifamily portfolio as well, but today the focus is on SFR.
And with the strength in the for sale housing business do you see any potential to monetize any of your assets.
Block sale or to accelerate some of those dispositions.
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We're going to we're continuing to look at those opportunities.
I think if they if they come up yes, we will take advantage of that and we'll try to monetize those assets sooner and bring back the cash.
But we're we're in a pretty good position now I think on that portfolio and we're going to generate we think we're going to generate upwards of $350 million a cash in that kind of mid to long term. So we don't really want to.
You know I don't think we want to do anything at this point that would compromise that amount of cash flow, it's meaningful to us. So it really comes down to whether we can achieve asset sales, which are in line with that cash profile.
Makes sense appreciate the color and maybe just turning to the single family business for a minute with double digit increases on renewals or renewals that move ins in July do you think thats reflective of the mark to market potential for the portfolio as a whole or is that it may be reflective of some dental.
Demand doors seasonal trends.
Well I mean, if you asked me that questioning in Q1 or kind of pre pandemic item that you see it just seems too high. So I think we kind of felt like the loss to lease in the portfolio kind of pre pandemic was probably wed like 6% by 6% range.
Nothing nothing nothing in a double digit range. So I think some of it definitely speaks of the pent up demand and that so many families right now your nesting and they want to get to cities and they want to get into single family combination. So there is theres some kind of big pent up demand today, but that may moderate that may moderate over time.
So I don't think I think you would be aggressive to save fully reflects the loss to lease in the portfolio is somewhere in between.
And when we think about organic growth overall for single family.
Not in 2020, but moving into 2021 do you think that might remain above the kind of 2% to 4%.
Are you talking about our you're talking about rent growth there.
Okay.
Well I growth.
No I think I think we can do better than that I mean, I think that longer term given the demands were seeing right now and again, we think that these I mean, we've been seeing those migrate migration trends all along to the sunbelt and those are accelerating so I think with these kind of de urbanization trends that we talked about.
I think at this point it looks like we can hit 4% to 5% NOI growth overtime.
So I think 2% to 4% would be conservative.
Hopefully, we can do a little bit better than that and that kind of 4% to 5% range.
Appreciate the color that's all from me. Thank you very much thanks, Matt.
Your next question is from the line haul globally with National Bank financial.
Hi, good morning.
I tell.
So with the pandemic ongoing the state and municipal finance as they're going to be.
Probably in Russia for the next for a while what are you sort of hearing from your tax advisors right now about things like property taxes development charges are they giving any insight.
How things might look.
It's it's still murky I would say, but those municipalities. They arent tough shape, but they've also got to balance the needs of their stake holders and the residents and live in those communities. So my best guess is that we're going to continue to see property tax increases, but theyre going to be muted compared to where they've been in kind of previous year.
There's.
If you take single family Rentals example, our property tax increases this year about 5% I mean, we were guiding them, what six John six or 7% early in the year in previous years, there were 8% to 9%. So those have come off already quite a bit.
But I would I would think that we're going to continue to see property tax increases just given that that municipalities are in touch it and the other thing is obviously, sometimes they're they're really linked to home price appreciation and higher assessed values and and the underlying market is very very strong and the for sale housing market is strong and we are seeing home price appreciation.
Okay.
And then in the areas where are the regions, where you're seeing sort of these.
Larger double digit.
Rent increases on new leases.
Are you are you following the market. There are you, leaving the market on selling those rents or maybe those markets, where you don't have as much competition.
But Kevin you want to take that.
Yeah, I did I didnt get all of these.
What are we following the market there like you're comfortable in that in that double digit increase because you can point to like a competitor leasing at roughly the same rate somewhere around.
Somewhere around in the neighborhood or.
Are you are you potentially leaving the market in those increases or do you just not or the those maybe areas, where you don't have a lot of competition.
Yes, I mean, Thats I spent a lot of time and multifamily in my career and this is really just first job I'd had where we.
Our problem as we have too much demand when I first started with the company we were getting lit up on social media, because we're getting back to everybody in time, we're getting all these online leads and calls we Couldnt shield.
And so it's a long way of saying that really.
This makes us business. So great is there's very little competition, our competition is mom and pop.
The other institutional companies they either have a slightly different product type, they're not in the same market or even if theres a couple areas, where we do overlap.
We have such few homes that they don't county on the market at the same time. So it's rare that we have a a true institutional competitor in the markets. So it's us competing against mom and pop in what we do is as we look at our availabilities, we look at what.
Seasonality, how many explorations, we have coming and then we and we use our own system to.
To give us the pricing and we tested and so we we have certain budgeted amount and we see we'll wait a minute our availability in this market is lower than we thought so let's push rents and see what we get and so we push rents higher and we get nibbles, we keep going and we end up leasing higher than we saw so.
It's really a.
A program that we've instituted and I think this just outsized demand thats coming right now because of the pandemic because people moving wanting the distance themselves is really helped push that so it's much less about competition, it's really letting the market dictate.
Where they want to live and in this this product type right now is definitely savored.
Okay. Thanks, very much that's helpful.
Again to ask a question first started one.
And at this time there no further questions.
Thank you Whitney I'd like to thank all of you on this call for your participation.
We look forward to speak into November when we discuss or Q3 results in the interim please stay say, we'll talk to you soon thank you.
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