Q2 2021 Tricon Residential Inc Earnings Call
Good morning, My name is Teresa and I will be your conference operator today at this time I would like to welcome everyone to the tricorn residential second quarter 2021 Analyst Conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
You would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press the pound key I would now like to hand, the conference over to your speaker today.
But take Nowak managing director of capital markets. Thank you. Please go ahead.
Thank you Theresa and good morning, everyone and thank you for joining us to discuss <unk> second quarter results for the three and six months ended June 30th 2021, which were shared in the news release distributed yesterday I would like to remind you that our remarks and answers to your questions may contain forward looking statements and information and this information is subject to risks and uncertainties.
That may cause actual events or results to differ materially for more information. Please refer to our most recent management's discussion and analysis and annual information form which are available on SEDAR and our company website. Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A.
I'd also like to remind everyone that all figures are being quoted in U S dollars unless otherwise stated.
Please note that this call is available by webcast on our website and a replay will be accessible there following the call.
Lastly, please note that during this call we'll be referring to a supplementary presentation that you can view by joining our webcast or you can access directly through our website. This will be a useful tool to help you follow along during the call you.
You can find both the webcast registration and the presentation in the investors section of track on residential Dot com under news and events with that I will turn the call over to Gary Berman, President and CEO of triangle.
Thank you <unk> and good morning, everyone. We appreciate you joining us today.
<unk> momentum continued in the second quarter as strong demand trends, coupled with excellent operating performance led to solid financial results for our company I want to start by thanking our dedicated team members, who continue to raise the bar quarter after quarter and how we perform and serve our residents. We've had an incredibly productive year to date and none of it would have been possible.
Without the dedication and passion that our team brings to work every day for those listening in please know why I'm extremely proud of your efforts and what we're all accomplishing together.
Let's start on slide two and talk about the key takeaways, we want to emphasize for you today.
First our business is benefiting from long term tailwind to support our sunbelt middle market rental strategy Americans are choosing to live in the sunbelt, because a superior job growth better weather lower taxes more affordable living options and now a heightened preference for space brought upon by the pandemic.
In our rental homes address the housing needs of America's largest demographic the millennials.
Second our core single family rental business continues to deliver solid operating performance with exceptional demand trends and low supply of available homes, it's clear that our single family rental business is booming.
Third we achieved a record pace of acquisitions this quarter with 1504 single family rental homes acquired primarily through organic retail channels, and we expect volumes to accelerate further into Q3.
The torrid pace of acquisition should silence any questions or concerns about our ability to invest in what is admittedly a very competitive housing market for us.
Our growth initiatives are supported by $2 billion of third party equity capital commitments announced year to date, making this the most prolific your fund raising and Tracon is 33 year history.
These investment joint ventures provide a clear path for us to double our portfolio at a 50000 homes over the next three years.
And finally, we've achieved all of the above while remaining disciplined with our balance sheet substantially exceeding our deleveraging target a year ahead of schedule.
Let's now turn to slide three for a summary of our results we.
We reported earnings per diluted share of <unk> 72.
Compared to <unk> 16 in the prior year, our core <unk> per share was <unk> 14.
Representing a 27% increase when compared to last year.
Our consolidated net operating income grew a solid 16% year over year, while overhead and interest expenses remained relatively stable on the whole, creating strong bottom line growth.
We also recently achieved a number of strategic accomplishments, including the formation of our $1.5 billion homebuilder direct joint venture <unk>.
<unk> into the FTSE NAREIT index and subsequent to quarter end the launch of our largest JV to date, the 5 billion <unk>.
We also completed a bought deal equity financing for $201 million in Canadian dollars, which helped to reduce our leverage and position us well for continued growth.
Moving to slide four and our single family rental business, we saw strong growth from new and existing assets as <unk> proportionate share of NOI increased by 10% and same home NOI grew five 5% compared to last year.
Without the impact of the Texas Storm, our same home NOI growth would have been 60 basis points higher at six 1%.
We also achieved a near record same home NOI margin of 66, 6% driven by strong operating metrics is worth noting that our NOI margin would've been 67% if were to exclude the impact of the Texas freeze.
In U S multifamily rental we had our best quarter since Q1, 2020 with operating metrics exceeding pre pandemic levels, including a return to positive NOI growth as well as solid occupancy turnover and blended rent growth trends that are accelerating further into Q3.
And finally for sale housing delivered another very strong quarter distributing $19.7 million of cash to Tri Con.
Let's now turn to slide five to discuss the fundamental trend supporting our sunbelt middle market strategy.
We often talked about the great migration to the U S Sunbelt and shared with you numerous statistics in recent quarters that clearly show these demographic trends accelerating during the pandemic as a suburban and single family lifestyle becomes even more enticing during a health crisis. These are not just passing trends, but rather long term population shifts that have been in place for many years.
Can see from the most recent census data that population growth in <unk> markets has outperformed the national average by about 400 basis points over the past 10 years and is expected to continue to outperform in the foreseeable future as growth begets growth.
And over the past year. These markets have also seen the fastest rebound in employment growth exceeding the national average by about 300 basis points population growth and job growth are the key drivers of housing demand and we believe the traffic attractive combination of warm weather lower taxes strong job growth and affordable living off options theres been in play.
For some time will continue to drive housing demand in the sunbelt for many years to come.
Let's turn to slide six which such strong housing demand trends. It's no surprise at home values continue to appreciate trigon single family rental portfolio experienced home price appreciation of 15% year to date, which contributes meaningfully to our growth in book value per share, but at the same time, we're also seeing market rents continuing to rise and we've.
Able to increase new move in rent growth by a similar 15% year to date. This compelling correlation between home prices and rents has allowed us to acquire homes at attractive cap rates and create value for our shareholders quarter after quarter.
With such compelling long term trends in our side it should come as no surprise that we focused on single family rental as our core growth strategy on.
On slide seven we outline our asset mix, where you can see that single family rental now represents 93% of our consolidated real estate assets and is expected to remain above 90% going forward.
Residential development is expected to remain near 5% of assets and also includes build to rent communities that onshore asset bar portfolio multifamily rental has been reduced to 2% of assets as a result of the portfolio syndication as an and is expected to remain below 5% going forward.
Let's now move to slide eight to expand in our <unk> growth strategy and talk about our various acquisition channels. As you can see we have a diversified acquisition strategy and a form complementary joint ventures with leading third party investors to help us scale faster.
For these channels, we plan to double our portfolio to 50000 single family rental homes over the next three years.
Subsequent to quarter end, we announced <unk> the successor to <unk> JV, one where we'll continue to acquire resale homes, mainly through the MLS as well as off market channels and portfolio acquisitions as.
<unk> is our largest joint venture to date and will add approximately 18000 homes to our portfolio over the next three years alone.
During the quarter, we also announced the formation of homebuilder direct JV, which focuses on buying new scattered homes and completed build to rent communities directly from homebuilders. This new venture is very synergistic with our legacy for sale housing business as it leverages, our long standing relationships with homebuilders to gain access to newly built homes.
Over the past year, we've also expanded into the development of <unk> build to rent communities under our joint venture with Arizona State retirement system.
On slide nine you can see a summary of our <unk> joint ventures. The key takeaway here is that these complementary investment vehicles. Each have a unique acquisition strategy that allows us to grow faster and diversify our portfolio, while providing a variety of housing options to our residents at accessible price points.
Turning to slide 10, we would like to give you some more insight into how these jv's have allowed us to expand our buy box and double our acquisition volumes.
Our expanded by box enables us to buy homes in 21 markets compared to 12 previously under <unk> JV, one including cities, such as Phoenix, Las Vegas, and Greenville, South Carolina, while still remaining focused on our middle market demographic.
Our target cap rates have tightened by about 50 basis points to a range of five to five 5%, which reflects the shift to lower cap rate markets, where we have in place operations, but did not buy and J D. One and also the inclusion of new homes under Homebuilder direct acquisition channel Interestingly, even with lower going in cap rates, our underwritten returns for <unk> and <unk>.
Homebuilding direct are higher than that of JV, one as we continued to benefit from the incredible attractive debt financing environment and the ongoing institutionalization of the <unk> industry.
Let's shift gears to slide 11 for an ESG update.
Knowing the release of our inaugural ESG report this quarter, we engaged in several initiatives in support of our companywide commitment to ESG.
We completed our first grasp of submission in June which positions us to receive our first grasp of rating in 2022 from the most prominent real estate focused ratings agency.
Second construction began in June Ontario's first purpose built indigenous hub, which is a part of <unk> West Don lands project. This is something we feel honored to be a part of as the hub will be a gathering place for indigenous people to help support the reclamation of culture and identity at a time when the atrocities of the residential school system are top of mind for all Canadians the indigenous.
I will help me critical health care spiritual employment training and family support needs for the community.
And finally I'm pleased to report that <unk> met or exceeded commitments to both the 30% club, Canada campaign, and black North initiatives CEO pledge to increase gender diversity and black indigenous and people of color representation at board and senior management levels. Although there is still lots of work to be done diversity inclusion and belonging remain a priority.
For organization and a key aspect of hiring plans for both leadership and non leadership positions at Tri Con there is genuine purity in our mission, we care deeply about our employees and the communities in which we operate and we know that a diverse organization will position us better to serve our residents and the communities. They live in as Dave themselves are inherently diverse.
That concludes my opening remarks, and speaking of diversity I would not I would now like to pass the presentation over to Sam to discuss our financial results.
Thank you Gary and good morning, everyone first of all I want to thank our team for the strong results. We produced this quarter.
With their efforts, we achieved record breaking numbers, while launching significant investment vehicles to grow our business effectively controlling our costs.
And meaningfully reducing our leverage.
Slide 12 highlights our progress against our five key priorities that we set out in 2019. These include growing our core <unk> per share at a compounded annual rate of 10% over three years through 2022.
Raising approximately $1 billion of third party capital over three years.
Growing our book value per share by reinvesting our free cash flows into accretive growth opportunities.
Reducing our leverage and improving our reporting.
As you can see we're well on our way to achieving and in most cases exceeding the goals, we set out well ahead of schedule.
Let's begin with our three year <unk> target. So far we've achieved 27 of <unk> per share year to date.
Assuming the current trend holds we are confident that we can achieve our <unk> target.
<unk> 52 to 57 and 2022.
Even with higher diluted share count caused by ex tangible per fair share offering last year and our recent equity offering.
In terms of raising third party capital it has been a record breaking start to the year, we have raised $2 billion of fee bearing equity capital, So far which is double the goal we set out a year ahead of schedule.
This includes our recently announced <unk> JV to our.
Our single family rental homebuilder direct joint venture.
Our U S multifamily portfolio syndication and our Canadian multifamily joint venture with CPP investments.
With regards to reducing our leverage target range of 50% to 55% we have exceeded our target ahead of schedule and now are sitting at 46% net debt to assets.
This translates to 42% net debt to assets on a proportionate basis and gives us ample flexibility to continue growing while keeping our leverage at a prudent level.
Our final priority was to improve our reporting which is substantially completed with our transition from investment entity accounting to consolidated accounting last year as.
As well as adopting REIT like MD&A disclosures, such as <unk> and <unk> per share.
We also published our first annual ESG report in May a major milestone in our journey.
This supports showcase our ESG commitments for the coming year, while detailing how we performed last year.
Now, let's turn to slide 13, I will provide highlights of our key metrics for the quarter.
Our net income from continued operations grew almost four folds year over year to $146 million.
This included approximately $71 million of NOI from our single family rental properties, representing a 16% year over year increase.
We also had a $254 million fair value gain on rental properties in Q3 compared to $33 million in the prior year, reflecting significant home price appreciation and <unk> markets.
Second our core <unk> per share increased by 27% year over year to 14.
Or 17 in Canadian dollars.
And third we reported <unk> 11 per share. This translates to 14 cents Canadian dollars and provides us with ample cushion to support our quarterly dividend of <unk> seven Canadian per share, reflecting an <unk> payout ratio of 42%.
Now, let's move on to slide 14, and talk about the drivers that contributed to our <unk> per share growth this quarter.
Which relates to our proportionate share of the portfolio.
The year over year increase of three <unk> per share or 27% can be attributed to the strength across several aspects of our business.
First our single family rental portfolio, which makes up 90% of our real estate assets delivered 10% growth in <unk> proportionate NOI.
This was driven by a 16% increase in the number of homes.
Coupled with strong blended rent growth of five 7%.
All of this was partially offset by a 1% decrease in occupancy due to our accelerated acquisition pace of vacant homes.
Our other businesses also contributed meaningfully this quarter.
Of note residential development.
<unk> to perform exceptionally well as demand for development locked in our for sale housing business remained strong.
The business contributed $8.3 million to our <unk> this quarter and generated $19.7 million of cash flow for tricorn, including performance fees.
There was also a $4.9 million increase in private funds and advisory revenue driven by an increase in development fees earned from Johnson lot sales.
Higher asset management fees earned from our syndicated U S multifamily portfolio and homebuilder direct joint venture.
As well as substantial performance fees earned from legacy for sale housing investments.
The offsetting factor was a lower U S multifamily rental <unk> year over year due to the 80% portfolio syndication.
On the expense side, we saw a year over year decrease in interest expense due to refinancing activities that have allowed us to benefit.
From the lower interest rate environment, as well as lower balance outstanding on our corporate credit facility.
This was largely offset by higher corporate overhead as we continue to grow our company as well as higher weighted average diluted shares outstanding.
From a preferred share equity issuance last year and our recent equity bought deal.
Turning to slide 15, let's discuss our debt profile.
As we look out to 2022, we expect to refinance the bulk of these maturities with new property level debt, including Securitizations.
We see a significant opportunity for interest expense savings in today's low interest rate environment, given that the blended rate on these maturities is approximately three 1%.
Whereas the current market is around 225% for five to seven year terms.
Moving to our liquidity profile on slide 16, you can see that our current liquidity position is strong.
With annual recurring cash flows and projected cash flow sources, providing.
Ample funding for our near term growth initiatives.
Our current <unk> run rate net of dividends gives us over $55 million of annual cash flow to reinvest in growth.
And this number continues to grow.
Meanwhile, on the liquidity side, we have approximately $570 million of our current liquidity.
Plus $185 million of net distributions expected from our residential developments over the next several years.
In terms of investments, we have $720 million of cash commitments in the next three years.
Which gives us strong visibility into our growth profile.
In short we are well funded for our growth plan and we will aim to calibrate the pace of growth such as our leverage metrics remain at a comfortable level.
On that note, let me pass the call over to Kevin Ball Fritsch, Chief operating officer to discuss the operational highlights for the quarter.
Thank you very much you Sam and good morning, everyone. We had another stellar quarter of operating results and I want to acknowledge the efforts of our operations and customer service teams.
These teams I'm extremely proud to work with and who continue to put our residents well being first.
Let's move to slide 17 to review the performance of our core single family rental business.
We continue to benefit from strong demand trends, which drove higher occupancy rent growth and resident retention and resulted in same home NOI growth of five 5% year over year or six 1%, excluding the impact of the Texas storm.
Digging into the numbers same home revenue grew five 4%. This was driven by a slight occupancy increase of 10 basis points and average rents increasing by five 4% lease over lease.
I am pleased to report that our bad debt has stabilized representing one 7% of total revenue this quarter only 10 basis points higher than this time last year and down from a high of two 7% in Q4.2020.
With that said over time, we believe we will return to pre pandemic levels of sub 1%.
On the expense side, we saw an increase of 5% compared to last year. This was largely driven by a $500000 increase in property taxes, representing a four 8% variance from the prior year as a result of higher assessed property values.
We also had a $600000 increase in repairs and maintenance expense, which was about 19% higher than last year, largely driven by the Texas storm.
This was partially offset by a $500000 decrease in turnover expenses, which are down by almost 37% year on year due to lower turnover as we continue to focus on exceptional resident service.
We also returned to ordinary course capital improvements, which resulted in fewer items being expense.
Turning to slide 18, you can see at the strong demand trends in the single family rental continue to fire on all cylinders.
With exceptional demand for our homes and limited available supply occupancy remains near all time highs while rent growth on new move ins continued to increase and hit an all time high of 17, 8% growth in June.
As we harvested the loss to lease that has built up over time with our low turnover rate.
Meanwhile, rent growth on renewals is inching up as strong demand for our homes allows us to adjust that metric a bit more while continuing to be sensitive to our residence financial circumstances.
July's Kpis built and improved on the strong operating performance produced during the first half of 2021 same home occupancy was 97, 5%, while blended rent growth printed a new record high of nine 3% based on 27% new lease growth.
And four 9% renewal rent growth.
In terms of turnover our same home rate was a low 23, 2% on a proportional basis in July and.
And compares to 27, 9% in July 2020.
Yeah.
Let's turn now to slide 19 to discuss our U S multifamily rental business, where I am pleased to say that we have now largely internalized property management of the portfolio. This has been a huge undertaking which we believe will lead to operating efficiencies and superior resident experience.
Following our 80% syndication in Q2, we reported only our 20% proportionate share of the operating results.
I'm pleased to report that our NOI from our same home NOI growth is once again in positive territory with a five 9% increase year over year.
When we dive into the components of NOI revenues were up five 7% compared to last year.
This was largely due to a 210 basis point increase in occupancy to 95, 6%.
Being partially offset by marginally lower average monthly rent.
That debt has generally stabilized and was only slightly higher at 2% of total revenue versus one 8% last year.
And revenues from ancillary services, such as bundled entertainment package.
Increased slightly.
In general concessions have almost disappeared, while blended rents are improving driven by our lease trade out rate of 14, 3% in the quarter.
This is arguably off a low base, but rent growth is expected to continue to improve further.
On the expense side, there was an increase of $100000 of five 5% year over year for <unk> proportionate share driven mostly by expenses returning to pre pandemic levels, including deferred maintenance activities that occurred in the quarter.
All in all this has been an incredibly strong start to the year with the most compelling demand trends that I've seen in almost 30 years in this business.
I wanted to thank our operations team again for their contribution this quarter and are up.
Unwavering dedication to our residents and now we say this again and again, but it really is because of their genuine commitment to our residents, but we're able to continue to deliver these exceptional results now.
Now I'll turn the call back over to Gary for closing remarks.
Thank you Kevin I'd like to spend a minute on slide 20, with an overview of the value creation opportunities beyond our core <unk> business, our investments in U S and Canadian multifamily rental and residential developments represent less than $3 of book value per share in Canadian dollars today, and we see a path to doubling that value over the next few years as you heard from <unk>.
Kevin Our U S multifamily portfolio portfolio is starting to show significantly better operating results at a time when cap rates are compressing meaningfully assuming sunbelt multifamily cap rates of 4%, which may still be conservative given how fast valuations are moving we think the portfolio is actually worth much more than our balance sheet suggests.
Second our Canadian multifamily development portfolio is on course to triple in value as we complete and stabilized our projects over the coming years, thereby capturing the value creation that comes from developing to an untrained yield of 475% in a market where class a buildings are valued at approximately three 5% and.
And lastly, our U S residential developments are expected to deliver about two times return on book value with a robust for sale housing market, providing a constructive backdrop for this business.
Taken together these investments could be worth over $6 per share in Canadian dollars when fully realized.
And so let's conclude on slide 21, with an overview of what we believe makes our store unique and compelling for our shareholders. We believe that <unk> may be the best business in real estate and Golden decade ahead with over 16 million single family rental homes across the U S. But only 2% of the of these homes being institutionally owned there was a phenomenal opportunity.
To roll up a fragmented industry and provide more American families with badly needed professionally managed rental housing with our recently announced joint ventures, we have a clear path to doubling our portfolio 50000 homes and strengthening our position as a leader in the <unk> industry, which is still in the early innings of institutionalization.
We also have the unique opportunity to manage strategic capital for some of the largest and smartest third party institutional investors in the world, which enables us to become a larger and more efficient operator pursue development activities largely off balance sheet and over time generate a higher return on equity for our shareholders and last but not least we've established an industry leading op.
Operating platform, which allows us to deliver consistently strong results, while offering superior service to our residents our people first culture and focus on innovation, our competitive advantages that we believe makes us a leading operator and also a good corporate citizen.
That concludes our prepared remarks, I will pass the call back to Theresa to take questions with Sam Kevin and I will also be joined by John <unk>, Andy Harmony, and Andrew Joyner to answer questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
And your first question comes from Matt Logan with RBC capital markets. Your line is open.
Thank you and good morning.
Good morning, Matt.
Gary you've done a great job of setting the business software, new joint ventures, and significant progress on the balance sheet.
Can you talk about your key priorities over the next three years and how do you define success over this period.
Well. Thank you. Thank you for the kind words, I mean look we've done a ton of heavy lifting over the last year or two and now now the big opportunity over the next three years is simply not to execute on what we delivered I mean, we have all the capital in place now to grow our portfolio of single family rental portfolio from 25050 thousand homes and so.
We just need to put our heads down and acquire roughly 502000 homes per quarter and get those joint ventures invested with really high quality homes. So we can offer more more options to our to our residents so thats by far and away the biggest goal.
I'd also like to see us make progress on all our developments, where we're building a burgeoning build to rent business.
That will deliver about 2500 homes over the next two or three years and so we'd like to get that off the ground not again provides.
Another option to our residence with brand new high quality housing.
And then in Canada north of the border.
Over the next three years I'd love to see a stabilize largely stabilize our portfolio create substantial value for our shareholders and potentially give ourselves an opportunity to lift that portfolio and create even more value. So those are those are the big things, we're going to work on over the next three years.
Great color.
Maybe a question quarter with Sam.
We really appreciate the proportionately consolidated disclosures this quarter.
And when we tally those up.
There were some sizable marks in Q2, but over the past year. They seemed to have lagged the case Shiller index, perhaps a bit.
Can you talk about what regions drove the fair value gains in Q2, and if you think there is potential for further fair value gains over the next couple of quarters.
Yeah. Thanks, Thanks, a lot we do remember our the way we calculate our fair value is really backwards looking so we always take four quarters rolling and we are very conservative about that.
And it's actually catching up over the past several quarters, we've seen home price depreciation increased significantly across a lot of the areas that we're in so it's not just one area specifically, it's not across the entire regions that we're in the Sunbelt, we do expect fair value pickup to continue going forward and we would expect the same amount to continue over the next several quarters going forward.
If you are evaluated on a cap rate basis, we're still very very conservative from that perspective. So we do expect fair value pickups to continue.
And Matt maybe I could just add to that.
If you look at even with the Big fair value increase this quarter. If you look at our <unk> portfolio on in place NOI, It's about a 5% implied cap rate if you use future run rate.
Sorry, if I should say, if we use in places for 8% and if we use run rate, it's about a 5% cap rate so extremely conservative.
And again as Sam said because of lagging nature methodology of how we determined a fair value. So.
That we're not seeing any portfolio is trade anywhere near those levels and so there is substantial opportunity for more fair value increases going forward.
Great and maybe one last one for me.
If I look at your subscription facility would it be.
Here that the homebuilder direct JV is certain to deploy capital can.
Can you give us a flavor for the initial acquisitions in terms of region home size and maybe talk about a Chrysler has any input.
Developing the home construction.
John do you want to take that sure and good morning, Matt and thanks for asking that question as you recall, we closed homebuilder direct midway through this quarter and we ended up closing on 105 homes in that vehicle during the quarter and I think as we've discussed before we expect it might take a couple of quarters for the acquisition volume in HD to really ramp up because in many.
Cases, what we're doing is actually ordering homes from builders in advance and so if we place an order today for example for 100 homes in a community. We may not start receiving deliveries deliveries until Q1 or Q2 of next year in terms of the product is you're asking a home sizes are not that dissimilar from our existing portfolio. They are slightly larger.
Because most new homes being built or a little bit larger than resale homes. So call. It closer to 1900 to 'twenty 100 square feet, whereas our standard portfolio is a little bit smaller than that and home prices are towards the higher end of our range simply because of the cost of new construction and then lastly, if you discuss the markets, we're seeing strong strong supply coming on.
On line in places like Dallas San.
San Antonio Houston, and Austin in Texas, We're also acquiring homes in Phoenix, Atlanta, Charlotte, So not too dissimilar to our broader portfolio, but theres going to be some more concentrations as we place orders for entire communities in certain markets.
Really appreciate the color thanks, everyone I will turn the call back.
Thank you.
And your next question comes from the line of Mario <unk> with Scotiabank. Your line is open.
Alright, okay.
Good morning Mario.
Just maybe wanted to touch on your expense growth this quarter.
Recognizing <unk> squeeze played a role.
The 5% to a bit higher than what we've seen in the last couple of years, how should we think about that.
France grew.
It's a ratio in the second half of this year and then going into 2022.
Given that there could be further scaled them opportunities within the business.
Well, okay. So it's a bit of a noisy quarter on the expense side and one of the reasons for that is the taxes free if you isolate or remove the taxes freeze on the expense growth for the first six months of the year is about two to two 5%. So that I would say as a more normalized number Mario the other issue is that in the high to the <unk>.
Pandemic Q2 of last year and in Q3 really deferred non essential maintenance and Capex and so that also is creating a bit of a kind of yes. It's also creating some noise in the numbers. So so I would say the numbers because of that are higher than they normally would be but to be fair. We are in an inflationary environment.
Right we're seeing.
Wages material costs with supply chain issues.
Rating pressures on all of our expenses property taxes are going to move up with higher home prices insurance premiums have moved up so all in all we are in an inflationary environment and I think we should expect higher expense growth, but I would say that the business is so strong the fundamentals are so compelling that we still should be able to drive our revenues.
Faster than our expenses and therefore grow our margin.
Got it Okay, and then I guess one associated question.
I noticed the direct expenses recorded umbrella, so far with $2 million up.
Over the $1 million kind of per quarter on average with the past quarter or so is that explained by the noise. Gary that you highlighted is lower is something closer to $5 million and other direct costs.
A decent run rate going forward.
Our indirect expenses on our <unk>.
Yes, I mean, I think I think some of that some of this noise. There's also.
If we're talking about the same line Mario I'm, just going to take a look at that other direct expenses yet the other issue. The other thing to keep in mind. There as we are rolling out our smart home technology and so the expense associated with that is a gross up so we show the revenue in the fee and the revenue item fees and other revenue, but then we show the expense associated with that in either directly.
Expenses, so that that part of the increase in the other direct expenses associated with the rollout of the smart home technology program.
Got it Okay, and then just maybe focus on the topline either for you or for Kevin.
It's kind of ruling on all cylinders here in terms of the rent growth occupancy extremely high.
Rents are still below where home prices in the U S should be across most regions.
When you sit back what do you what do you think is.
The biggest risk or the thing that.
Pick up the most mindshare for you in terms of continuing this really strong topline revenue growth.
Well I mean, we're actually we're holding back.
And so and it's one of the things I think Kevin and I are in the organization. We're most proud of and the fact is is that we are self governing our limiting on renewals.
And if we werent doing that if you look at our renewal growth I mean, it has it has edged up its in the high 4% range now, but if we werent limiting growth on renewals, we could see a renewal increases in many markets close to 10%.
So if anything were really protecting our residents, we're giving them more visibility and stability with their own finances, but we're also building in more and more loss to lease in our portfolio and that explains why our new lease spreads are higher than or higher than the industry and accelerated to 20%.
Now into July which is just unbelievable, but part of that is because we are self governing on renewals. So we're not really concerned about anything on the top line at this point in time.
I think the way we're running our business just gives us a much longer runway.
Got it.
The new lease spreads would that be a fair indication of where you think the mark to market in your portfolio is on the whole car.
Might be a little high.
20% seems high to me, but it wouldn't shock me if the loss to lease was in that kind of 15% range.
That was similar to where we comp the portfolio a quarter or two ago again CLO.
So for me, 15% sounds more reasonable.
But obviously, we continue to build more and more loss lease every quarters, we again.
Hold back on renewals.
Got it Okay and my next question is more of a high level question on your 2020 Investor Day in Florida, you kind of laid out various initiatives.
<unk> pretty much all of them.
Sooner than anticipated.
The question, but it's almost similar to an earlier one but.
Looks like over the next three years, that's really kind of keep your head down and focus on what's been announced.
In terms of initiatives.
If we look out call. It three to five years, what are some of the things today that the organization is focused on that.
It may not necessarily be material such as the the kind of multifamily development completion over the next three years. So it may not be a material, but with new.
New interesting things that the organization is looking at that you think kind of a very material impact.
Cohort six.
Seven years old.
Well I think if we keep on looking further outlook. So high level, we're going to and this is the big thing that everyone should focus on and we're going to go from 25000 homes.
And where we are today to 50000 homes in three years and after that if all goes according to oil and we do a good job. There is no reason why we can't raise another round of joint ventures that will ultimately allow us to go from 50000 to 100000 homes. So that that's ultimately what we're focused on and it is absolutely achievable, we need to observe the natural speed limiters.
Business and not grow too fast because then we might have operational hiccups, but we're able to go from now 800 homes to 500 homes to 2000 homes a quarter without skipping a beat.
And so we have this incredible runway ahead to grow the portfolio and as we do that we're going to become more efficient as.
As an operator, our overhead efficiency will continue to improve will become more innovative and we will be able to offer.
More options and ultimately I think services to our residents our residents as we ultimately build out.
State of the art resident App. So that's something that we're going to be working on I think we are just scraping the tip of the iceberg in terms of ancillary revenues, but long term, if you think five or 10 years.
I always say to our team and this is not it doesn't necessarily need to be taken literally but why couldnt, we potentially rent an autonomous car to our residents by the hour by the day, but that's just to give you a sense of what ultimately can be done if you control the rooftops with ancillary revenue. So there's a lot of exciting times ahead, I think on that and on innovation.
And then.
In other parts of our business, which don't get as much attention like all the development to build to rent. We're building a state of the art build to rent portfolio antique harmony is running that.
And up in in Toronto, Andrew Joyner is running.
What is going to be the unique and highest quality multifamily apartment business, certainly in Canada, but maybe anywhere and well being.
<unk> for us to create real value for our shareholders.
And then the other thing I would just say is we're incredibly focused on ESG.
ESG is I think it's still early days for the real estate industry right. Now it's may be only focused on environmental impact, but we think that with the events through the pandemic investors have really allowed us to prioritize the social factors.
Which we think allows us to run a much better business as we prioritize our employees and then our residents and youre going to hear more and more about that so we're going to be unveiling programs.
For both our residents and our employees that we think are incredibly exciting and will make us a better and better company over time.
Got it and just on the <unk> over <unk>.
Long period of time, given what you've learnt and developed in the U S.
Potential.
Trucking to export that model into other developed countries across the world or is there simply enough more than enough growth in the U S somebody with a couple of them.
I mean, absolutely it could be it could be extrapolated to other markets I. Just don't think we're focused on that today, because it's just such a deep market.
The U S housing market is the largest asset in the world I mean, it's depending on how you measure it it's 40% to 50 trillion dollar asset class.
The single family rental business based on 16 or 17 million units is a 4% to five trillion dollar asset class right. So it's bigger than all of your entire Canadian housing market is so big and institutions like us only own about 2%.
So there's this massive opportunity to roll up a fragmented industry and that's why I would say that single family rental maybe the best business in real estate because you have this incredible roll up opportunity, but you don't typically have another asset classes, maybe reminds me a little bit of where storage was 20 years ago.
But this is.
Incredible runway ahead in the U S. We don't we don't need to look further afield.
Okay. Congrats on executing on the strategy that you laid out. Thank you. Thank you Maher. Thank you.
Your next question comes from the line of Jonathan <unk> with TD Securities. Your line is open.
Thanks.
Good morning.
Are you guys still looking at doing a U S Department Sunbelt joint venture.
We are we are we're in.
<unk> advanced on creating what we call a growth vehicle.
Growth vehicle will probably be announced with the deal and this is not going to be a major its not going to be a major fund.
It's really a growth vehicle that will allow us to really round out our portfolio.
And just kind of build on it on the margin right. Some places for example, we might only have one or two assets and there is an opportunity to really kind of round that out for our institutional partners and so that's something you should expect a later in the year probably in Q4.
Okay.
That's helpful and then just.
On slide 12, and just so I understand it because it does sell through previous.
Because you guys are with I guess with the exception of the apartment JV pretty much.
Don with third party capital Raisings until you get a good chunk deployed.
But it still shows a $1 billion 2022 targets is that.
How should I think about that.
Oh that show that was or what we're doing on this performance dashboard is setting our targets right long term goals that were basically put in place in 2019. So the 2019 target was $1 billion by 2022, and we doubled that already in 2021, So we're double where our targeted.
That's all it is okay, just double checking on that and then the.
Second question.
I have is how should we.
Very good for sale housing quarter in the performance fees, obviously helped your quarter, how should we think about both of those lines for the back half of 2021.
Yes, so I mean look the for sale housing business is booming right and this is where I think when we said some of our targets. We didn't we didn't expect such a strong market and for sale housing in the pandemic just with all the D urbanization and the Densification trends work from home, it's really it's created an unbelievable backed.
Rob for all type all things housing in the U S, but certainly for for sale housing and so on everything in that business for US today is on fire that is coming through and our investment income as we use discounted cash flow analysis and appraisals cashless coming in sooner.
Home prices in la prices are moving up and so the numbers are higher than where we thought they would be.
C, where we typically think they should be on the for sale housing side would probably be half.
Where they are coming in this quarter, we would typically target high single digit.
Unlevered returns on invested capital.
Right now they're double that.
So I would say those are there are quite a bit higher than where we would expect on the development fee side.
I think this is a strong quarter.
I would say we think the development fees are probably pretty stable going forward, although I will say that.
Johnson is benefiting from this.
Really strong environment.
As homebuilders start to limit their releases, which theyre doing we may see a lot lot sales slowed down a bit but other than that I mean look Houston and Texas are extremely strong. So I would say that the development fee line is pretty stable, but we had a strong quarter.
Okay. So for sale housing should continue elevated for the rest of this year and the other one was on the performance fees, which are obviously very lumpy but.
Line of sight for that.
Uh huh.
Yeah, I would say look there theyre extremely episodic and lumpy as you said, we do not we cannot predict them quarter to quarter.
So I'm not going to predict quarter to quarter for you except to say that there'll be significant performance fees over time, but I would expect probably a quarter back half of the year.
Okay. Thanks, I'll turn it back.
Okay.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from Stephen <unk> with BMO capital markets. Your line is open.
Thank you good morning, guys Hi.
Hi, Steve.
Hi, <unk>.
It's a great color on the call. So thank you.
Wanted to focus in on your goal to double the size of the single family rental portfolio.
Could you just give a little bit of color around sort of the pace to get there I assume is it fairly even over the next three years and then secondly to that.
How do you see margins evolving as you double the size of the portfolio are there any mix impacts and then I guess thirdly.
You've obviously.
<unk> invested a lot in the infrastructure to support the single family business that we've seen at some of the Investor days, which is impressive.
<unk>.
What what.
What size portfolio does the infrastructure support our Canada support without adding more more investments along the way.
So John do you want to start on the pace and then maybe ill fill in on the margin or maybe and Kevin can chime in after yes, yes, sure and Stephen that is a great question I think as we indicated earlier on the call. This quarter, we acquired just a hair over 500 homes. We think that this coming quarter Q3, we are on track to acquire 2000 plus homes, but recall also there.
There is some lumpiness and seasonality in acquisition volume and in particular Q3 tends to be our highest of the year. So it's likely to drop down a little bit into Q4, but all in all if you think about acquisition volume 6000, 7000, plus acquisitions, a year and if you multiply that by three years 6000 times 318000 to 20.
And that gets you to that 45000 home target that we indicated earlier.
Okay, and then in terms of in terms of mix or I'll talk on that and Gary can speak on margin now.
Now that we've been able to expand our joint venture backed joint ventures across all of our markets and even add a few more we think that the mix is.
Improved actually a little bit when you think about the margins in some of these markets for example, Phoenix, where we're now buying in meaningful volume. It's typically been a higher margin market for us, which is certainly helpful and the offset some of the drag that we see in some of the slightly lower margin markets without with higher property taxes, but Gary I'll, Let you talk maybe what the total total margin, yes, so and again.
Just.
I had a little bit more color on the on the pace. So we're going to.
I think if John has his way we're going to go from about 6000 homepage annual pace to 8000 right over time and if we can get up to 8000 that obviously, we go from 25 to roughly 50, but then the other thing is you also have to remember that we have the build to rent program and that's going to deliver about 2500 units over the next several years and then.
If all goes according to plan will probably raise another build to rent fund, which will allow us to grow even faster. So we're very confident about our ability to go from kind of 25050 thousand over the next few years and then.
So on the margin, yes, absolutely some of these west coast markets do you have higher margins on new homes. The homebuilder direct will be favorable to the margin because all other things being equal because when we buy new homes, they have lower repairs and maintenance.
The early years, so thats favorable to the margin and then I think in terms of giving some kind of commentary on where the margin could go we're roughly we're at about 67% today. If you exclude the impact of the Texas freeze and again.
I think theres still quite a bit of opportunity in the portfolio.
Obviously, you've seen the re leasing spreads which.
Which is a major opportunity I think we can probably push our occupancy higher for about 97 five years. There's no reason why we couldnt push that hard in 98.
The bad debt is elevated.
And we will start to come down probably next year and so that alone could bring us as we normalize all of that could bring us from 67 to 68 and then I.
I think look if we can be in an environment, where revenues are going to grow faster than expenses. There is a path to getting to a seven handle on the margin. So that's probably not a short term short term goals, Steve that probably over the mid term.
Mid to longer term there is no reason why we couldnt ultimately get to 70%.
That's great that sounds very encouraging and then maybe just finally with respect to the capacity.
Around the investments that you've made what what size portfolio can the infrastructure currently support.
Yes, sorry, we didn't get to that part of the organization.
Organization has definitely been built to manage a much larger portfolio. That's one of the things. That's so exciting we can do a lot more with the team we have in place and so we should see real efficiencies in our overhead as we deploy the capital and go from $25 to 50000 homes. So that's a really exciting opportunity I think to become more efficient.
And that will drive our <unk> per share growth over the next few years in the field, though as you add more homes, you do need to add more add more bodies right. So that that is the synergies really will come more in the centralized office and our corporate.
But as we go from 25% to 50000, we're obviously going to need to add a lot more maintenance tax.
Yep Yep right, Okay, well, that's great. All my other questions have been answered. Thank you and congrats on your performance. Thank.
Thank you Steve.
And your next question comes from the line of Tal Woolley with National Bank. Your line is open.
Hi, good morning, everybody.
It's out.
I wanted to talk about the Canadian platform for a second.
The Taylor youre going to be finishing construction towards the end of this year.
Should we expect.
To start pre leasing and what do you think your expectations of net rents are going to be.
And do you have an idea of like.
On stabilization what your expected yield is going to look like.
Yes, so we are going to complete the building in March.
We're a little bit behind but that's.
It's a much better opportunity I think to lease the building in March and maybe December January.
We will start pre leasing around that time, maybe a little bit before.
And I think in terms of lease expectations. It will clearly be $4 per foot plus right is where we're going to lease and I would say that and this is I think for the Taylor, but its a commentary probably for the entire portfolio.
<unk> seen pressure on the ranch.
During the pandemic, but I would really view it as a disruption.
It was really kind of a temporary disruption and will ultimately probably be back on target for our underwriting.
And you said and we're seeing that on a salve I mean, it's unbelievable how fast the markets moved over the last few months.
We've gone from 82% occupancy that will probably be closer to 97%.
In a month or so as you can see how fast we're going to be going back to pre pandemic ranch and then growing from there and so we typically view the pandemic really is a disruption and given how tight the market is is everything opens up and the border opens and we get more foreign students coming back.
We'll be back to where our underwriting is and I think on the Taylor.
We're expecting a trended development yield.
Of closer to like five five maybe even even maybe even as high as 6%, but five 5% to 6%. So certainly above the 475% we've been guiding to in terms of how to think about the valuation of the portfolio. The Taylor should be quite a bit ahead of that.
Okay and.
You're talking about your leasing experience at the Selby too.
Any lessons you've learned from there that you could take to the other projects.
I'm going to I'm going to hand that question over to Kevin Kevin any.
Questions any lessons learned on the <unk> that we can apply.
And then maybe Andrew you're welcome to chime in.
Yes, I think that.
It's really having the staff trained and ready and to be nimble.
Understanding what the market is understanding what are what our competitors are doing constantly looking to see what is being advertised and then being nimble listening to the resin as they're coming in.
We brought in we started using yield star at the property that is helping us set rents.
So compared to the market, but also to our own property and its just looking at how long a unit sits on the market and whether we need to move the rents up or down and then just making sure that the property has presented themselves and that they are completely.
Some biting into well maintained its groomed.
Making sure that the.
Our resident experience is unsurpassed and what we've noticed is the Selby was the quality of the construction and the amenities that were delivered are second to none and we.
We're in the pandemic and it was hard to use the amenities, but.
As we started to open up we've seen them people just gone back and so the amenity package I know, we're doing the same with Taylor and on the other projects are going to be remarkable and then the what we've learned to is just really engaging with our residents so having a good.
Social media presence and having.
And then in the.
Property, having all of the different.
Vince and even if they are virtual events, we had a lot of people that were.
Taking part of those events and they were spreading that and as the economy starts to open up.
Toronto, starting to open up that that word of mouth really brought in the resident base and the prospects in which has helped us to move back back in and really get up to stabilization.
Okay and then just my last question on the residential development.
Income that you booked this quarter.
I apologize if I've missed this somewhere in the MD&A, but is it possible to get to.
A little bit of clarity on the composition of that income like is that predominantly lot sale income as it realized unrealized gains.
On the value of the investments.
Yes, I mean, we could probably take that offline for you.
But I would tell you it's really the way that income is determined how is through largely we talked about this earlier in the call. It is through a discounted cash flow analysis and appraisals and so this all being essentially for sale housing. It's all for sale housing. So it's mainly lots and lot sales, but in some cases, we're also selling homes to consumers but.
Essentially if you are in an environment, where lot prices and home prices are going up and youre selling faster from a discounted cash flow perspective, youre going to youre going to have higher income and.
That's essentially what's happening so that's why the income is quite a bit higher than what we would have forecast. We said earlier that we typically expect.
Unlevered yield on the invested capital in the high single digits, and we're probably double that rate today.
That again is a reflection of just how strong the U S housing market is but the entire makeup of that is essentially <unk>.
Lots and home sales.
Okay, sorry for the double question Triple books to sour.
I apologize.
Maybe some questions.
Okay. Thanks, Gary.
Okay.
Yes.
There are no further questions at this time I will turn the call back over to Gary Berman, President and CEO of <unk> residential.
Thank you Teresa I would like to thank all of you on this call for your participation. We look forward to speaking with you again in November discuss our Q3 results.
Okay.
This concludes today's conference call you may now disconnect.
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