Q1 2022 Tricon Residential Inc Earnings Call
Good morning, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the Tri Con residential first quarter 2022 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.
I would like to ask a question. During this time simply press star followed by the number one on your telephone keypad if.
If you would like to withdraw your question again price to start one.
I'd now like to hand, the conference over to your speaker today, Wojciech Nowak managing director of capital markets. Thank you. Please go ahead.
Thank you and good morning, everyone and thank you for joining us to discuss <unk> first quarter results for the three months ended March 31, 2022, 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. 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, Edgar and our company website as well as a quarterly supplemental package on our website.
Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A.
I would like to remind everyone that all figures are being quoted in U S dollars unless otherwise stated and 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 the call, we'll be referring to a slide presentation that you can follow along by joining our webcast or you can access directly to our web site.
Can find both the webcast registration and presentation in the investors section of truck 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 Wojciech.
Good morning, everyone. We've had a terrific start to 2022 and I am excited to discuss our Q1 results with you. Let me share with you some of our key takeaways from the quarter on slide two.
First we continued to benefit from the strength of our sunbelt middle market strategy with insatiable demand for our rental home showing no signs of slowing.
Our business has proven to be extremely resilient throughout the pandemic and we expect it to continue performing well into the future.
Second our growth plan is on track, we grew proportionate NOI by 23% year over year and we're on pace to acquire 8000 plus homes. This year with over 1900 homes acquired this quarter third our single family rental operations are stronger than ever with record low turnover record high occupancy and solid rent growth as we expect these <unk>.
To continue we are pleased to announce an increase in our same home NOI guidance for the year.
Next our fee revenue increased meaningfully year over year, while overhead expenses remained stable from Q4 of 2021.
And finally, we achieved all of this while maintaining a flexible balance sheet with minimal near term maturity maturities and ample liquidity to fund our growth plans.
You can see these and other metrics reflected in the summary on slide three clearly our business is booming on all fronts and we'll dig into the detail throughout the call. So let's move to slide four.
The public markets are going through a volatile time right now with a lot of uncertainty surrounding inflation interest rates and the economy. We intentionally built our <unk> business to be defensive and believe it will once again prove itself in the current environment. We think of our business is anti fragile after the term coined by the author Naseem Nicholas Taylor.
Beyond <unk> key tenants of resilience and robustness, we expect to thrive under difficult or more volatile conditions for a number of reasons.
First we remain focused on the hard working middle market demographic are resilient resident profile has stable jobs and solid household income of $85000 with a comparable rent to income ratio of 23%.
Second in this time of hyperinflation or efficiencies of scale allows us to benefit from the national procurement programs that enable us to save money on parts appliances and materials for a horse.
Third as I like to say the cure for high prices is high prices.
As an inflation hedge we are exposed to both rising market rents as well as rising home prices on our balance sheet.
Moreover, our built in loss to lease of 20% and should provide a long runway for rent growth.
Likewise, a strong correlation between home prices and rank growth also allows us to consistently acquire homes at five to five 5% cap rates, making our growth strategy sustainable over the longer term and.
And finally, what I love most about what we do is that we are able to provide essential housing in a supply constrained housing market. The insatiable demand for high quality professionally managed homes speaks for itself in any given week, we get over 13000 leads for only 200 homes available and as mortgage rates surpassed 5%, we estimate that the monthly cost of owning a home is.
10% to 30% higher than renting a triton home.
We are not only confident in our outlook, but also believe strongly that single family rental plays a central role in addressing the key challenge of America's housing market, namely an acute shortage of housing supply to affordable prices, if managed properly and responsibly. We believe strongly that single family rental is a noble business because it provides safe quality housing to American <unk>.
Please do either can't afford to buy a home or don't want to at an accessible price point. It also provides residents with a turnkey home and a low maintenance lifestyle that gives some time back to focus on what's important to them.
I tried to Anders purity, and our mission, we truly care about our residents and empower our frontline employees to go above and beyond so we can provide outstanding customer service.
And so as we turn to slide five I want to provide you some insight into <unk> decision to selectively engage with media to help spread this message and to shape a positive industry narrative. A recent interview was 60 minutes is a case in point.
There are several misconceptions about our industry that we aimed to addressed.
First we are not wall Street, where a housing provider. We are a people first company and have many programs in place to better the lives of our residents, including our recently launched Tricorn Vantage program designed to enhance the financial well being of our residents our suite of services ranges from educational tools to our credit builder program and other programs to help.
Families by home if they so choose.
Woven right into our company DNA as our long standing practice of self governing on renewal rent increases with annual rent increases for existing residents typically sat at rates below market, we want to prioritize our residence financial security and peace of mind, while they are living in a track on home.
And finally, we are not boxing out first time homebuyers are acquisition program accounts for less than half of 1% of resale volumes in our markets and we typically buy homes that require renovation to make them more livable and doing so we are upgrading the quality of the housing stock and the communities, where we own homes, what's driving up housing prices as the overall lack of supply of existing and new.
Homes in this regard we are committed to being part of the solution and we're adding 3000, new homes to the market by 2024 for our build to rent strategy and.
In short we are being proactive about solving America's housing challenges and we see tremendous opportunity for our business to be a platform for doing that.
I'd now like to pass the presentation over to with Sam discuss our financial results.
Thank you Gary and good morning, everyone Q.
Q1 was another great quarter for us and I want to thank our dedicated team we will continue to execute on our rapid growth, while delivering top notch resident experience.
Despite the tough operating background of geopolitical conflicts rising interest rates.
Light chain shortages and record high inflation.
I am proud to report we remain firmly on track to achieve our ambitious goals. We set earlier this year.
On slide six we summarize our key metrics for the quarter.
Core <unk> was up 32% year over year to $43 million.
Core <unk> per share was <unk> 14, an increase of 8% year over year.
<unk> was <unk> 12 per share, which continues to provide us with ample cushion to support our quarterly dividend with an <unk> payout ratio of 43%.
Let's move to slide seven and talk about the drivers of core <unk> per share this quarter.
Our single family rental portfolio delivered 23% year over year growth in <unk> proportionate NOI.
This was driven by.
By an 11, 6% increase in same home NOI and a 12% increase in proportionate rental home count.
Our <unk> contributions from fees increased by 103% compared to last year.
This was driven by incremental asset and property management fees from newly created joint ventures. This past year.
In our adjacent residential businesses, the 53% decrease in <unk> reflects our 80 percents indication of the U S multifamily portfolio last year.
It also reflects lower results from the U S residential development versus a very strong comp in the prior year.
On the corporate side, we had lower interest expense as we reduce our debt significantly.
And benefit from lower in place rates.
This was offset by higher corporate overhead expenses as we staffed up for our growth.
Of note overhead expenses were actually down a bit sequentially from Q4, and we expect them to stay around this level.
Lastly, the diluted share count this quarter was 26% higher as a result of last year's equity offering to fund growth and reduce leverage.
Let's turn to slide eight to discuss our fee revenue and operating efficiencies.
Our unique strategy for managing third party capital allows us to scale faster and run a more efficient business.
The fees, we earn also allow us to offset a large portion of our corporate overhead expenses.
Our recurring fee streams totaled $19 million in the quarter up 110% from last year.
This includes asset management fees property management fees development fees, but excludes performance fees as they tend to be episodic.
Together these recurring fees covered about 60% of our recurring overhead costs.
Compared to 44% coverage in the prior year.
Ultimately, we expect our fee revenue to cover the majority of our overhead expenses and allow our shareholders to benefit from strong NOI growth contributing directly to the bottom line.
Let's talk about our balance sheet on slide nine.
We have continued to prioritize deleveraging while remaining focused on growth.
We have cut our leverage almost in half since the start of 2020 with net debt to adjusted EBITDA down to $8. One time in the current quarter and net debt to assets at 36%.
Much of this was achieved at our U S. IPO prior common equity offering and preferred equity financing.
Turning to our proportionate debt profile on slide 10, the key takeaway here is that we remain focused and have minimal near term maturities. We have a strong liquidity position of $558 million in available cash and credit facilities to fund our growth.
Further I really want to emphasize this we have minimal exposure to rising rate environments with 75% of our proportionate debt at fixed rates following our latest securitization transaction, which closed in April .
On slide 11, I'm happy to present to you our updated guidance, which includes a 50 basis point increase to same home NOI growth in 2022.
This increase was driven by strong revenue growth.
Which we see continuing in April but also reflects some moderation for the balance of the year relative to our very strong Q1 print.
This was partly offset by expenses striking towards the higher end of our prior guided range as a result of higher property taxes and inflationary pressure on controllable expenses.
However, we reiterate our <unk> per share guidance as a strong same home trends may be offset somewhat by higher expected rates on future debt financings this year.
And our expectations of acquiring 8000 plus homes remain unchanged.
On slide 12, we reiterate our long term targets as part of our three year performance dashboards that.
The 2024 targets include growing our core <unk> per share at a compounded annual rate of 15%.
Expanding our portfolio in the <unk> space to 50000 homes.
Maintaining stable leverage at eight to nine times net debt to EBITDA and improving our overhead efficiencies such that 90% of our recurring overhead will be covered by fee revenue.
Although rising interest rates are a headwind for our ethical target. This target was set with increasing rates in mind.
Moreover, the strong NOI growth. We are seeing also provides us with a buffer which makes us comfortable with the outlook.
And to give you more insight on the drivers of the NOI growth I'll turn the call over to the man with a tan our Olympic Surfer, Kevin Baldridge.
<unk>, Sam and good morning, everyone.
Our strong first quarter performance is without question, a testament to the depth and breadth of our dedicated team.
Our resident first approach and our best in class operations, all of which continue to fuel growth.
Credibly proud of what we've achieved and I want to thank our team for going above and beyond every day.
Let's start with our portfolio growth on slide 13.
In the past year, we've expanded our portfolio by 32% in aggregate are 12% on a proportionate basis.
We are off to a great start this year with over 9500 homes acquired in Q1.
Putting us well on track towards our target of acquiring 8000 homes in 2022 through resale and new home channels.
Q1 is typically a seasonally slower acquisition quarter and so we expect the pace to accelerate in Q2 and Q3.
As home prices have increased so have average rents, which allows us to continue buying at our targeted cap rates of 5% to five 5%.
Second aspect of our growth in same home NOI, which expanded by 11, 6% compared to last year.
Let's dig into the components on slide 14.
Same home revenue growth of 10, 4% was driven by rental revenue increasing nine 6%.
This was made up of seven 2% increase in average rents.
70 basis point uptick in occupancy and roughly 150 basis point decrease in bad debt to below 1%.
This was partially helped by outsized government rental assistance.
We received during the quarter going forward, we anticipate that that back towards one to one 5% in the near term.
Our rent growth remains healthy with blended rents increasing by eight 7% during the quarter underpinned by an 18, 7% increase on new move ins and six 3% increase on renewals.
Our renewals reflect our policy of self governing which maintains rent growth below market levels for existing residents and in turn keeps our turnover low.
As we moved into April we saw a continuation of these strong rent growth trends.
Finally, our other revenue also grew meaningfully up almost 32% from last year as we increased take up rates in our ancillary services and resumed late fees after putting them on pause during the pandemic.
We see a path to increasing other revenue by over 16% per home over the next couple of years as we continue to rollout current programs such as same home technology and renters insurance and introduce.
New value add ancillary services to enhance the resident experience like telecom partnership solar panels, or just discounted cleaning services.
A key driver of our expected rent growth going forward is the embedded loss to lease in our portfolio, which you can see on slide 15.
Our policy is self governing on renewals coupled with long resident tenure as resulted in an estimated loss to lease of 20% across our portfolio.
We recapture this on new leases, which have been similarly, and increasing by close to 20%.
We expect this loss to lease to provide a multi year runway for rent growth in our portfolio.
Let's now turn to slide 16 to discuss same home expenses.
Our same home expense growth of eight 1% was driven by property taxes, increasing 11, 5% from last year.
We expect that year over year variance to come down on that in future quarters, as we comp against higher prior year numbers, but regardless property taxes are up meaningfully and was and reflecting significant home price appreciation in our markets.
Repairs and maintenance expenses were also elevated this quarter as we returned to a higher level of maintenance calls post COVID-19.
Work order volume was up 12%, while labor and materials and.
An increased scope of repair work added up 13% on the cost of each work order, even with the benefit of all purchased accounts.
On the other hand turnover expense was down considerably as our turnover rate decreased by 650 basis points from last year to a record low of 14, 7%.
So our occupancy bias and focus on our customer along with a greater proportion of costs being capitalized given the more extensive work being done on homes with longer tenure.
And the property management side, we've seen the benefits of scale to offset inflation as we are managing 32% more homes compared to last year, using our centralized and tech enabled platform.
Which resulted in a lower cost per home.
Lastly, other direct expenses were up due to the incremental cost of providing value enhancing services to our residents, including smart home technology and Renter's insurance.
Put it another way are non controllable expenses, which include property tax HOA and insurance were up 10%, whereas our controllable expenses on R&M turnover property management marketing and other direct expenses were up only five 5% as we concentrate on efficiencies and cost can.
Payment to counteract inflation pressures.
We are focused on the things, we can control to offset inflation, where possible like managing our national procurement programs and driving efficiencies through technology and operational improvement.
All the while keeping an emphasis on creating the best resident experience possible.
Now I'll turn the call back over to Gary for closing remarks.
Thank you Kevin let's conclude on slide 17, if Theres one thing I can leave you with today is that the factors that have driven our performance and value creation over the past year continuing to be in place as.
As we said throughout this presentation. Our focus is steadfast on growth by partnering with leading global real estate investors trike and has a clear path to increasing its <unk> portfolio to 50000 homes by the end of 2024, we have the balance sheet operating platform of third party capital in place to achieve this target with confidence and we believe that favorable.
<unk> in our industry should drive strong operating performance for years to come our growing portfolio, coupled with strong same home results should also translate into meaningful NAV appreciation for shareholders.
And of course, let's not forget about our adjacent businesses, which account for about 6% of our balance sheet, but represent a meaningful source of upside and potential cash flow to supercharge. Your sfer growth. These include our Canadian multifamily build to core business, a 20% interest in our high quality multifamily portfolio located in the Sunbelt and legacy for sale housing ask.
Assets. These businesses are all benefiting from a robust housing market and we believe they could ultimately ultimately be worth two times, our <unk> carrying value and represent $1 1 billion of value for our shareholders should we monetize these assets over time, we would use the proceeds to pay down debt or grow as if our portfolio and in the process simplify our <unk>.
Business.
That concludes our prepared remarks, we acknowledged that these are tough times filled with uncertainty, but what hasnt changed is the demand trends in our business, which are rock solid and because of that we remain confident in our outlook I'm humbled by the entire Tri Con team, who put their heart and soul into serving our residents and communities, while continuing to drive toward our ambitious growth plans.
We've built an incredible platform to do good to elevate the lives of our residents while empowering our teams to be the best they can be and in doing this hopefully we can inspire the broader industry to do the same I will now pass the call back to the operator to avnet to take questions with Sam Kevin and I will also be joined by John <unk> and Andy Harmony 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.
We asked today that you limit yourself to one question and one follow up we'll pause for just a moment to compile the Q&A roster.
Your first question today comes from the line of Sandy Lowe with Goldman Sachs. Your line is now open.
Hi, Good morning, Thank you for taking my question.
Could you talk about what are you seeing in the home buying market in general now that mortgage rates with cross channel five in a quarter.
As buyer behavior shifted given how best to producers.
Rates have risen in these last couple of weeks and months and how do you think about the ability to maintain yield wound GAAP treats in such an environment, especially given that you have.
Box size in mind.
Hi.
Good to talk to you Gary I'm trying to think that I'm going to try to unpack that for you I think.
When we think about buying homes were buying at a 5% to five 5% cap rate right.
And so thats still provides us with sufficient spread the spreads obviously narrowed we did our last securitization at 424, 3% to date I would probably be at about four 7%, but what we're continuously doing as we're reevaluating our buy box, we can make tweaks, we make tweaks daily weekly we.
We can think about for example, cutting out the lowest span of cap rates and thereby increasing our cap rate target, we could think about narrowing our market coverage and maybe moving out of some markets that have lower cap rates. Our goal ultimately is to maintain a positive spread were allergic to negative leverage and so there is things we can do to get keep ongoing but what I will tell.
Are you is that all other things being equal even with this higher interest rate curve is.
It's more accretive for us to buy more homes than last homes.
With respect to the home buying environment.
Is still extremely strong right, but our guess is that is mortgage rates continue to move up or the market gets used to these much higher rates.
We will start to see that stabilize or Peter out a little but that's our best guess, we're not clairvoyants. If you look back at previous cycles. Every single time that mortgage rates have increased by 100 basis points or more and in this case they moved up much more significantly certainly from where they started we've seen home prices existing home prices and new price home prices stable.
Or potentially even come down now what's different about this environment is that we've also never seen such shortage of supply. So that's what's different.
Housing market, both on the existing and new home front is unbelievably tight and so the number of bidders is definitely decreasing.
Builders for example are using rate locks and other incentives to continue to drive drive home sales, but the demand from what we hear and what we see in our own projects is still exceptionally strong we haven't seen any cracks yet our best guess, though is that over time at these higher rates again, you start when you start to see home prices.
Stabilized.
And if they stabilize it actually provides a better opportunity for us to buy homes and it could ultimately lead allow us to buy homes. One at a time at higher cap rates right because again, if home prices stabilize and rents continue to increase the way. They are we are going to see higher cap rates overtime.
Okay.
Thanks, Thanks for your thoughts there Gary.
Home price appreciation slows and I'm, not just thinking 2022, but potentially all tiers as well in home buying margarine and how should we think about the ability to charge higher rent I mean, I'm thinking gaucho can you recharge new leases at an elevated clip.
If that has no support from home price appreciation.
So what happens over time and we've seen as we've been in this business now for 10 years and we've seen this through empirical studies is that there is almost a 100% correlation between home prices and rents now they don't necessarily move in tandem. So what we've just seen as we've been through a period, where home prices have moved extremely.
Rapidly faster than brands and Thats led to a slight compression in cap rates, when we buy one or two homes at a time, but.
But what we think now with much higher mortgage rates is that those home prices are likely to stabilize rents will continue to catch up or increase which will mean that we'll probably see slightly higher cap rates, where we're buying homes. One at a time in terms of future rent, yes. I mean, there is no way that if you think about our rent growth.
Blended rent growth of 8%, 9% I mean long term depending on what your horizon is thats not sustainable.
That will probably would likely moderate to our forecast if we look out to let's say 2024, we're assuming NOI growth, probably let's say in the outer years of around 6%.
So we still see very strong growth.
There's a couple of things to keep in mind, there is huge loss to lease in our portfolio right. So 20% maybe higher than that and so as a result, we're going to continue to get outsized rent growth.
And the other thing is is that the demand for our business again this is ware.
I'm, a little bit more hesitant on how much where home prices moderate how much will rinse moderate the demand as we talked about it's just insatiable.
We're getting.
13000 leasing inquiries FERC 200 homes available any given week I mean that is just it's just astounding right and we're not sure that's going to go away it doesn't feel like it today the business is booming.
And there is just it's an incredible product there are so many American families that want this experienced a low maintenance lifestyle and we just think thats going to continue continue into the future.
Okay.
Thank you for that insight.
Your next question comes from the line of Mario <unk> with Deutsche Bank. Your line is now open.
Hey, good morning.
My one question pertains to.
The recent kind of proposed transaction with partners group acquired <unk>.
Important to acquired.
Close to a billion dollar transaction in terms of 2000 or so.
The ones in the U S can you shed any color on.
What implications in terms of the valuation as it does in the treated at that range what implications there may be for your portfolio consideration KBR, Inc. Barbara trends location.
Yes, sure Mario and thanks very much. This is Jon <unk> speaking on that transaction and there's actually been a handful of private market transactions that have taken place in the last six months to unpack that now there is a number of markets there.
That overlap with ours, but there is also a number of them, especially as you know more in the deep South I believe Midwest that don't don't overlap with Tri console was less of a target for us, but what I would say as we see private market transactions taking place.
In spite of some of the turbines youre seeing in the public markets are still trading at extremely keen are strong cap rates over the last six months, we've seen portfolios trade in some cases as tightened as the high twos and in the low threes on in place rents and I think what is important to remember when you're seeing these private market transactions or even in our portfolio is theirs.
Ample loss to lease to a transaction that might take place in the low three cap rate on in place rents may actually be in the low to mid fours on mark to market rents and so I think it's important to keep in mind, when you're thinking about those trades, but also the valuation of our own portfolio.
Yes, and I'll add to that I mean, when you think about the private markets investors are continuing to increase their allocation of real estate and we expect that we will continue to happen going forward for every 10 basis points increase in private capital allocation, another $80 billion to $120 billion needs to be allocated to real estate that's a.
A huge amount of money and the preponderance of that is now coming in many ways into what we call <unk> industrial and residential because those are the best places to get returned today and so there's a wall of capital out there what's happening I think as we speak is we're not seeing any private investors really exit the market Theyre just.
Adjusting their return expectations, which makes sense I mean, the math changed.
Underlying interest rates refinancing costs are higher and so our best guess from being in the market as it on portfolios.
In residential we probably seen prices private market pricing drop from the peak by about 10%. So if we see the peak Mario is let's say in February .
If 2022, we think maybe private market pricing is down 10% on private market cap rates might be up about 50 basis points, but they are far lower as Jon just said then where the public markets are at.
Our best guess is kind of where we're trading today and maybe we're trading at a kind of implied five 5% cap rate that is absurd. It's absolutely absurd. If you think about where private market valuations are today, they're probably at three 5% maybe up 50 basis points from where John talked about there were three 5% today, that's factoring in a much higher inter.
Rate curve.
And again because of that the reason for that is because of the loss to lease the public markets are not factoring the loss to lease in valuations and private markets are.
Okay, and then my follow up.
Not necessarily related to my original question, but I'll go to there.
Higher level dairy like when you look at the past three months.
I think back to the Q4 call.
And I'm, specifically thinking about the margins on the margin what would you say is the one thing that.
Youre incorrect, we most positive volume relative to three months ago, and then Conversely, what are the one thing that stands out that you're incrementally more cautious on relative to three months ago with Howard Weil.
<unk>.
And the last couple of months to address.
<unk> you are talking about as if our NOI margin.
I'm, saying overall.
Overall business wise business wise.
Sure.
Well I think.
Look I mean, I think where we have to be where we have to look at things and be and be monitored very carefully is certainly inflation. I mean, we are in an unbelievably inflationary environment.
We've never seen this before it if you think about it we've got balance sheet normalization.
<unk> never seen that before we have a war between Russia and NATO.
Thats never happened in our lifetimes.
Zero Covid policies in China like if you wanted to create the perfect storm for inflation I don't think you could even make that up that's what it is so we are in an inflationary environment and that affects our entire business now at this point in time nothing is insurmountable and we're very fortunate that we're in a business, where we continue to believe that we can drive revenue.
Faster than expenses, but we've not seen if you look at our NOI print this quarter, we've never seen revenue and expense growth is high I mean, they are both really high it's driving exceptional NOI growth, which is a real positive but the thing we're really keeping an eye on is the inflation rate. It does start it is starting to feel like that.
Stabilizing a little bit supply chain issues feel like they are starting to stabilize a little bit, but thats, where we have to continue to monitor monitor the business.
Alright.
Thanks, Brian this bad equation within the portfolio.
No no I mean in some ways. It feels like we're in an economic period of stagflation in some ways.
Certainly you could feel that with higher grocery prices and prices at the gas pump and certainly higher rents.
As far as our business is concerned I mean, the business is booming.
If you think about it let's just talk about this high level.
Growth in <unk> at 12% multifamily up 18% in the U S. 24% in Canada, I mean dose you can't even those numbers are unbelievable that gives you a sense of how strong our business is on the ground and it does not reflect what's happening in the capital markets.
Okay. Thank you.
Your next question comes from the line of Nick Joseph with Citi. Your line is now open.
Hey, it's Michael Bilerman here with Nick.
You.
Can you just commented that you thought the public market.
<unk> single family rental or at least your stock is absurd.
Relative to the private market.
And I wanted to think a little bit about how public market investors sort of.
I think are more about where the puck is going rather than where the puck is today.
And there appears to be as much as you were talking about how everything is Polish prices are down.
Home perspective.
There may be more risk in the future. So why shouldnt the public market investors have a higher discount rate or risk profile.
Yeah.
They may think that eventually home prices go down and rents.
Turning based on based on that.
Well I mean, we cant we cant move the market I mean, the market is what it is in markets, having a moment theres a huge amount of uncertainty out there I just talked about the reasons for the uncertainty.
And when when the market is uncertain as it leads to very volatile.
Movements in the stock market and much lower pricing and Thats what were seeing today.
That's the capital markets that doesn't necessarily mean that is being reflected on what's happening on the ground today on main street for what's going to happen in the future and as far as our business is concerned the demand is rock solid we don't see that changing like I said, we've got 200 homes available any given week and we're getting 13.
Leasing inquiries are leads that we don't we don't see that changing people have to live somewhere.
If obviously the cost of.
Of debt or equity moves up that will obviously have an impact on valuations thats beyond our control, but what doesn't change is the underlying demand for our business and we don't we don't see that changing so my best answer is that the markets tend to overreact.
And I think we're probably in that type of situation and things will probably stabilize but.
It doesn't it doesn't change our it doesn't change our outlook.
As to where we think this business is going this business was built to be defensive he was built to be able to be resilient and to perform an inflationary times, which we're in today and also in recessionary times, we think we do relatively well both in inflation and in a recession and so we remain confident in the outlook.
You have obviously very big growth plans and you want to use a lot of other people's money to do that and you've already have raised a bunch of that and obviously the equity offering that you did recently.
Levered the balance sheet and provided you a little bit of growth capital I guess with the stock where it is how does that sort of affect your view right. Arguably you could use some of that excess capital to buy your own stock.
That effectively then just takes up leverage in Hudson to the future growth that you want to have so how are you sort of balancing.
Where you are going to need some level of attractive equity.
To be able to fund your <unk>.
Strong external growth.
Yes, it's a great question I think look I mean, the stock market valuation is a point in time.
And it is low today, but it can move up quickly. So I think what we don't want to have as a knee jerk reactions or stocks low today or this week and now we're going to just switch from buying homes to buying back our stock. We don't think that makes a lot of sense.
If the stock was low forever and that might be different situations, but as I said, it's a point in time.
And the way, we think about our business as we're growing NOI by 20% a year right. If you think about it that's a combination of external growth.
It's the 8000 homes a year plus the same home growth that's incredibly strong for an environment, where we can grow our NOI, 20% a year apropos for sure over time by let's say, 15% a year, we think it makes sense to focus on the growth and finding efficiencies in our business rather than buying back our stock.
It's Nick here, sorry, one more.
Just on the balance sheet, given the higher interest rates, how does that change your views on target leverage in the 25% floating rate debt.
Yes, I think it's with Sam.
It actually so we're looking at our balance sheet and we've done a pretty great job over the past couple of years completely deleveraging or more importantly, we've done we fixed a lot of our debt 75% of our debt is currently fixed 25% of it is floating of the 25% of that is floating today.
One which is a term loan that matures in 2022, we're going to refinance that for we can keep the rate exactly as those actually and it's got a cap on the upper end so it doesn't really impact.
The higher rate environment and the other two items that are floating we're actually looking at a securitization as we speak we are in the market today. The rate is probably going to be higher at 70% leverage youre, probably going to be closer to $4 75, maybe $4 85.
But it's still a positive spread and it is still lower than what were what were buying up so we're going to try to fix for as long as we can and we're really in a great position and apart from that really the next big maturity is 2024. So we have time to start thinking about options there, yes and Nick.
Only thing the only thing I would chime in as possible that if we remain in a high rate in via <unk>. The high rate environment for a longer period of time, it's possible that in our joint ventures is certainly a new joint ventures that we target lower leverage right that might that's another way to kind of bring down the effective cost of debt.
That might be something we were going to consider with our joint venture partners going forward.
Thank you.
Your next question comes from the line of Richard Hill with Morgan Stanley . Your line is now open.
He came it's Adam on for rich.
Great.
I just wanted to ask a little bit about kind of the what you just mentioned Gary the eastern upon raising and ask if you could remind us what the timeline is for fund raising for new for new JV potentially and if that timeline has changed or shifted at all.
I did kind of executed to plan right and kind of have been buying this kind of 80000 homes per year executing on that plan.
We're actually going a little faster than we thought one of the reasons is the home prices have moved up so we're putting out capital a little faster than we initially anticipated and setting our three year target.
And so we would expect to get to that kind of 50000, hallmark or certainly invest all the capital in the JV by the end of 2024 and as possible that that's going to happen sooner and that puts us in a position then to raise new funds sooner.
I can't say, specifically, whether it's half year or a year faster, but it's going to be could be meaningfully faster than what we're currently projecting.
The conversations we're having with our existing partners are very bullish.
They want to put out a lot of love. This sector, we performed extremely well for them. They want to put out a lot more capital the real governors how much capital can we manage how many homes can we buy do we the operations in place to manage that growth, but the capital is there from our partners to keep on going and so thats something thats really exciting.
<unk> is not we're not really focused on fund raising with the existing JV to a homebuilder directs we're putting the capital out but.
But what I will tell you is that on the build to rent program. We are now nearly fully committed on what we call <unk>, our joint venture with Arizona State retirement system that ventures now fully committed and so we're now in a position to.
Think about launching a successor vehicle. So that's something you should be expecting later in the year.
Great.
Paul I guess just switching gears.
Turnover considerably lower every quarter right I think.
A hair over 14% in April .
Wanted to ask if that kind of your assumptions going into the year on same store.
Expenses.
You've kind of given we'll turn it over to Don if thats kind of changed your view or.
With some of the kind of the controllable variety or some of those operating expenses might be going.
Going into the future I would turn it over kind of holds at these levels right I mean, given the tight housing market.
There may be changes youre from a long term view about.
Turnover expense some of those other expense line that may be impacted.
Well I'll, let Kevin maybe chime in on some of the expense line items, but I would just say high level that never in a million years did I ever think we'd be at this level of turnover.
It's mind blowing I remember, having seeing a few years ago, maybe we could get below 25% maybe right now.
Now we are below 15.
We just never we just never projected this we never thought this would happen is partly a function of how much demand is out there and the fact that we're self governing on renewals right and I think that we're team is doing such a great job.
On the quality of the home and the service that people just don't want to leave it's just such a great.
Form of housing so I think that's got to change our expectations, but I still think that 15% just seems so low and I think when we look at our projections. We're typically looking at maybe 20% this year, 18% to 20% this year and if we looked at the kind of a longer term forecast, let's say up to 2024, we probably be projecting 25.
<unk> turnover so to give you some sense of.
How that will impact the various line items, but 25% I would say, maybe 18% to 20% this year and 25% longer term.
Anything else you want to add Kevin on that now.
To your to your projections I think that we will see turnover go up a little bit you know people have been hunkering down.
Does of Covid and that psychology, now is changing and so we're seeing people starting to move a little bit more and so I think that I don't see the turnover staying this low I think it will get back to like what Gary was saying because we'll start seeing decoupling happening from the Covid era, we were already starting to see it a little bit. So we will see turnover go up a bit.
And it's still it's going to stay in the 18% to 20%, most probably and thats going to help mitigate our costs.
The other things that we're doing just to let you know.
To help our our costs going into the future as we've increased the work order was done in house, we're up to 70% of work orders.
Our team.
Yet into our centralized office, 70% of that is done by our by our in house tax. We also have national purchase contracts that have helped us have shield with some of the inflationary pressures. So we're seeing in some cases the cost of appliances for instance, going up 30% and we've got locked in prices at 5%.
7%, 8%, so it's giving us a hedge on that we're also the average age of our homes or 24 years right now.
The homes, we're buying these days of 14 to 15 years old and we've seen that translate into lower cost by 20%, 20% or so.
And then we've also we've rolled out what we call intelligent virtual assistant Iga and.
In concert with a permission to enter and so that allows us to more efficiently and quickly respond to work orders provides better customer service, we're getting the houses faster.
Increasing satisfaction and then its also helping us push the number of homes are tests per.
Per day and per week, which makes us more efficient so.
In addition to the lower turnover that we're experiencing we're constantly thinking from a technology standpoint, and process improvement standpoint to keep our costs low.
That's really helpful guys. Thanks, again and really appreciate it.
Great. Thank you.
Your next question comes from the line of Brad Heffern with RBC. Your line is now open.
Hey, everyone, you've talked about a potential recap of the U S multifamily portfolio in the past.
We assess the likelihood of that change just given all the capital market's turmoil.
How does that affect the final picture for 2002.
We're still looking at it.
It's still something we'd like to do.
It certainly has become a little bit more difficult or perhaps a little bit less accretive given the underlying.
Underlying rates have increased significantly as you know abroad, but it's not something we we still think makes sense.
If you look at our <unk> carrying value, which is about $1 7 billion $1 seven 5 billion I mean its significantly above.
Where we bought the portfolio, where we syndicate it and is obviously much higher we got about $800 million of debt in place on out, let's say a $1 70 175 billion.
Portfolio evaluation, which is conservative quite conservative I would say and so there seems to be room night, a recap so again, a little bit more difficult than where we were a couple of months ago or a month ago, but something we still think makes sense and something we're going to continue to look at.
Yes, if I could add to that as well is let's talk about this year as you know we talk about our commitments of buying up to 8000 homes.
You really put that in.
Mathematically, we're looking for another $200 million of equity that we need for our to fund our portion of the growth.
<unk> after dividends provides us with another $50 million. This year. So our shortfall. This year is really about $150 million.
We are in a great liquidity position our credit facilities.
The unrestricted cash of about 558 million available for us. So we could easily absorb all of that without having to go to the capital markets or do any of these dispositions either this or this is just a plus for this year.
Okay.
Okay got it thank you for that.
And then I'm curious you've mentioned several times the 13000.
Applications for 200 spot I'm curious if you've changed.
<unk> standard standards at all.
We're trying to upgrade the credit quality of the portfolio just given all the macroeconomic concerns.
No we really haven't.
Keeping with the same program that we've had we currently we think things are pretty strict we currently turn down between 48% to 52% of applicants. So we from the very beginning we've really cared about the propensity to pay of our residents and so we've been maniacal and are kind of under.
Writing process, we took that we used to underwrite across all the different offices that we had around the country. We centralize that so we had a consistent approach and that we were living within all of the fair housing laws and we've found that it's really been helpful on with Covid hit and the Moratoriums hit we couldnt use all.
Our normal collection processes that hurt a little bit, but we're we're now improving markedly since we started we started going back.
To our normal practices and we're going to start seeing our delinquency rate come down pretty good, but we haven't changed.
Our practices on how we're underwriting we still see that.
Rent to income rate is at about 23%. It's been 22, 23% all along and we've been really pretty happy with that with our resident base.
Okay. Thank you.
Your next question comes from the line of Jade Rahmani with K B W. Your line is now open.
Thank you very much.
April numbers sounded good but has there been any moderation in demand.
Either in number of leads.
Conversion ratios from number of leads.
Or rent their willingness to accept asking rents and secondly could turnover in some ways reflect a weakening in demand since there's such a gap between new lease rent growth.
Versus.
Renewal rent growth.
So I'm going to answer the first question Jade and just say no. There's been no change if anything we are going into the stronger spring leasing season and in some ways trends remain as robust if not more robust as where they were where they were so no change at all.
I will see this if you think about the you think about the for sale housing market versus the rental market. The for sale markets, probably never been more expensive. If you go back to 2020 or sorry, 2000, let's say back from Millennium has never been more expensive. If you look at housing on a price to.
Income basis, right for sale housing and price income basis has never been more expensive. Conversely rental housing has never been more affordable on a rent to income basis, we just talked about being at 'twenty. Two 'twenty, 3% rent to income has never been more affordable going back to 2000. So we're really in a great position to continue.
To drive the business.
In seasonal demand, we've got pricing power, we're using that responsibly as you know we could be pushing our renewals much harder were not so we're building in that loss to lease and I think the turnover the low turnover I think in my opinion, just really reflects the fact that we are self governing.
When we're giving people six or six 5% renewals. They go around and look around and what else can they get in the market I mean realize theyre getting a good deal and they stay and they like the product and they like the service.
They like what we do and and there is no reason to go anywhere else. So no. We don't we think the low turnover is more reflection of the way we're running the business.
Thank you.
The supply side.
The positive and negatives and I Wonder how you see it on.
The existing home market.
Something like 80% of mortgages have a rate less than four 5%, creating a very large disincentives to move on.
On the other hand every company in this space seems to be chasing the build to rent.
Model.
I, even know mortgage Reits that are lending money in that asset class as well as homebuilders developing that asset and the supply chain issues might be forestalling, the onset of that supply.
So how do you think about the supply picture and is there an environment later in the year, where supply chain gets relief and there is suddenly and avalanche or a big inflow of new newly developed rental homes that delivered to the market.
Well I mean, I'll, let Andy talk about supply of build to rent.
But I think before that I would just see this on the existing home market, which obviously has a major impact on our ability to buy homes right because that's really what's driving our growth.
If you think about the 8000 homes that we are going to buy this year roughly seven out of eight our existing homes.
That market over the last couple of years, including up until today has never been tighter it's never been a more difficult time to buy existing homes, maybe ever than it has been in the last couple of years and we are having no issue hitting our 8000 homes that are five to five 5% cap rates. So I just wanted to be clear on that.
I think if anything can happen to loosen the market I would agree with you more people are likely to stay in place.
<unk>.
Maybe with considerably higher mortgage rates.
Gives us it gives us an opportunity maybe maybe it helps loosen the market a little bit.
Maybe we will see I mean, the market is so tight I don't know if we could get any tighter it probably over time gets looser and if it gets looser thats better for us.
It allows us to be more flexible with our acquisitions that might allow us to buy at higher cap rates, especially as I said, if rent if rent growth starts to now outpace home prices.
Build to rent is a different animal.
And Andy why don't I turn that turn that over to you because it's true there is when Jay saying Theres a lot of competition build a rep certainly I would add though new home supplies are currently at historic lows as well right. There has been very significant demand on the retail sale of new home sales as well as increasing.
A number of groups pursuing build to rent, while you have supply chain and delivery delays. So both both supplies are less than a month rate cut of historic.
Forever lows in terms of supply our sense on new home supply is that it will increase over time, but it takes a long time building more homes, just like an aircraft carrier. It takes a long along in a large amount of time to turn our increase that supply. We do think we'll see a little more supply come online over maybe the latter part of this year and into the <unk>.
Following year, but it comes on very slowly a few hundred homes here a few hundred homes, there and there is still a very large amount of blocking and tackling required to acquire gain approvals for developing sites and then work them through the development and construction timelines. This is probably a couple of years or more before those supplies go back to normal from historic lows.
We don't see them skyrocketing quickly. It just takes too long to mobilize this business to move supply quickly and we think it's going to take quite a while to do so and Jade I.
Ill just add one more comment on that you talked about supply chain and you know maybe the supply chain loosening later this year early next year, but one major element of homebuilding and labor. Okay. So even if all of the appliances or windows that are causing some delays do show up there's just a massive shortage of labor.
Available in the United States in part due to lack of my great integration over the last several years that hasn't been solved and so in spite of no. Let's think about the last several years before the supply chain shortages. There is still a demand for new housing, but a major constraint in labor and we don't see that property.
Constant.
Your last question today comes from the line of Stephen Macleod with BMO capital markets. Your line is now open.
Thank you good morning, guys lots of great color. So thank you.
I just had one question for you and it relates to something Gary that you mentioned with respect to the infrastructure that you have in place to support the single family business, which which I know you've invested a lot in built quite a significant platform.
How many homes do you think you can support on the existing infrastructure.
Without having to add incrementally.
I think we could we can buy with the existing platform. The platform is very scalable right in terms of the technology. We've got an incredible tech enabled operating platform.
What does need to get scale. These the people component of it right. So remember when you go and buy homes. You. Then if you buy a lot of homes you need more people to renovate those homes, which were involves more supers to oversee the renovation and obviously you need more tax to ultimately turn and repair those homes. So there is a real significant people component, which is why.
Where are we where we're continuing to hire aggressively but we've got I would say the team and the platform in place.
To acquire 8000 to probably 10000 homes a year. If we wanted to go faster than that we'd have to invest certainly more in our people and going and going.
Faster on the hiring front, but eight to 10000 is where we could be I think given the capital markets environment, We're probably and based on our guidance, we're probably much more likely to be closer to 8000.
Then 10000, if we were in a better capital market environment, we could probably go faster based on the platform and people in place. So I hope that answers. Your question for you, but one way either way of significant growth.
And again, we believe that.
The growth more growth and less growth is accretive for our business.
Okay. So it sounds like the.
The real variable cost component is on is on the people.
But with the technology platform you have you can support above 50000 homes.
It's more just the blocking and tackling of buying renovating.
And managing the home specifically.
Okay.
Even when the technology to buy a home right.
Which is pretty pretty impressive.
We don't buy side on seat right. So as soon as we put our homeowner contract we need to send someone there to inspect the hump that requires people right. Then we renovate the home to a common standard that requires people then we've got to turn to home and service to home all of that requires people that is the hard part of the business, it's actually not the acquisitions.
And that needs to be scaled appropriately we're actually finding at.
Last year was a much tougher time to hire this year, we were hiring great people great tax.
And so we've got we've had no issues on the hiring front.
And even in this very tight supply market and no issues on the acquisitions front either.
Okay.
Great. Thank you.
Steve.
Okay.
There are no further questions at this time I'll turn the call back over to Gary Berman, President and CEO of Tracon residential.
Thank you and I'd like to thank all of you on this call for your participation. We look forward to seeing what the markets look like when we speak with you again in August to discuss our Q2 results.
Thanks, everybody.
This concludes today's conference call you may now disconnect.
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