Q2 2022 Tricon Residential Inc Earnings Call
Good morning, My name is David and I'll be your conference operator today at this time I'd like to welcome everyone to the try calling residential second quarter 2022 Analyst Conference call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session if you'd like to ask.
Good question. During this time simply press Star can you followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again I'd now like to hand, the conference over to your speaker today, Wojciech <unk> managing director of capital markets. Thank you. Please go ahead.
Thank you David and good morning, everyone and thanks for joining us today to discuss strike on second quarter results for the three and six months ended June 30th 2022, which were shared in the news release distributed yesterday I'd like to remind you that our remarks and answers to your questions may contain forward looking statements and information.
This information is subject to risks and uncertainties that may cause actual events or results to differ materially.
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 web site as well as the supplementary package on our website.
Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A.
I'd 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. During this call we will be referring to a slide presentation that you can followed by joining our webcast or you can access directly through our website.
Can find both the webcast registration in the presentation.
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 Tri County.
Thank you <unk> good morning, everyone and thank you for joining us today.
As we navigate through some volatile and uncertain times I'm happy to report that our business performed well through the second quarter with strong operating fundamentals continuing into July and August let me share with you some of our highlights from the quarter on slide two.
First we continue to benefit from the resilience of our sunbelt middle market strategy with exceptional demand for high quality rental homes. Despite the uncertain macroeconomic backdrop, our business is firing on all cylinders and continues to deliver consistent results quarter after quarter.
Our growth plan remains on track, we grew proportionate NOI by 24% year over year and had a record quarter single family rental acquisitions and as home prices stabilized, we're now seeing opportunities to buy homes at higher cap rates third we had another excellent operational quarter, and our <unk> business with near record low turnover record high occupancy.
And strong rent growth next our private funds and advisory fee revenue increased meaningfully bolstered by strong performance fees and finally, we achieved these results while keeping leverage at the low end of our target range with minimal near term maturity maturities and ample liquidity to fund our growth plans.
You can see a summary of our headline results on slide three our as of our business is performing extremely well and we will delve into these metrics throughout the call and our adjacent businesses. We also achieved two important fundraising milestones this quarter I'd like to highlight.
First we closed the successor JV with Arizona State retirement system to extend our build to rent program and increased housing supply in our core Sunbelt markets. This new 500 million JV includes $100 million or 20% co investment from Triton, which we expect to fund gradually over a three year investment period.
Can we restructure our Canadian multifamily built a core joint venture with Canada pension plan investment Board, it's an all equity capital structure, increasing the total equity commitment from 500 million Canadian to $1 5 billion, while simultaneously learning <unk> equity commitment from 150 150 million Canadian to $116 million.
Our restructured JV will help reduce our balance sheet exposure to development activities and maintain lower leverage metrics as we add new projects.
Moving to slide four we had another productive quarter on the ESG front publishing our second annual ESG report and expanding our sustainability initiatives first we made headway in addressing our environmental footprint. We've now completed energy efficient upgrades to 70% of our <unk> portfolio, including energy star appliances efficient HVAC and hard work.
Our systems low flow water fixtures and smart thermostats, we're also deploying rooftop solar and over 1100 newly constructed homes and are piloting our first net zero rental homes in a build to rent community located in Grand Central part Johnson Master plan community in Houston.
And second we announced our market leading downpayment assistance program, which also also allows qualifying long term residents to receive $5000 towards the down payment to buy a home of their choice.
<unk>, we are deeply committed to providing housing optionality for our residents, including the ability to either rent or own a home as we aim to be part of the solution in addressing America's significant shortage of affordable housing options.
As we move to the next few slides, we want to address some of the key questions. We've been getting from investors and analysts have weight given the rapidly shifting economic environment.
First on slide five let's talk about acquisitions.
Clearly acquisition financing rates have moved up in March we are financing at rates just over 4%, whereas in July we completed a JV to securitization at closer to five 5%, while the higher financing rates will have a negative impact on the cash flow. We earned from our homes. We're also seeing a moderation in home prices, which in turn has allowed us to buy homes at cap rates.
At a range of five and a quarter to five 5%, which is roughly a 30 basis point increase compared to where we are buying three months ago. This change to our acquisition underwriting or the combination of higher rents and stable home prices enabled us to by nearly 2500 homes in the quarter at a positive going in spread to current financing rates.
We thought it would be interesting to show a price to <unk> multiple for typical single family home given that the <unk> contribution from every home includes fees, we earn for managing third party capital.
We're effectively buying homes at a 12 times price to <unk> multiple compared to 11 times earlier this year still a very accretive use of capital I would point out that the securitized securitization rates have come down recently and we think that the same deal. We did in July it can be done at closer to 5% today, which brings us back to a 11 times multiple looking at.
It differently for our real estate loans for buying homes at again, a nominal cap rate of five and a quarter to five 5% and when including the net fee income of fully loaded or adjusted cap rate of six 5% to 7%, which remains very compelling even at a much higher interest rate environment.
So what's driving cap rates higher as you can see on slide six there are two factors at play NOI or the numerator is rising home prices or the denominator is moderating on the one side NOI is rising because of higher rates market rents were up 6% nationally compared to last year, yet even with that change has probably never been more.
Affordable to rent versus own a home given how high mortgage rates have moved on the other side, we see home prices cooling average MLS closing prices in our markets are down about three 5% since April and we find ourselves pivoting for making offers at a premium to less price to now offering below list price and still being successful in our purchases clearly.
Our acquisition opportunities attractive and from a cap rate perspective should become even more attractive over the balance of the year.
So how do we go about funding our growth plan.
Let's turn to slide seven to see the building blocks of our cash sources and uses.
On the left side you can see we have a rapidly growing cash flow driven by strong same home NOI growth and a growing portfolio of homes. We're also looking at opportunities to unlock the value of our U S multifamily portfolio and to sell a small number of noncore <unk> homes, which can provide a significant amount of growth capital and lastly, we have more than $500 million of liquidity.
Through our revolving credit facility and cash on hand.
On the right side of the slide you can see we've planned investments of about $300 million per year in our <unk> business, including about $130 million remaining for 2022 if.
If we think about our growth plan through 2024, we estimate having over $1 billion of cash sources, when extrapolating cash flow growth over two and a half years and layering on the other cash sources from our adjacent businesses compared to about $750 million of planned investments over the same time period in other words, we have sufficient capital in the medium term to fund our growth plan.
And don't need to rely on the equity capital markets.
The next Big question is how will our business fare in a recessionary environment, which we addressed on slide eight we have some experience in this department during the 2015 2016 oil price crash the impact of the Houston market. When we look back we came out largely unscathed as oil prices declined and unemployment spikes as you can see occupancy.
Our Houston portfolio remains stable and subsequently improved while average rents grew over 4% during the same time period illustrating the past ability of single family rental even in a down market and most recently our business fared extremely well during the pandemic. Another proof point for the expected resilience of our business model.
Now, let's move to slide nine to answer the question of what is the impact of rising interest rates on our long term outlook as I spoke about earlier higher interest rates are a drag on our acquisition economics, which we are mitigating by buying at higher cap rates from a longer term perspective, it's actually the same home NOI growth is a more significant driver of our results.
So with higher rates factored into our long term forecast, we will need to deliver higher same home NOI growth in order to get to the same endpoint.
Nice thing is that NOI growth has indeed trending higher than expected and we feel comfortable that our 2024 core <unk> per share target of 83 to 88.
Still achievable in short, what we're giving up with higher financing costs, we expect to make backup with NOI growth, providing an attractive hedge in today's uncertain environment I.
I would now like to pass the presentation over to Sam to discuss our financial results.
Thank you Gary and good morning, everyone.
We delivered another strong quarter with exceptional financial results and I'd like to thank the entire track on team for their contribution in making this such a successful year so far.
On slide 10, we summarize our key metrics for the quarter net.
Net income from continued operation was up 185% to $417 million, which includes $396 million of fair value gains on rental properties.
Core <unk> was up 43% year over year to $52 million.
<unk> per share was <unk> 16, an increase of 14% year over year.
And <unk> per share was <unk> 13 up 18% year over year, providing us with ample cushion to support our quarterly dividend with an <unk> payout ratio of 39%.
Let's move to slide 11, and talk about the drivers of this core <unk> per share.
Our single family rental portfolio delivered 24% year over year growth in Tri County proportionate NOI.
This was driven by 10, 5% increase in same home NOI and a 12% increase in proportional rental home count.
Our actual full contributions from fees increased by 110% compared to last year.
This was driven by incremental asset and property management fees from newly created as a foreign multifamily joint ventures in the past year, along with strong performance fees from legacy for sale housing investments, which added over <unk> <unk> per share.
In our adjacent residential businesses the year over year decrease in ethical reflect lower results from U S residential development versus a very strong comp in the prior year.
On the corporate side interest expense was down slightly as we reduce our proportionate debt balance while keeping the effective interest rates stable compared to last year.
And our corporate overhead expenses increased from last year as we staffed up for the growth and started to travel more often this also included costs associated with our U S listing and Sox compliance program.
Of note overhead expenses was actually down 4% sequentially from Q1, and we ask them to stay around this level as we focus on driving overhead efficiency.
Lastly, the diluted share count this quarter was 24% higher as a result of last year's equity offering to fund growth and reduce leverage.
Let's turn to slide 12 to discuss our fee revenue on overhead efficiency.
The fees, we earned by managing third party capital allow us to scale faster improve our operational efficiency and offset a large portion of our corporate overhead expenses.
Our recurring fee streams totaled over $22 million in the quarter up 108% from last year.
This includes asset management fees property management fees and development fees, but it tends to exclude performance fees as they tend to be episodic in nature.
Together these recurring fees covered about 74% of our recurring overhead costs compared to 50% 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 now turn to our up proportionate debt profile on slide 13, I am happy to report that we ended the quarter at seven eight times net debt to EBITDA, which is just below our near term debt targets.
We have minimal near term maturities and we aim to limit our exposure to rising interest rate environment by having the majority of our debt at fixed rates.
Nonetheless, we do have 31% of our debt at floating rates as of Q2, which is largely related to short term warehouse facilities that we use to acquire homes.
I will also note that the benchmark rates have moved up significantly since Q2, and our weighted average rate that you see here a $2 nine 8%, it's probably closer to three 4%.
We understand how important it is to be proactive with floating rate debt and near term maturities. So on slide 14.
Wanted to highlight what we're working on today.
First.
Youll see that we are in the process of refinancing and extending our $218 million term loan to 2024.
That will eliminate any 22 maturities and refinancing exposures.
Second in July , we refinanced and extended $101 million of our proportionate JV warehouse debt.
<unk> securitization maturing in 2028 at a fixed rate of 547%.
Admittedly this was a high rate to pay but we aim to blend at an attractive rate over the life of the joint venture.
Sometimes we'll finance at higher rates, and sometimes will finance on lower rates, but we are focused on improving our weighted average rate and term over time.
As Gary mentioned that same deal today would be closer to 5%.
And finally, we want to remind you that our <unk> JV too and homebuilder drive floating rate facilities are used to fund our <unk> acquisitions, which are expected to be refinance with long term permanent debt overtime once homes are stabilized.
And so we are constantly extending our debt profile with permanent financing.
Moving onto slide 15, I'm pleased to present, our updated guidance for 2022, which includes.
And increase the same home NOI growth by 75 basis points at the midpoint.
This increase was driven by stronger than projected revenue growth trends and expenses tracking a bit better than previously expected.
We are reiterating our ethical per share guidance is the strong same home trends are being offset by future potential higher interest expense.
We are also on track to acquire 8000 homes, but we don't expect to exceed this target.
On slide 16, we are reiterating our long term targets as well as part of our three year performance dashboard.
The 2024 targets include growing our core <unk> per share at a compounded annual rate of 15% over three years.
Expanding our <unk> portfolio to 50000 homes may.
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 rate environment is a headwind for our ethical target. This target was set with increasing rates in mind.
Moreover, our strong NOI growth. We are seeing also provide a buffer which makes us comfortable with the outlook.
And to give more insight into the drivers of the NOI growth that occurred this quarter.
And if Tracon celebrated Christmas in July he will be our very own Santa Claus I'll turn the call over to Kevin Baldrige, Chief operating officer.
Thank you very much the same.
Good morning, everyone.
Let me start out by saying that as we continued to grow our comedy add more homes and welcome new residents. Our operations teams have done a fabulous job supporting momentum of our business without missing a beat.
I continue to be amazed at our team's unwavering commitment to resident service and operational excellence and how they keep raising the bar quarter after quarter.
Now, let's start out with our portfolio growth on slide 17.
When we compared to last year, we've grown our portfolio by 34% in aggregate to almost 33500 homes Inc.
In Q2 alone we acquired a record of almost 2500 homes diversified across 18 primary markets.
These include both newer MLS homes, and new homes purchased directly from homebuilders, which together are gradually bringing up the average vintage of our portfolio as well as the average acquisition price in rent, while remaining true to our middle market strategy.
With over 4400 homes acquired year to date, we firmly are on track towards our targeted buying 8000 homes. This year.
The second aspect of our growth is same home NOI, which expanded by a solid 10, 5% compared to last year, let's dig into the components.
As you can see on slide 18 same home revenue growth of eight 2% was driven by a seven 6% increase in average rents and 80 basis points in occupancy gains.
Our rent growth remains healthy with blended rents increased by eight 4% during the quarter derived from a 19, 6% increase on new move ins and a six 4% increase on renewals.
Our renewals reflect our policy of self governing which maintains rent growth below market levels for existing residents and in turn helps keep our turnover below.
As we moved into July we saw continuation of the strong rent dynamics with blended rent growth over 9% and occupancy at a high 97, 8%.
These demand trends are an absolute dream and the best I've seen in my entire career.
We expected strong demand such as this along with an estimated portfolio loss to lease of about 20%. We will continue to drive robust rent growth through 2022 and beyond.
Our bad debt expense has been trending around one 5% over the past few months and we see it reverting to pre pandemic levels of one and sub 1% by early next year.
Finally, other revenue also grew over 11% from last year as we rolled out ancillary services and resumed late fees after putting them on pause during the pandemic.
We see a path to increasing other revenue by about 15% per home over the next couple of years as we continue to rollout current programs such as smart home technology, and renters insurance and introduced new value add ancillary services to enhance the resident experience like telecom partnership solar panels.
Or discounted home cleaning services.
Let's now turn to slide 19 to discuss segment <unk> expenses.
Our same home expense growth of three 7% was driven by property taxes going up 15, 6% from last year.
Electing significant home price appreciation in our markets.
On the other hand repairs and maintenance expenses were down this quarter.
Although the portfolio experienced higher work order activity as well as cost inflation post pandemic, we had an easier comp against last year, which included $300000 in repair costs related to the Texas freeze.
Turnover expense was also down considerably as our turnover rate decreased by 730 basis points from last year to a near record low of 16, 5%, thanks to our occupancy bias and focus on customer service.
We also capitalized a higher proportion of churn costs given the more extensive work being done on homes with longer resident 10 years and people spending more hours in their homes during the pandemic.
On the property management expense side, although we are seeing the benefits of scale as we are managing 34% more homes compared to last year. This is being offset somewhat by general cost inflation from a tighter labor market and increased hiring to meet future growth in demand.
In this inflationary environment, our focus remains on the expenses that we can control. This includes leveraging our national procurement program driving efficiencies through technology, and making operational improvements wherever we see the opportunity all the while creating the best resident experience possible.
Now I will turn the call back over to Gary for closing remarks.
Thank you Kevin I want to highlight on slide 20 that our adjacent businesses, which account for about 5% of our balance sheet still represent a meaningful source of upside and potential cash flow to supercharge. Our SSR growth. These include our Canadian multifamily built the core business at 20% interest in our high quality multifamily portfolio located.
Located in the Sunbelt and legacy for sale housing assets. These.
These businesses are all benefiting from a robust housing market and we believe they could ultimately be worth nearly two times, our IRS carry value and represent 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 our asset for our portfolio and in the process simplify our business.
We want to leave you with a few key takeaways on slide 21.
First we know these are difficult and uncertain times, but our business is resilient is defensive and it was designed to perform well in good and bad times next there is incredible disconnect right now between property fundamentals and public market valuations, we know that interest rates can fluctuate, but if you look at cap rates over time, they tend to be more stable.
And finally, we have the platform people and technology in place to grow to 50000 homes with confidence we believe that favorable tailwind in our industry to drive strong operating performance for years to come and we think our growing portfolio coupled with strong same home results should translate into meaningful NAV appreciation for shareholders.
We acknowledge that we are living through an uncertain economic environment, but what hasnt changed is the demand trends in our business, which remain rock solid and leave us confident in our outlook to close out I would like to take a moment to thank our amazing team, who lives and breathes our mission of positively impacting the lives of our residents through housing every single day the care com.
Passion and heart that each of you put into serving our communities is truly unmatched I will now pass the call back to David to take questions, which Sam Kevin and I will also be joined by John <unk>, Andy Carmody, and Andrew Joyner to answer questions.
Thank you 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'll pause for just a moment to compile the Q&A roster.
Will take our first question from Sean Denis <unk> with Goldman Sachs. Your line is now open.
Hi, Good morning, and thank you for taking my question. So could you throw some color on occupancy occupancy, obviously ticked up sequentially and then your same store revenue trends slowed coming from <unk>.
Could you talk about the drivers there and then what what's going on in July obviously transact celebrated but could you perhaps show some insight into what you are lapping in July and what's behind that acceleration.
Hi, good morning Janney.
And then over to Kevin to talk about occupancy and leasing trends go ahead Kevin.
Sure. Thank you, yes, we're seeing continued demand strength in this business right and so this is also the strongest.
Time of the year.
And when people are moving and and people are households are being formed people are having that make decisions because of our kids are in school and so typically this is a time when leases are expiring and we're picking up a lot of demand.
We constantly and we have our revenue management team, that's very sophisticated and they're constantly looking at.
By by market, what our availabilities are.
What the rents are where occupancies are and we're constantly playing with pricing to try to maximize the demand between occupancy and rent growth and this is the strong season, I think they've done a fabulous job and we've been able to push occupancy up and for you to know.
We play in a kind of what we call the Sweet zone.
97, 5% to 98% and we will play with rents while we're in that zone, and so youll see quarter to quarter, we'll try to keep between 97, 5% to 98. This this past.
In the quarter, we breach that a little bit to the high end. So it allowed us to push rates a little bit higher. So I think we will see occupancy stay high.
In Q Q3, and then again as the seasonality of the trial.
Back down into that lower range of 97 to $5 forward, but we've tried to stay in that same range.
And I didn't.
Go ahead please.
Please go ahead I was going to say July .
So through July our occupancy really is at night in the 90% 97 eight.
Range and again.
And within that sweet spot, where we're able to push rents as youll see our blended rent growth grow to above 9% and so it's playing with rents and occupancy so the occupancy even though it dipped below 98% assume that suite range, where we play with with some with occupancy and rents.
So is there Ravi for you too.
Tell us what was July last year like what are you lapping.
Well I think we have seen.
Just strong stronger trends people have come out of the pandemic.
<unk> moving again has started.
Going out and having back to normal activity and so where we're seeing that our occupancy has grown at rents have grown.
Appreciably as people have started going back to normal life and we've seen our demand is growing we've had.
<unk> site visit.
Visit.
Increased at 73% leasing out on our processes for the total portfolio.
Has been over 100% over last year, so a lot higher than our than the overall portfolio growth.
So we've seen very strong demand trends since since the pandemic deals kind of in an RFP for rearview mirror, we're getting upwards of 50000 leads per month on a 1000 homes that are available.
In any given months.
Property, New lease property tours are also like close to 100%.
So we've just seen a lot of household formations and now, especially with interest rates, having climb we've got a lot of millennials, they're forming households, and theyre getting pushed into <unk>.
We've got a lot of tailwind that are hitting and it's showing up in July so we're pretty enthused.
Shannon, we can always go back and look at where we were in July but I.
I would tell you from my standpoint, it's clear that all of these metrics are at record levels. The occupancy in Q2 was at a record level I believe even in July it's back at 97%, even though it's dipped down 50 bps is still at a record level the new lease trends at.
At 23% into July are also at record levels. So we don't have the numbers off the top off from July of 'twenty, one, but they are all at record levels and we're seeing some sequential growth in new leasing trends, especially in the southeast and markets like Atlanta Charlotte in Colombia.
That's perfect. Thank you and any ways that you can contextualize earn in going into 2023.
Sorry, I didn't hear the question earnings.
And then the embedded growth.
Although loss to lease yes, I mean, I think the law. So we still think the loss to leases in that in that 20% range I mean, theres a little bit of a debate internally. We've got some people think it's higher than that but I think we're guiding probably conservatively to about 20% and it and its strongest in the western markets.
The southeast we've seen as I said stronger sequential growth in the southeast taxes in Indianapolis tends to be weaker, but I think with that loss to lease.
I think all of these trends are sustainable for quite some time right all of them occupancy blended rent growth remember, we're holding back on the on the blended rent growth because of the because we self govern on renewals, but overall I mean, I think as we look into later this year and into 'twenty three I mean, we're very confident in the outlook for occupancy and rent growth.
Fair enough. Thank you.
Yes ill just add to that really quickly on the.
On the on the renewal rent growth, we still have room to grow there, although we cap our rents we still have at least another 50 basis points to move those higher and it just takes time because our renewals route 60, sometimes 90 days.
Continue to see our renewal rent growth grow in the future months and in Q3 of last year. Our occupancy was 97 six I don't have July with me, but for the whole quarter was 97 six.
Yeah.
All right next we'll go to Brad Heffern with RBC capital markets. Your line is now open.
Yes, thanks, good morning, everyone.
Obviously, you've had your public peers curtail acquisition pace in a pretty significant way I guess can you walk through the decision.
Not to do that and potentially wait for better opportunities further down the road.
Yes, Hi, Brian good morning.
I mean, the first question I would say is that if you've got no product on the shelf why wouldn't you supply more right and thats essentially the environment. We're in I mean, we're seeing insatiable demand for our homes, we've never seen an environment like this where I would say the cost to rent a home.
Versus the cost to own has been better obviously with much higher mortgage rates. So there's insatiable demand for our product.
We feel we need to supply more homes to meet that demand from consumers, who are residents and on top of that we don't have the scale of our peers.
And so operationally, we think it makes sense to continue to grow. So there is definitely operational reasons to want to continue to grow I think from a real estate fundamental perspective. It's also incredibly compelling we have this ability to very quickly through our Tri Ed acquisition program to adjust cap rates to flex those quickly and we've been able to increase those cap rates.
Probably 30, maybe even 40 basis points over the last three months and we think we're going to be able to increase loans, maybe by another 25 bps over the course of the year.
The trends, we're seeing in home prices and rents and we and we think with that with those those normal cap rates compared to where we can finance today its attractive on top of the fact as we talked about we manage third party capital and earn fees and so our adjusted cap rates are in that six 5%, 7% range, which again compared to where we can finance today.
<unk> remains very very attractive. So those are some of the differences are peers don't I think manage the same amount of third party capitals, we do maybe they don't get the same accretion that we get but it's absolutely accretive for us to keep on growing we have held back a little bit, though I will say that we were guiding to above 8000 early in the year. This.
This year now we think we're going to hit 8000, which means 4400 homes in the first half 3600 homes in the second half of the year. So that is a little bit of a slowdown and that just really reflects your own internal capital plan, how much capital we have in order to be able to fund our growth we do not want to rely on the market the equity capital markets, we don't like.
Our cost of capital so we have to be able to manage that and so we are we are slowing down a little bit broad, but we are sticking to the overall guidance for 2022.
Yeah.
Okay got it thank you for that.
And then in terms of the opportunity set for acquisitions.
Im not sure. If you said in the prepared remarks or not but have you shifted at all to more newer homes and are you seeing a greater opportunity set from your homebuilding partners versus the traditional MLS channels.
Yes, I'll start and I'll now hand, it over to John just one other thing I would say is that.
It's very difficult to be a market timer right I just want to say one thing back to your earlier question I mean, we're not clairvoyant, but if you think about it if you said.
Why not stop buying right and we by the way we've done that before I mean, we stop buying.
At the onset of the pandemic because we just had no certainty what the future was going to look like we didnt. Even know how are we going to renovate the homes. So we're never afraid to stop but we want to keep on going up its compelling but back to this question of market timing.
<unk> why not buy later, if you go back a year, where you could buy homes lets say at a 5% nominal cap rate and now we're buying at a five 5% cap rate. Once you would've been given off with giving up was 10% NOI growth right. So you would have been back to the same place anyway, and so we don't think about buying at any point in time, we're continuously.
Buying and refinancing obviously, an environment that may change from time to time, but it's an ongoing process that we just might speed up or slow down depending on our cost of capital with respect to this quarter's acquisitions about 20% are new home through what we call homebuilder rack and 80% are through <unk> and John .
Maybe you want to give a little bit of color of what we're seeing.
In the new home channel through Homebuilder direct yes for sure and Brad on the new home side.
What we're seeing is a little bit more home price faster home price reduction homebuilders, obviously are looking to hit their quarterly targets as well, so there's a little bit faster to reprice than the average person who might be reselling their homes. So when you talk about what we're seeing from a cap rate expansion perspective, it's been a little bit faster to expand on the new home side, and we actually expect that.
We will continue anecdotally, we've been able to buy homes scattered across various markets and that might've listed for 400000 in the past that have been reduced by in some instances upwards of 10%. So we're seeing a little bit more.
Price price reduction on the new home side, and we're really starting to see more capitulation on the community acquisition side as well where builders are realizing that they had new community started slated to launch later this year early next year, and then might have thought they would be selling eight or 10 homes a month and they're looking at how can they meet those sales objectives, otherwise and they realize that there is this.
Wholesale or SSR channel that they can move their homes into so builders that eight to 12 months ago I might've been disinterested in partnering with a single family rental owner operators are much more interested now we're getting way more inbound inquiries from let's say the top 10 or 20 largest homebuilders in the U S that should result in more acquisitions later this year and early next year.
Okay. Thank you everyone.
Next we'll go to Adam Kramer with Morgan Stanley . Your line is now open.
Hey, guys. Thanks for taking the question and hope you're all doing well.
Just wanted to kind of drill in a little bit on kind of the expense side I think some some some positives here from the lower turnover.
On the turnover on the turnover expense line and maybe some of the other lines, but maybe just drilling in on the kind of the property tax line and I recognize there are some.
Maybe walk units with a year over year comp maybe.
Maybe just walk us through kind of a 15% increase and maybe what youre kind of thinking for the back half here.
Hi, Adam Hope you're doing well so.
What we're seeing.
Is largely.
Assessments come in significantly higher I mean, they're up 14% right. So I mean, we can't second blow I mean, you can't take that the home price depreciation on one hand, and not be prepare to see higher assessment. So that's where that's where the number comes from it's a 14% increase in assessments across the board.
About 2% is related to the fact that we under accrued last year.
In Q2, so that gets us to about 16% and at the current time, we're expecting.
For the balance of the year to be about 15%.
Now there's a real question Mark I would say, it's the one key question Mark on our expense profile, because we haven't got the tax bills will largely get those in September October and then we will be able to see what happens to the millage rates.
Are the tax bill is lower than the assessments, so there could potentially be upside.
There has been in the past in the past, we've also contacted and receive some rebates but.
At this point in time to be conservative, we're assuming 15%.
But we'll see we'll see whether municipalities want to strike the balance or not.
Got it got it that makes total sense.
And then just on the kind of interest rate on acquisitions.
Future acquisition that I'm looking at kind of a slide slide five in the deck and it's really helpful breakdown that you guys provide.
It looks like maybe youre kind of assuming that I think the July debt was at five and a half maybe it would be 5% debt today, maybe just walk us through kind of the.
If you were to go out and raise debt today on kind of the next the next batch of homes that you buy.
That correctly that that would be at a 5% rate give or take in may.
Maybe just kind of walk us through kind of the interest expense assumptions for the remainder of the year and kind of given given the new debt implications yes.
Yes. Thanks for the question Adam Yes, so we're assuming that if we were to go out today and do another securitization deal.
Or any type of financing it will be around the five maybe 510.
Again, the market has moved it peaked when we did our deal and now so far as it's come in a little bit and we expect it to stay pretty stable over the next several quarters, but obviously, we as Gary mentioned, we tailor acquisition program as well as we're very flexible. So if we think the market is really going to move significantly higher we will look at acquisitions again.
But we're expecting it to be in the $5 to $5 10 range over the next several quarters.
And I think Adam the only thing I would add to that is that on that 505 deal I mean, we did top tick.
The benchmark rate or the swaps.
And that was unfortunate but it is what it is I mean, there is as with Sam said in his prepared remarks, there's going to be periods, where we finance at higher rates and others, where we financed at lower rates. We don't look it at one point in time, but I think the other thing to talk about is really the spreads right and as spreads have widened significantly in.
On the large deal there were about $2 15 that was the blended spread on that takes us back to 2015 to 2016, when the securitization Mark opened up for these type of single family rental deals and.
Then as there is more acceptance of asset far and see MBS type debt.
Debt offerings that those spreads got cut in half and now they are back to where they were in 2015 2016. So you can see there is some pretty significant dislocation in.
In the debt markets and so as we kind of get through that and we think ultimately will stabilize not only hopefully we see better longer term benchmark rates, but we also see lower spreads.
So that's just to give you a little more insight into the market.
That's really helpful. Gary.
Thank you guys and.
Just maybe a last one if I may just on the renewals and a really robust loss to lease 20%.
Maybe even higher.
Kind of thought as to kind of raising I guess the renewal the renewal rate that you guys have kind of a cap the self imposed cap that you guys have maybe kind of make.
It's an effort to kind of.
Capture as much of the loss to lease as you can.
A little bit of a shorter timeframe by raising the renewal.
No we're going to keep to the six 5% cap Kevin talked about how there's still a little bit of catch up later this year that we'll be up then will flow through our numbers, but we're going to stick to that six 5% cap rate for the year, we will reevaluate next year.
Looking at a number of different metrics to determine how to do this but the key thing obviously is wage growth.
All the surveys we see we see wage inflation in that kind of 4% to 8% and so we think were striking the balance and remember we have a resident focus on people first approach to running our business, which is incredibly important and we know ultimately we'll capture that back through the loss to lease when we can mark to market. So if rent growth slows down in the future.
We should be able to do a little bit better.
Because we've got the loss to lease built up in the portfolio.
Great. Thanks again for the time guys I appreciate it.
Thank you Okay next.
Next we'll go to Jade Rahmani with <unk> W. Your line is now open.
Yes, thank you very much.
I think the inventory and supply.
Picture somewhat complex the annualized right now on the one hand homes listed for sale Bill are low relative to historical trends in 2019.
But they are up sharply and continuing to increase.
In addition, the homebuilders have.
Very high backlogs, yes, the supply chain has forestalled that delivery of inventory into the market.
And so new homes for sale supply is going to increase.
And then finally homes under construction looking at both multifamily and single family is extremely high.
Not as high as we were in.
In the <unk> period.
And especially on a per capita basis, but it is high so.
I noted in your I noticed in your commentary.
Especially in the press release, you said relatively tight housing supply so.
What's your view of the overall supply picture right now.
Relatively tight.
What's that.
That's the quick answer, but let's try to unpack it because there are a lot of there are a lot of moving pieces. So first of all in our markets.
The new listings are actually down about 10% year over year. So that's not that's not a store.
And by the way that's as tight as we've ever seen it so new listings down 10% year over year and that makes sense because when you think about it when mortgage rates really move up and have almost doubled the way they have people arent going to list their homes, they're going to keep them off the market and that leads to compression of new listings, but for homes that are being listed they are taking longer to sell.
So thats the other side of the equation of days on market.
Is increasing and sellers don't have the same pricing power that they used to have so we are seeing a slight moderation in home prices from the peak.
As we said in our in our remarks I mean, we were in the past say two or three months ago, having to buy it.
Really make offers above less let's say five or 6% above less now we can make offers below at a discount to list and still get the same acceptance rate on our offer so the market is moderating and the months of supply in the market Jade and a lot of our sunbelt markets has gone from about half a month.
Let's say three months ago, which is absurdly low to.
So about a month and a half today. So yes, the supply is increasing but the supply remains extremely tight we used to think that a balanced market in the resale in the secondary market was about five months.
Months of supply and we're about one five months today. So this bears watching it is moving quickly. If it continues to move up then youre going to see more pressure on prices, but as of today as we speak today.
We would say that the market is tight.
On the new home side.
There arent there are quite a few builders I would say many builders are sales today are probably half of where they were last July so theyre seeing some pressure there.
Theres the cancellation rates are moving up there, there's more spec inventory than there ever was and thats, probably what youre, referring to and the reason there was more spec inventory as builders were always trying to match in this inflationary environment pricing to cost. So they would they would build more specs and so now theyre going to have to onboard those facts and thats going to be likely an opportunity for us.
It's right in our.
The direct channel.
It also will ultimately lead to opportunities in development.
And that's why we're excited about being able to raise a new fund today and take advantage of future opportunities, but we don't think we're going to see widespread distress.
This is nothing like post Dfc.
Market on the whole is tight there might be a little bit of dislocation short term opportunities, but not widespread distress.
Okay, Yes that does make sense and I wouldn't anticipate widespread distress because the balance sheets are in very good shape and also the nature of the mortgage structure is primarily fixed rate nearly all fixed rates. So there isn't going.
Going to be a cascade of defaults.
Just simply driven by rate increases.
The current environment.
I know that you cited the impact of average closing price on the MLS down three 5% since April have you seen any stabilization base.
<unk> just in the last few weeks dip in mortgage rates stepping back below 5% in concert with the treasury market improvement.
No we haven't because I mean mortgage rates still compared to where they were let's say six months to a year ago are significantly higher even though they've moved down from let's say six down to like lower fives are still really high.
So we're still seeing consumers still have sticker shock they're pausing.
And we're seeing that through higher cancellation rates and lower sales for new homes.
Thank you and just lastly on the adjacent businesses.
<unk>.
Is it correct to assume that U S. Multifamily is the asset with the most near term potential for capital release, either through sale or refinancing or recapitalization of that project how are you.
Elastic is that any timeframe around timing.
Yes sure.
Short answer is yes. Your assumption is correct, but I can't at this point give you any more clarity around around timing.
Thanks for the questions.
Okay.
Next we'll go to Tal Woolley with National Bank Financial your line is open.
Hey, good morning, everybody.
<unk>.
Just wanted to start actually with the restructuring of the CTC JV I appreciate you, giving us some <unk>.
Color on what you think the benefits will be I was just wondering if you could talk a little bit.
What the Genesis was for that transaction was up driven by you or by the clients.
If you can give us a little bit more color there.
Yes, I mean, I wish I could say it was driven by us because we think it's a great idea, but it was really driven by that.
And it really illustrates I think the dichotomy that we're seeing in the market right now between the public market valuations and private market valuations and really what we're seeing from all our private investors as they want to put out more capital right. This is the reason I mean, when you use construction financing you don't need it you don't get to put out nearly as much capital.
Also CPP came to us and say Hey, why don't we make this an all equity capital structure, we can put out way more capital you don't have to worry about the volatility in the debt market.
And it was restructured in a way where our co investments lower and it's neutral fees and so all in all we thought this is a great deal with Gulfport.
And I will as an extension same thing, Arizona State came to US and said look we're really bullish long term about build to rent there might be some dislocation now, but let's get a fund ready and take advantage of opportunities. So that's what we're seeing in <unk>.
On the private fund side.
And.
Can you can obviously look at further down the road the debt markets stabilize you could decide.
That at that point to refinance two as well I'm assuming.
Yes, we absolutely we have that flexibility.
We do but we're also comfortable in capitalizing these development projects on an all equity basis, and we've looked at it both ways. It's untraditional.
As you know all of these projects are built with significant amounts of debt, but it gives us a real significant competitive advantage to be able to go in an institutional process lets say, where we're dealing with the government to say this can be we've got all the capital lineup AB funded all equity.
Got it.
And then just a little bit more on third party fundraising just with all of the.
Volatility in the market.
Is that impacting how you approach raising more third party capital or are you seeing any impact on demand.
From partners to put capital to work.
We're not I mean again I think the proofs in the pudding because of the two.
Private funds announcements this quarter right, obviously, they restructure the CPP JV I just talked about the launching of what we call T pass to our next bill to rent vehicle.
Seeing significant interest and demand from private investors, we've talked in the past about these beds and shed strategies about how private investors really have a preference for residential and industrial I would say in this environment. They probably haven't even more preference for now badger residential because of the short term duration of leases in an inflationary environment.
Where industrial and some cases, you have longer longer duration leases, which creates some uncertainty and less inflation protection. So residential we feel has never been.
It has never been in higher demand from private investors and it keeps us very confident in our outlook and it bodes also really well for ultimately when we get through JV too and then homebuilder direct and then be able to go and launch a successor funds.
To buy single family homes.
Okay, and then just in Toronto here.
As we start to their personal lease up phase for the Taylor West Don lands can you give us a sense of.
Where you think.
Rent per square foot would blend now.
That was relative to pro forma when you were underwriting.
Sure, Yes, so I mean, I think we were just joking about this earlier I think we've got to hang a neon no vacancy sign in front of the Salve because we literally don't have one vacant unit.
At the building today.
It's staggering the growth we've seen in the Toronto purpose built rental.
Market over the last several months, where now we're now signing leases on one bedrooms close to $5 per square foot.
Which is massively ahead of where our underwriting would it being even if we even if we.
If we were to kind of fast forward that to where we are today and I think that flows all the way through to the Taylor.
Which is starting lease up.
And then obviously block eight later this year.
So I think Andrew tell me, if there's if there's anything you'd add but I mean.
I think on the revenue side, we're going to be at or above all our trended rent projections.
So we've seen a little bit of cost creep.
We lock in the cost upfront, but we have seen a little bit of cost creep, but it's taking a little bit longer to complete these projects, but that should be more than offset.
By the revenue growth.
I think the Taylor right now is looking at we're looking at a development yield closer to 6%. So that's looking really good based on where rents are today.
Yes, Hi, Donald <unk>.
I would just add in advance of this call walk to walk by our marketing group and they are sharing that we're getting about 50 of leasing inquiries a day.
That the <unk>. So I think demand has certainly come back in a very meaningful way in Toronto.
We'll be delivering these projects into the right environment.
Okay and then.
Then just lastly, obviously.
The there was the U S congressional hearing.
Six to eight weeks ago I believe.
What's your sort of sense on what could be building on the regulatory front.
Anything.
As.
The federal government at least starts to examine this a little bit.
The industry, a little bit closer look a little bit more closely.
Okay.
We don't see much coming out of that for now I mean, those congressional hearings did not seem to be conclusive from our perspective did not seem to indicate that they would lead to any kind of short term action.
The way we think about it is this is an emotional asset class right and when we are in an environment, where there is a lot of inflation much higher home prices much higher rents or single family rental industry in all housing for that matter is going to attract more attention from both the median politicians and it's always been like that that's not going to go away.
When we get into environment, where home prices start to moderate like they are today youre going to see less noise less hearings.
Our inquiries into our business and it's going to ebb and flow and it's just something that we're going to have to live with.
The best way to manage it obviously has to be the best corporate landlord. The best corporate citizen, we can be to take care of our own employees. So they can take care of our residents and when they do that's great for our investors in our business. That's the philosophy and hopefully we can lead by example, but the industry is still in its early days, it's still it's evolved a lot but in compared to other <unk>.
<unk> is still in its infancy, and I think over time, we get better and better.
We learned to partner more with the governments and show them that this is an industry thats incredibly beneficial to residents of renters.
And just when im thinking about regulatory changes overall, it would seem to need to be more likely bad.
If there were changes that would impact to.
It would be more likely at more local government level and state level as opposed to the federal level or the like all of these.
Levels of government kind of hospital alignment some point through that something yes, I would agree I would agree I mean, we're in we're in probably face the most pressure over time, we will be at the local level.
Could be forms of rent control I mean, there is obviously some of that in let's say, California.
The sunbelt tends to be obviously much more libertarian much more pro business. So we see less risk there, but there is there is pressure from <unk>.
Our communities.
Which may want to prevent.
Buying homes are renting of those homes.
That's where we'll see pressure we've been very successful to date and.
And having some states adopt legislation that would mitigate some of the powers of each ways to block out.
To block out residents are renters, we actually think that that is discriminatory.
And.
We've been we've been successful.
Industry lobby Nics has been successful and having legislation created to combat that so, but it's something we're going to have to fight locally.
Okay now that's great. Thanks, everyone.
Yes.
Kevin do you want to add something.
You mentioned the national rental home count solve NIH C. They have been very active at the local levels and we're going to start our first local chapter in Charlotte.
And that will be it is going to be a kickoff next month and so there is a very active initiative right now amongst all of US that are part of the NIH to really go to the state level to talk to the city Council men mayors.
Too early to tell on our side of the story. There is a lot of education that needs to happen and we're prepping for all of that Youll see us take a more active role will first try Khan for sure, but also our industry into the NFC.
Okay, that's great. Thanks, everyone.
Thanks Bill.
Next we'll go to Stephen Macleod with BMO capital markets. Your line is open.
Hey, guys.
Steve.
Hi, lots of lots of great color on the call. So far so a lots of my questions have been answered, but I just wanted to follow up with two the first one being the new build to rent Sfer JV can you just talk a little bit about.
Sort of where that is focused as it differs from.
The current JV, that's almost fully committed.
By geography, and then secondly, I just wanted to confirm Gary I think in your prepared remarks, you were saying that your NOI tar.
Targets are predicated or underwritten, reflecting higher rates. So I just wanted to see if you could put some color around any potential downside sensitivity.
Yes, so I mean I think on.
And John and Randy you're welcome to chime in but I think on what we call our successor build to rent ventured <unk> too.
We're probably looking for a little bit more diversity I think in the development of acquisition program right. So so tea pounds, one has largely been focused on California and Texas.
And I think we'd like to see some more diversity in end to end right now I mean from an <unk> perspective, we're buying an <unk> market. So we have the ability to diversify into those 18 markets and we'd like to see more of that.
We're obviously, increasing our development yield targets those are now closer to 6% given where financing rates are.
And we're taking our time a little bit there the land the land market is.
Theres, a little bit of dislocation on land market.
We think we're going to see some lower land prices. So again, we talked about.
The <unk> or the acquisition market is one we're continuing with development is whenever there's uncertainty around how to underwrite a development, that's where you should probably pause or go slower and so we actually we've taken approach where lets keep on going in acquisitions because that makes sense. We are getting is positive.
Spreads to financing, but on the development market lets take our time. So we haven't done much in the last quarter and we may not do much over the next couple of months, but as we start to see land pieces settle maybe come down construction prices come down.
Which we're starting to see for the very first time, we think we're going to get better development yields and obviously, we think long term there is a massive massive under supply. So that's a great opportunity to be able to deliver more build to rent.
So.
Okay. We're good.
So and then on the sensitivity on the longer term outlook.
Really what we're seeing is that the NOI gains are offsetting some of the interest expense.
The increase in interest expense right, both on new debt and existing debt.
So in order to hit that kind of 83 to 88 target in the past, we were really assuming NOI growth of about 6%.
So in order to hit it now with let's say interest rates 100 basis points higher we're going to need NOI growth of 8% to get to the same place. So hopefully that gives you a little bit of insight, but we're in an.
<unk> right now where that higher NRI NOI growth is being used to offset higher interest expense growth and is actually really interesting hedge.
Yes.
Yes, that's it.
Really helpful. Thanks, Gary.
There are no further questions at this time I'll now turn the call back over to Gary Berman, President and CEO of Tracon residential.
Thank you David I'd like to thank all of you on the call for your participation. We look forward to speaking with you again in November to discuss our Q3 results.
Sure.
This concludes today's conference call you may now disconnect.
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