Q2 2022 Tricon Residential Inc Earnings Call
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 our legacy for sale housing investments, which added over <unk> <unk> per share.
In our adjacent residential businesses the year over year decrease in <unk> 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 a 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.
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 expect.
Next on to stay around this level as we focus on driving overhead efficiency.
Okay.
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 and overhead efficiencies.
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.
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'm 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% today.
We understand how important it is to be proactive with floating rate debt and near term maturities on slide 14, we wanted to highlight what we're working on today.
First.
Youll see that we are in the process of refinancing 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 on hydro rates and sometimes you'll finance the lower rates, but we are focused on improving our weighted average rate and term overtime.
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 'twenty 'twenty four targets include growing our core ethical our share at a compounded annual rate of 15% over three years.
Expanding our <unk> portfolio 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 rate environment is a headwind for our <unk> target. This target was set with increasing rates in mind.
Moreover, the 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 Tri Con celebrated Christmas in July he will be our very own Santa Claus I will turn the call over to Kevin Baldrige, Chief operating officer.
Thank you very much Sam.
Good morning, everyone.
Let me start out by saying as we continued to grow our company at warm homes and welcome New residents. Our operations teams have done a fabulous job supporting the 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 compare 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.
Remaining true to our middle market strategy.
With over 4400 homes acquired year to date, we firmly are on track towards our target of buying 8000 homes. This year.
The second aspect of our growth in 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 increasing 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 expect that 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 up 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 resume 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 same home expenses.
Our same home expense growth of three 7% was driven by property taxes going up 15, 6% from last year, reflecting 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 trees.
Turnover expense was also down considerably as our turnover rates decreased by 730 basis points from last year.
Through 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.
And the property management expense side, although we are seeing the benefits of scale as we are managing a 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 rents and experience possible now.
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, a 20% interest in our high quality multifamily portfolio located.
Located in the Sunbelt and legacy for sale housing assets.
These businesses are all benefiting from a robust housing market and we believe they can ultimately be worth nearly two times, our <unk> 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.
There's an 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 can.
Passionate 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 tell us 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 throw 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.
Season is when people are moving and in and people are households are being formed people are having to make decisions because 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 Thats very sophisticated and they are constantly looking at.
By by market, what our availabilities are.
What the rents are where occupancies are and we're constantly playing the 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% and 98 this past.
Quarter, we breached out a little bit to the high end, so that allowed us to push rates a little bit higher so I think we'll see occupancy stay high.
<unk> Q3, and then again as the seasonality of product.
Get back down into that lower range of 97 to five going forward, but we're trying to stay in that same range.
Go.
Go ahead.
Please go ahead I was going to say July .
So through July our occupancy really isn't like the 90 million 97 eight.
Range and again.
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 with occupancy and rents.
So is there any way for you too.
Tell us what was July last year like what are you lapping.
Well I think we've seen.
Just strong stronger trends people have come out of the pandemic.
Started moving again it 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.
Had our.
Web site.
Is it half of it.
Increase at 73% leasing out on our properties as is for the total portfolio.
<unk> has been over 100% over last year, so a lot higher than our overall portfolio growth.
So we've seen very strong demand trends since since the pandemic has kind of been in that.
The rearview mirror, we're getting upwards of 50000 leads per month on a 1000 homes that are available.
Any given month.
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 climbed you've got a lot of millennials.
Forming households, and they're they're getting pushed into <unk>. So we've got a lot of tailwind or 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 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 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.
Markets like Atlanta, Charlotte in Colombia.
That's perfect. Thank you and any ways that you can contextualize earn in going into 2023.
Okay.
Sorry, I didn't hear the question, earning.
The embedded growth.
Mark.
While the loss to lease.
Think about velocity, we still think the loss releases 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 to.
Probably conservatively to about 20% and in it and its strongest in the western markets, Florida. The southeast we've seen as I said stronger sequential growth in the southeast, Texas and Indianapolis tends to be weaker.
I think with that that loss to lease I think all of these trends are sustainable for quite some time right all of them occupancy blended rent growth per member were holding back 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.
Confidence in the outlook for occupancy and rent growth.
Fair enough. Thank you.
Yes ill just add to that really quickly on the <unk>.
On there.
And the renewal rent growth, we still have room to grow that although we cap our rents we still have at least another 50 basis points to move those higher and it just takes time because of renewables route 60, sometimes 90 days and so you'll 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 better for the whole quarter was 97 six.
Alright 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 <unk> 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 homes, we've never seen an environment like this where I would say the cost to rent at home versus the cost to own us.
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 for residents and on top of that we don't have the scale of our peers.
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 triad acquisition program to adjust cap rates to flex those quickly and we've been able to increase those cap rates.
<unk> 30, maybe even 40 basis points over the last three months and we think we're going to be able to increase those 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.
Today 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 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.
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.
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 mean, I'll start and I'll 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 when we stopped 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 we're going to renovate the homes. So we're never afraid to stop but we want to keep on going if 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 up 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 in 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%.
Our new home through what we call homebuilder direct 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 are 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 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.
The 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 stated 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.
Wholesale or SSR channel that they can move their homes into so builders that eight to 12 months ago might have 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 drilling a little bit on some of the expense side.
Some positives here for me to have a 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 was some maybe walking us what the 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.
Hope you're doing well so what we're seeing.
Is largely.
Assessments come in significantly higher I mean, they are up 14%.
So I mean, we can't stock and below 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.
For the balance of the year to be about 15%.
Now there is a real question Mark I would say, it's the one key question Mark in our expense profile because.
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.
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 contested 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 that makes total sense.
Then just on the kind of interest rate on acquisitions.
Future acquisition debt 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.
Reading that correctly that that would be at a 5% rate give or take.
Maybe just kind of walk us through kind of the interest expense assumptions for the remainder of the year and kind of give it given the new debt implications.
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.
The market has moved if peak when we did our deal and now so far 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 retailer acquisition program as well as we're very flexible. So if we think like 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.
Yes.
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 can add to higher rates and others were refinance at lower rates. We don't look at 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.
And the last deal there were about $2 15, and that was the blended spread on that takes us back to 2015 to 2016, when the securitization market 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 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.
Thank you guys.
And just maybe a last one if I may just on the renewals I mean, 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 a 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 is still a little bit of catch up later this year that will be that 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.
Next we'll go to Jade Rahmani with <unk>. Your line is now open.
Yes, thank you very much.
I think the inventory and supply picture is somewhat complex the annualized right now.
On the one hand homes listed for sale Bill are low relative to historical trends and 2019.
But they are up sharply and continuing to increase.
In addition, the homebuilders have.
Very high backlogs, yet the supply chain has forestalled the delivery of inventory into the market.
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.
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.
Yes.
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 our markets.
The new listings are actually down about 10% year over year. So that's not that's not a story.
And by the way that's as tight as we've ever seen it so newest things 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 her remarks, I mean, we were in the past say two or three months ago.
To buy it.
It really make offers above list, let's say five or 6% above list 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.
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.
Five 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 that 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.
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. We're 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 unload those snacks and that's going to be likely an opportunity for.
Ross.
And our homebuilder 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 rate. So there isn't.
We're 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.
Is it correct to assume that U S multifamily.
The asset with the most near term potential for capital relief, either through sale or refinancing or recapitalization of that project how are you.
<unk> 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 <unk> I appreciate you, giving us some <unk>.
Color on what you think the benefits will be I'm, just wondering if you could talk a little bit.
What the Genesis was for that transaction was that driven by you or by the clients.
Can you give us a little bit of 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 of 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 cap.
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 as an extension same thing, Arizona state came to us and said look.
We are 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 the.
On the private fund side.
And.
It 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 have that flexibility.
We do but we're also comfortable in capitalizing these development projects on an all equity basis, when 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.
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.
Dan I think the proofs in the pudding.
Because of the two.
Private funds announcements this quarter right, obviously to restructure the CPP JV I just talked about the launching of what we call T pass to our next bill to rent vehicle, we're seeing significant interest and demand from private investors. We've talked in the past about these beds and shed strategies about how private.
<unk> really have a preference for residential industrial I'd say in this environment, they probably haven't even more preference for now beds from 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 <unk>.
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 to then be able to go and launch.
Access or funds.
To buy single family homes.
Okay, and then just in Toronto here.
As we start to their personal Liza phase for the Taylor West Don lands can you give us a sense of.
Where do you think.
Rent per square foot would blend now and where that was relative to pro forma when you are underwriting.
Sure Yeah. 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're seeing 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 be 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 H.
Later this year.
So I think tell me, if there's anything you'd add but.
I think on the revenue side, we're going to be at or above all our trended rent projections right. 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, <unk>.
I'll just add in advance of this call walk to walk by our marketing group and they were sharing that we're getting about 50 of leasing inquiries a day that.
At 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 just lastly, obviously.
The U S congressional hearing.
So six to eight weeks ago I believe.
What's your sort of sense.
What could be building on the regulatory funds.
If anything.
As.
The federal government at least starts are down on this a little bit.
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're 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.
We think 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 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 spot.
The industry is still in its early days, it's still it's evolved a lot but in compared to other industries is still in its infancy, and I think overtime, we get better and better.
We learned to partner more with the governments and show them that this is an industry that's incredibly beneficial to residents of renters.
And just when I am thinking.
Regulatory changes overall, it would seem to me to be more likely bad.
If there were changes that would impact too.
It would be more likely more local government level and state level as opposed to the federal level or the like all of these.
Levels of government kind of have to align at some point between the next something yes, I would agree I would agree I mean, where were probably face the most pressure overtime will be at the local level.
It 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 hoa's.
Or communities.
Which may want to prevent.
Buying homes are renting of those homes. So that's where we will see pressure we've been very successful to date.
Sure.
And having some steep adopt legislation that.
Would mitigate some of the powers of each ways to block out.
Blackout residents of renters, we actually think that that is discriminatory.
And we've been we've been successful.
Industry lobby NFC has been successful and having legislation created come back that so, but it's something we're going to have to fight locally.
Okay now that's great. Thanks, thanks, everyone.
Kevin do you want to add something.
You mentioned the national rental home count solid 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'll 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 seat to really go to the state level to talk to the city councilmen mayors.
Too early to tell them our side of the story there is a lot of education that needs to happen and we're prepping for all of that you will see us take a more active role well first triathlon for sure but also our industry into the NMC.
Okay.
Okay, that's great. Thanks, everyone.
Next we'll go to Stephen Macleod with BMO capital markets. Your line is open.
Hey, guys.
Steve.
Alright lots of lots of great color on the call. So far so 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 SSR 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 Tom.
Targets are sort of predicated our 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 or Andy you're welcome to chime in but I think on what we call our successful build to rent venture T pause too.
We're probably looking for a little bit more diversity I think in the development of acquisition program. Rachel So tea pounds, one has largely been focused on California and Texas.
And I think we might see some more diversity and right now I mean from an analyst's 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.
There is a little bit of dislocation in the 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 were contain 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 taken approach where lets keep on going in acquisitions because that makes sense. We're 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.