Q3 2022 Tricon Residential Inc Earnings Call
Good morning My.
My name is Colby and I will be your conference operator today.
At this time I would like to welcome everyone to the tricorn residential third quarter 2022 Analyst Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question Press Star followed by the number one on your telephone keypad.
I would now like to hand, the conference over to your speaker today.
Wojciech Nowak managing director of capital markets. Thank you. Please go ahead.
Thank you Colby and good morning, everyone and thank you for joining us to discuss strike on third quarter results for the three and nine months ended September 32022, 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 for more information. Please refer to our most recent management's discussion and analysis and annual information form which are available on SEDAR Edgar and our company.
Website as well as 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 also like to remind everyone that all figures are being quoted in U S dollars unless otherwise stated.
Note that this call is available by webcast on our website and a replay will be accessible there. Following the call. Lastly, please note that during this call we will be referring to a slide presentation that you can follow along by joining our webcast or you can access directly through our website you can find both the webcast registration in the presentation in the investors.
Actions 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 Tracon.
Thank you Laurie good morning, and welcome everyone I hope, you're all doing well, let me start by saying that we are living through some unprecedented times with fewer political and financial experiments that have yet to run their course, but from where we sit today. This looks a lot more like a wall Street recession, then at main street recession, I would never suggest that we are immune to macroeconomic.
But as we've seen in the past and continue to see the demand for our high quality professionally managed rental homes remains incredibly strong our business continues to be resilient and defensive and I am pleased to report that we delivered another solid quarter, let me share with you some of our highlights on slide two.
We continue to see exceptional demand for homes and in today's high mortgage rate environment is more compelling than ever to rent versus own a home.
This is evident in our results as we delivered another fantastic operational quarter with single family rental same home NOI growth of 10, 2% record high NOI margin of 68, 5% occupancy remaining close to 98% turnover remaining at a low of 18, 6% and blended rent growth consistently strong at.
Eight 4%.
And after quarter end in an environment, where deal flow has ground to a halt we sold our remaining interest in our U S multifamily portfolio and a transaction that somewhat compared to the landing on the Hudson.
This landmark transaction, we've taken an important step towards simplifying our business and substantiate the value of our assets, while generating a significant amount of cash to reduce leverage and position our balance sheet for future growth.
On that note we grew our portfolio by almost 2000 homes during the quarter, we plan to decelerate our acquisition pace to 850 homes in Q4, and 7300 homes for the full year, which is still a record for <unk> com. While this fell short of our previous guidance of 8000 homes. We feel this is prudent given today's capital markets environment, where financing ratio.
Climb much faster than acquisition cap rates, and where the securitization market is going through a period of price discovery.
We remain committed to growing our business over the long term in a strategic and responsible way at this time that means slowing the pace of our acquisitions until it makes sense to accelerate once more to be clear we are slowing down today. So we can buy new and existing homes at higher cap rates in the future and to position ourselves to buy larger portfolios at discounted prices.
And we do foresee such opportunities becoming available.
The great part of better model. So we can scale, our acquisition program up or down very quickly depending on market conditions, and we now have nearly $3 billion of dry powder, including liquidity and our own balance sheet and third party unfunded equity commitments, we will lean in and deploy that capital when the time is right.
Moving to slide three.
You can see some more detail regarding our U S multifamily portfolio sale, which we completed in October . This was a complex multi party transaction that would have been difficult to execute in the best of times and I want to thank our team for their hard work and persistence and getting the sale over the finish line.
We're also grateful to our U S multifamily team for their dedication and service to our residents and wish them well as they partner with the new ownership with this sale, we have fully divested our U S multifamily portfolio and expect to complete the property management transition to the new owner by the end of this month.
Transaction was an incredible round trip for Tri Con, which started with us acquiring a portfolio of $1 3 billion back in 2019, syndicating, 80% in 2021 and exiting the portfolio evaluation close to $1 9 billion. Three years later the transaction represents an IRR of 20% plus for Tracon and over 50%.
For our JV partners is one of the most successful deals in our 35 year history.
Our gross proceeds of 315 million included $215 million for the equity value of the portfolio plus $100 million of performance fees, which have goes into our management Ulta pool.
And so with the net proceeds of 216 million after transaction costs, we were able to pay at a $180 million outstanding on our corporate credit facility with cash left over in the bank to buy back some of our own stock and to continue growing our single family rental portfolio overall, our liquidity now stands at $700 million and again, when including unfunded equity capital.
Commitments for our various JV, we have nearly 3 billion of dry powder to deploy as we enter new cycle.
This transaction clearly demonstrates the massive divide between private and public market valuations that exist today, let's turn to slide four.
Sold the portfolio at a four 4% implied cap rate based on Q3, NOI and an evaluation in line with our <unk> book value. This comes on the heels of a steady stream of dispositions of non core assets are homes that were completed throughout the year at an average 12% premium to our reported fair value. In addition, our U S residential developments continue to <unk>.
Generate cash while our Canadian multifamily portfolio is being rapidly de risk as it progresses through construction all of this to say that we have a lot of faith in our reported net asset value of $13 74 per share or $18 83 in Canadian dollars and believe the pullback in our stock as far overdone.
Let's move on to slide five to talk about what we're seeing out there in the rental housing market.
So far this year market rents were up 6% nationally compared to last year that with mortgage rates, reaching 7%. It has never been more affordable rent versus own a home.
In fact, when we look at the national data cost about $700 more per month to own an entry level home versus ramping one housing affordability in the U S is a significant problem and that has been amplified by higher mortgage rates and chronic under building with no end to cite the supply shortage, we take pride in knowing that providing quality rental homes that accessible.
Price points, and adding new construction through our build to ramp program, we are helping to be part of the solution.
It's no surprise then as we turn to slide six the demand for our rental homes remains exceptionally strong a combination of healthy leasing traffic and relatively few homes available for rent is driving our occupancy and rent growth even as we enter a seasonally slower leasing period at year at July .
July and August tend to be very strong months in terms of rent growth as family settling for the school year, followed by a dip in September and Q4, as we take more of an occupancy bias as you can see in the chart heading into October we pushed occupancy backup over 98% that rank growth decelerated slightly to 13%, reflecting some seasonality and.
Our occupancy bias.
On slide seven we wanted to frame for you where the demand supply balance is from a historical context the demand for our homes as measured in leads per marketed home is down from pandemic levels, but still double what we experienced in 2019 with that being said we are starting to see a return to normal seasonality and new lease trade outs in Q4 and a moderate.
And the overall level of rent growth.
One of the factors at play it could be a higher supply of rental homes that we're seeing in our markets, which might be caused by would be home sellers opting to rent out their homes in light of the challenging mortgage environment.
Supply of rental homes in our sunbelt markets appears to be back to where it was prior to the pandemic and rental softened about 3% to 5% from the peak.
We wanted to fly these dynamics because COVID-19 brought about a very unique set of circumstances, where single family homes were at an exceptionally high demand given the acceleration of suburban migration and work from home trends with a gradual return to the office or hybrid work. We should also expect a return to more typical seasonality and ranked growth even though the numbers are still.
Great by any standard.
Turning to slide eight let's talk about acquisitions, we successfully shifted our acquisition criteria and are now buying at cap rates of 575% and higher however, the cost of debt financing has moved up much faster when we look back to March of this year, we're financing at rates just over 4% and buying homes at an implied price to <unk> multiple of 11.
Times, which was very accretive fast forward to today the cost of boring has moved up to nearly six 5% with a <unk> securitization market experiencing significant dislocation.
Since we are now buying homes at closer to a 14 times price to <unk>, multiple which is at or above where our stock is trading and as an amber signal for us meaning that it makes sense to slow acquisitions until we see better alignment between cap rates and financing rates.
As you can see on slide nine we are temporarily shifting our capital allocation strategy, while we wait for better investment opportunities to emerge we plan to allocate less capital to acquisitions over the near term and instead prioritize debt repayment as we've done with the proceeds from our U S multifamily portfolio sale and in the interim also buyback some stock during the quarter we.
Just a normal course issuer bid to buy back up to $2 5 million shares over the course of 12 months.
Want to emphasize that we are not adverse to shutting off the acquisition spigots completely as we did during the beginning of the pandemic and are under no pressure to grow from our JV partners. Likewise, we can turn the taps on very quickly when we feel the time is right we will be prudent with our capital allocation and are focused on maximum long term value creation for our shareholders and private investor.
Speaking of fiscal conservatism I would now like to pass the presentation over to with Sam who is appropriately dawning of <unk> to discuss our financial results.
Thank you Gary and good morning, everyone.
We delivered another strong quarter of financial results.
I want to thank our exceptional team for their hard work and dedication as we continue to get better at everything we do.
On slide 10, we summarize our key metrics for the quarter.
Net income from continued operation was up two 5% to $179 million, which includes $107 million.
A fair value gains on rental properties.
<unk> was up 22% year over year to $46 million.
Core <unk> per share was <unk> 15, an increase of 7% year over year.
<unk> per share was <unk> 11 down eight 3% year over year, but still providing us with ample cushion to support our quarterly dividend.
With an <unk> payout ratio of 45%.
Lastly, our <unk> book value stands at $13 74.
Yes.
Our $18 83 in Canadian dollars.
Up almost 30% year over year.
Let's move to slide 11, and talk about the drivers of core <unk> per share our single family rental portfolio delivered 26% year over year growth in trackers proportion NOI.
This was driven by a 10, 2% increase in same home NOI and 10% increase in proportion of rental home count.
Alright, Thats, a full contribution from fees increased by 13% compared to last year.
This was driven by higher asset and property management fees from newly created as a foreign multifamily joint ventures in the past year.
While there was a decrease in development fees related to higher onetime commercial land sales in prior year and Johnson.
In our adjacent residential businesses the.
The slight year over year decrease in <unk> reflects lower results from U S residential developments versus a very strong comp in the prior year.
On the corporate side interest expense was up as we have a higher debt balance to support the growth of our single family rental portfolio.
Along with higher average interest rates.
Corporate overhead expenses increased from last year as we staffed up for growth and started a travel more often.
Also included costs associated with our U S listings and our favorite Sox compliance program.
Of note, we accrued $4 7 million of <unk> expenses related to future expected performance fees.
And without this expense our overhead costs would be in line with Q2, and generally holding flat for the year.
Lastly, the diluted share count this quarter was 18% higher than last year as a result of equity offerings and the U S. IPO, we completed in 2021 to fund growth and reduce leverage.
Let's turn to proportionate debt profile on slide 12, I am pleased to report that we ended the quarter at eight three times net debt to EBITDA, which is on the low end of the near term target of eight 8% to nine times.
We have minimal near term maturities and we aim to limit our exposure to rising interest rates by having most of our debt at fixed rates.
Nonetheless, we do have 31% of our debt at floating rates.
And note that more than 60% of this floating rate debt is subject to caps on one month's sulfur.
This floating rate debt is primarily and warehouse lines used to acquire homes. This is not a permanent part of our capital structure.
Is an exposure, we actively seek to term out and roll into fixed rate instruments. When we have a large enough pool of acquired homes to do so.
Our debt profile remains a top priority and we have been proactive with terming out any near term maturities. So.
So on slide 13, we wanted to highlight where we currently stand you can see here that we have little to no debt maturing until 2024.
The 2024 that includes subscription lines and warehouse facilities used to fund acquisitions temporarily until they are refinance with long term debt.
We did exactly that in October we rolled some of the debt into a term loan maturing in 2027 at a floating rate.
A cap, which gives us optionality on refinancing if fixed rates become more attractive.
And we've mentioned before we repaid our $182 million of floating rate credit facility. Upon the sale of U S multifamily portfolio.
On slide 14, I am pleased to present, our updated guidance for 2022.
This includes an increase in core <unk> per share by <unk> 14 cents at the midpoint.
Due to the inclusion of net performance fees earned from U S multifamily portfolio.
These performance fees of approximately 15, roughly $46 million. After taxes are included in the full year guidance.
Aside from that we essentially moved our guidance at the beginning of the year of 60 to 64 to now 60 62.
Driven by higher interest rate expense and slight impact of removing U S multifamily portfolio.
We basically had a very strong year, including the negative impact of rates, but very strong same home NOI growth.
This was offset by tightening up our same home revenue growth to 8% to 9% for the full year.
We also lowered our same home expense growth to four 5% to five 5% down 275 basis points from the prior midpoint.
Due to lower than expected repairs maintenance and turnover expenses and potential for lower than expected property taxes.
We've seen the bulk of our taxes come through in the fourth quarter and so far it looks like our tax accrual may have been on the conservative side.
We're coming in lower than expected in Georgia, our biggest market, although were still waiting to see what Florida, and Texas look like.
Lastly, we increased our same home NOI growth projections that 10% to 11% driven by the lower expense growth.
As Gary mentioned earlier, we've also decided to reduce our pace of acquisitions in order to preserve capital for more attractive opportunities in the future.
As a result of our acquisition guidance moves from 8000 homes down to 7300 homes for the year.
As we look ahead to current year and beyond.
We know that we have excluded our 2024 targets from this deck.
We opted to withdraw these targets in light of the uncertain interest rate environment and economic outlook.
As well as our intent to place flexible with acquisitions.
We aim to stay within our target leverage range of eight to nine times debt to EBITDA and could potentially get an <unk> <unk> per share of <unk> 83 to 88 and 2024.
But this is much more contingent on strong acquisition volumes lower rate environment and launching a follow on <unk> joint venture.
We will provide formal guidance for 2023 next quarter generally we feel good about the direction of same home NOI growth.
But could see some headwinds or <unk> from lower acquisition volumes higher interest rates on our software for sale housing market in the near term.
We will continue to monitor these factors very closely.
Conversely, as we accelerate growth into a more favorable environment.
We could see an upside <unk> per share.
And now to give more insight into the drivers of NOI growth I will turn the call over to our very own ray of Sunshine. During this turbulent times, our chief operating officer, Kevin Baldridge.
Thank you very much for Sam and as always and good morning, everyone.
I wanted to start out by recognizing the incredible efforts of our frontline employees. Our team did a remarkable job this quarter as they continue to deliver a superior resident experience and navigate extreme water challenges all without missing a beat.
Im encouraged by the operating metrics, we've been able to achieve and we remain vigilant as we monitor the ever evolving macro backdrop.
Let's turn to slide 15 to talk about the drivers of our double digit same home NOI growth of 10, 2% for the quarter.
On the top line revenue growth was driven by a seven 9% increase in average rents and 30 basis points and occupancy gains.
Our rent growth remains healthy with blended rents increasing by eight 4% during the quarter, including a 16, 3% increase on new move ins and our <unk>.
Six 6% increase on renewals.
We continue to self governing on renewals by keeping rent growth below market levels for existing residents and strategic and responsible approach to rent rent increases helps maintain our industry, leading resident satisfaction scores, while keeping our turnover low as Gary mentioned rent growth remains strong.
Going into October as we continue to harvest the loss to lease of 15% to 20% that we built up in the portfolio.
<unk> statements provides a good basis for continued rent growth going forward.
Our bad debt expense, which is embedded in these revenue numbers has been tracking around one 5% over the past few months and we see it reverting to pre pandemic levels of 1% or lower later into next year.
Finally, other revenue grew by almost 7% from last year, we see a path to increasing other revenue by about 14% per home over the next couple of years as we continue to roll out current programs, such as smart home technology, and renters insurance and introduce new services to enhance the resident experience.
Telecom partnerships solar panels are discounted house cleaning services.
Let's turn to slide 16 to discuss our same home expense growth of two 9%.
The rise in expenses was mainly driven by property taxes, which were up 15, 8% from last year, reflecting significant home price appreciation in our markets.
As Sam mentioned it looks like we've been maybe a tad conservative on our tax accruals in key markets like Atlanta.
As Bill will continue to roll in through the next month, we'll have a better sense of where we will land for the year.
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 a greater proportion of work orders that qualify to be capitalized incentive expense.
Turnover expense was also down significantly as our turnover rate decreased by over 220 basis points from last year to 18, 6%. Thanks to our focus on customer service and our occupancy bias.
We also capitalized higher proportion of turn costs given the more extensive work being done on homes with longer resident tenures and people spending more time in their homes during COVID-19.
And lastly property management expenses, we're seeing inflationary pressures in labor cost offsetting some of the efficiencies and scale that we've achieved as our portfolio has grown.
Let's move to slide 17 to update you on our Hurricane response and impact.
To say I'm impressed with how our team came together would be an understatement as soon as the hurricane hit without question and without hesitation key members from neighboring markets stepped in to help right away. All in all we had 15 teammates from surrounding markets travel books, Florida work day and night to make sure. Our residents were looked after.
Sure.
Our SVP of eastern operations, Bryan edge set at best and that he was overwhelmed with the teamwork. The response of wanting to help from multiple departments and of course, the can do attitude of the entire team.
Indeed, Brian the way his team rises to every occasion to go above and beyond for our residents continues to amaze me.
I am pleased to report that our people and residents remained safe throughout the hurricane with minimal financial impact to Tri Con in total we expect to repair bill of around $3 million with one third covered by insurance.
The impact to <unk>.
And finally, turning to slide eight I am happy to share with you. Our recently launched resident Bill of rights.
Which outlines our strong commitment to providing quality move in ready homes, when carrying and reliable service.
This includes some key elements of our Triton valor vantage programs, such as moderating rent growth on renewals getting our residents the opportunity to buy their rental home if we decide to sell it.
And our newest program that is getting rolled out this month offering down payment assistance to residents who wish to buy the home of their choosing.
Of course, we have been doing many of these things all along that it was important to take formal and public accountability and put pen to paper to ensure our residents were aware of how much we truly care.
Don't just talk the talk that we walk the walk.
This bill of rights is the first of its kind for our industry and I hope that we have led the way and opened the door for others to do the same now.
Now I will turn the call back to Gary for closing remarks.
Thank you Kevin our resident centric approach continues to make us a leader in the asset for our industry and as a source of inspiration for our team.
To wrap up we want to leave you with a few key takeaways on slide 19 first the value of our company is underpinned by our <unk> portfolio, which continues to perform extremely well <unk>.
Next I want to emphasize that we believe in responsible growth we are prudent in our capital allocation and continually elevate all available options to foster long term value creation and finally, we have the platform people technology and dry powder in place to grow when the time is right and that growth can add significant towards for <unk> per share.
File.
And as I said at the beginning of this call. Although we're not immune to macroeconomic pressures. We believe our business is resilient and defensive and it was designed to perform well in good and bad times. As we look ahead, we are perfectly positioned in and with an inflation protected portfolio, a strong balance sheet and ample third party capital ready to deploy.
When we move back into a risk on environment.
I will conclude my prepared remarks by saying that I am truly privileged to work alongside such a world class team their hard work dedication resilience and willingness to go above and beyond for our residents is unmatched and their can do attitude enabled us to produce another strong quarter in the face of a difficult macroeconomic environment I will now pass the call back to Colby.
To take questions with Sam Kevin and I will also be joined by John Alan Slide any carmany and Andrew Joyner to answer questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause just for a moment to compile the Q&A roster.
Your first question comes from the line of Chardonnay looser from Goldman Sachs. Your line is open.
Hi, Good morning, everyone and thank you for taking my question.
I'd like to start with the flip that you guys saw between Opex and Capex is sarafina expenses moved to the scope of the order increased and moved into capitalizing those expenses. So.
By when should we expect that relationship to normalize.
How should we think about these line items going forward.
And then should we expect capex to be in.
When when Opex look more like <unk>.
Normally like it normally should.
Ginny good morning, that's a great question I'm going to pass that on to Kevin to elaborate.
Thank you Gary yes.
Yes, I think we will see we will see things normalize again, Intel probably middle of next year, what's happened and I think <unk> seen it.
As we've spoken as we've just had people living in our homes longer not only longer tenures are diverse and living at home 24 hours a day before they were lending on homes eight hours a day for instance, and so that turns over getting take our larger scopes and even the work orders that we get on R&M.
Are more involved we had were still getting people that are that have not been calling us for two years and are trying to have people in their homes on the property now we're getting those waves of calls and in the work or is it just more extensive.
I think thats going to continue definitely through the rest of this year I would say in the for sure. The first quarter next year, probably later part of the second quarter.
It's hard to totally gauge it but I would say by mid next year, we'll be back to where our expenses will be tracking.
Pretty much with inflation.
Got it and for my follow ups here and I'd like to sort of focus on the long term outlook that you've all procedures. Most from the stack, but you mentioned during the call that you know you can still get to that.
Range of Cora Hustle 80, 288 pardon me Simon.
Mr representing the numbers given in the past but.
What would it take.
For you to get there like how much of a normalization and in lending markets would we need and you know basically transaction markets to come back.
Something else that we might be missing like help us understand how should we think about.
Yes.
Beyond 2020 from here.
Yes.
Take that so.
I think and just to clarify youre talking about our soft guidance for 2024, which was <unk> 83 to 88, and we're moving that because we think it is at risk.
We're definitely in a very difficult and unpredictable macroeconomic environment Nobody's really clear on the trajectory of the fed the market is reflecting that and so we think it's just prudent to remove it at this time it doesn't mean, we can't achieve it.
And I think to answer your question specifically, what it would take is we'd have to go back to mine 2000 homes a quarter, so 8000 homes a year.
We would have to see a slightly positive relationship or spread between acquisition cap rates and financing rates now that doesn't necessarily take a lot to happen. So for example, if you are buying at a six cap and home prices were to decline by 5%. That's a 30 basis points increase in your acquisition cap.
Right.
<unk> NOI went up by 5%, that's another 30 basis points or if the fed pauses or slows down again financing rates, maybe come in a little bit. So it doesn't take a lot but in order to hit that level of acquisitions 8000, a year, we want to see a slightly positive spread between acquisition.
GAAP rates and financing rates, we think that makes sense.
The next thing we need to see is strong.
Same home NOI growth.
We will probably see that.
Steve Decelerate, a little bit next year, but I think if we get hit high single digits.
7% to 8% I think that that.
That helps us get there.
Obviously, we want to get the JV III.
The big Big catalyst for fee income and.
We're close to that but we'd like to get to that hopefully by the end of 'twenty three or into 'twenty, four and that gives us a chance to lineup for let's say <unk>, let's say 83, but what I would see this Chinese that.
If we don't get it in 24, maybe we get it in 'twenty five.
All we're looking at here is a period of deferral.
As we slow down and just wait for better opportunities to invest our capital, but once we do theres significant torque and our <unk> per share profile.
Got it thank you.
Your next question comes from the line of Mario <unk> from Scotiabank. Your line is open.
Hey, good morning, good morning, everyone.
Hi, Mario.
Good morning, just coming back to just coming back to the 24 guidance question.
Gary.
What was the original acquisition spread.
The team built into the $83 88.
Yeah. So the last time, we updated it we are actually pretty neutral. So we were looking to buy homes at a five five cap and we are looking to finance that at just under five five so maybe five in a quarter.
And that would have got us there, but since then.
Financing rates have kind of blown out to about six 5%. So that just doesn't work right. So we have to get back into more of a positive spread scenario.
It's actually interesting.
Even with a little bit of negative leverage, which we don't like you.
You can still generate very strong irr's right. So it's something that is interesting to kind of think about it from a private market perspective, because if we can buy homes lets say at a six cap and we can grow that NOI at five or 6% we've been doing that over the long term obviously much higher now, but if you can grow that have five or 6% you can lever to $6.
65% and have neutral even slightly negative leverage.
And you assume let's say home prices grew by 3% a year you can still and should probably generate about a 15% gross IRR. So that's the math that's happening in the background for our private investors and kind of why they want to go faster, but we just think right now Mario it makes sense for us to slow down and wait for better opportunities ahead.
Got it okay. So.
If it <unk>.
I think a longer term positive acquisition spread seems reasonable in terms of an expectation in the broader market once things settle out.
There is an abundance of opportunities to buy homes when that happens so presumably from the 8000 homes.
Per year that you need is really kind of up to you once those parameters are identified.
So when you sit back and think about some of the factors is to identify what are you most concerned about in terms of the assumption violation physical.
Physical same store NOI growth at 70%.
Uncertainty about getting us <unk> three off the ground given changes in appetite.
On the institutional side.
The biggest risk.
So we feel great I mean, we feel great about the underlying fundamentals of the portfolio and our operations just really.
Theres really no concern about same home NOI growth I mean, we're not anticipating a significant or difficult recession. If we did that might change things, but kind of from where we sit today again as we said in our prepared remarks. We think this is really more of a wall Street recession, the real only levels uncertainty our concern is around the trajectory of interest rates.
That's what's really holding us back and Thats holding the debt capital markets back and that's why we're seeing dislocation, but once that dislocation goes away and it will I mean this is not permanent sometimes when we are in the public markets. We have us feeling like things are permanent but they are not right. We will find equilibrium again, we'll find a point where acquisition cap rates or exceed your financing.
Rates and that's a signal for us that's the green light to go much faster.
And we do think that we're setting ourselves up for significant opportunity because homebuilders.
Homebuilders at some point, we think are going to want to transact right. Now there is a bit of price discovery going on we bought some homes discounted homes from builders, but will think we think there'll be more of that.
We also think that a lot of startups and single family rental and May have trouble getting financing and so maybe some portfolio of shake loose.
And we want to make sure that we're ready for that because we think we can get those at discounted prices.
Got it Okay, and then in terms of the organic growth like the 7% to 8% you are talking about.
Still very strong.
A key element of that is is that could be your renewal spreads given the turnover is where it is today.
Yes.
The answer to the pandemic kind of flows.
Those renewal spreads in response to a generational events, how should we think about those.
Those renewal spreads in the event of a slowing economy.
Necessarily hugely deep recession.
In relation to the mark to market portfolio today with <unk>.
Are you that you can see kind of the mid single digit renewal spreads in 'twenty three.
Pretty comp I'm more confident.
I think the main reason we're confident is one we still think we're going to see some level of inflation is going to be moderated inflation, but we're we think we're going to be an inflationary environment. Therefore, it makes the sense. It makes sense to have higher renewals.
Moved that off as you said from a bed zero percent in the heart of the pandemic to nearly 7% today. So that has moved off and I think we're comfortable with where we are today, we think it makes sense and it makes sense in particular, given the loss to lease right the loss to lease in our portfolio, maybe came down a touch when we comp it again CLO, maybe last quarter was 20% this quarter's 18%.
But we still have a lot of room there.
And so we think for passing on renewals in the 6% range. It's still a very good deal for our residents.
Got it Okay and then last question just on conducting the capitalization versus expense.
Question this quarter in terms of the two 9% growth in expenses year over year, what would that have been roughly without changes to let the capitalization versus expensing mix.
The way the Whitney Yes, the way we would think about it is if you look at the cost to maintain which includes everything that we're expensing and capitalizing that's up about 21%.
And about 40% of that is related to inflation.
Whether it's labor or materials, so that's up about 8%.
That's the way I would think about it.
Into next year.
Again Im sticking my neck out here My Best guess is that's probably that again again moderates maybe to about 5% right from what we're seeing.
So hopefully that gives you some better indication into the expense items.
Yeah, that's perfect. Thanks, guys.
Thank you.
Your next question comes from the line of Brad Heffern from RBC capital markets. Your line is open.
Hey, everybody. Thanks.
You mentioned a potential further slowing in acquisitions in the MD&A. So I'm curious if you're still putting a significant number of homes under contract today and maybe what the current quarterly run rate is.
Yes, so the homes that are under contract.
Today are going to hit Q4.
So of the 850 homes that were guiding to.
A significant amount of those are already under contract.
We are slowing down at this point into Q1, right. So I kind of I think if we think.
Let's say 850 for Q4, I think it's probably a reasonable assumption for where we ended up in Q1.
Want to go slower we want to conserve capital, but as we said in our prepared remarks, if we see a change in the environment. We might go much faster and we can turn on a dime.
So I would expect slow slower than in Q4 slower in Q1, but then maybe by the time, we get to Q2, maybe it's fast.
<unk>.
Okay got it and then can you talk about that from the standpoint of your partners. Obviously, the flexibility makes sense from your standpoint, but you sort of walk through the math on how you can still generate a solid IRR for your partners.
So how long are they willing to sort of be flexible and how does waiting longer impact the decision on JV III.
It's unusual for them they.
They're not used to managers or GP, saying, hey, we want a slowdown because.
Because typically private managers want to put the capital out and are incentivized to do that from a fee perspective, So I think.
<unk> media, a little bit surprised but I think they would agree that with us that it makes sense and they are very supportive and patient.
We've got no issue getting the capital out I think for both funds homebuilder direct and JV to the investment periods ending in 2024. So we've got lots of time to put that capital out and they're ready for us.
Complete the investment period for the next fund all they have all expressed an indication to us that they're very happy with the program. They really like us are far and they're supportive of us re upping and raising new funds. So this is a triton decision. It's not a partner decision we want to go a little slower we have.
And do that they're supportive.
And we know the support us when we want to go a lot faster.
Okay. Thank you.
Your next question comes from the line of Nicholas Joseph from Citibank. Your line is open.
Maybe just on.
Further to capital allocation, how are you thinking about the share repurchase program and balancing that against kind of current leverage which are recognized as being near target range, but a bit higher than what we see with many of your single family peers.
With the capital we received for the proceeds we received from selling U S. Multifamily portfolio has been really largely allocated to debt repayment. So thats. The first thing we did.
We think that makes a lot of sense.
It obviously improves our leverage metrics subsequent to quarter end and then we have a little bit of capital leftover and some of that capital will be left will be for us.
Buying back our stock we started to do that.
We think thats more of a signaling effect Nick than anything else. The buyback we think it makes sense I mean to be clear from an economic perspective, it's probably neutral.
Probably neutral between buying back our stock and acquiring homes given the fees we earn.
But again right now as we pay down the debt we're waiting.
We're going to use some money to buy back stock.
And then we're going to wait for.
For better opportunities to grow faster again.
Is there additional debt that could be easily pay down are there prepayment penalties associated with that I'm, just trying to get a sense of kind.
I'll hand that over that yes, yes.
I'll hand that over to with Shannon talked about kind of a near term maturity schedule, whether it is hi, Nick as you could as you can see theres nothing maturing in 2022 or 2023, we've paid back most of that in addition to that.
Three times net debt to adjusted EBITDA was that as of Q3.
After we sold the portfolio and used the proceeds to repay bank debt. Our new number is six eight times. So I think that's the number to kind of look at as well.
We do have the ability to pre back to payback some of our debt maturing in 'twenty five 'twenty six but we really think it's more prudent to save our capital as Gary mentioned for acquisitions and growth potential.
Some potential deals coming down the pipeline.
And we also have we just mentioned as of October we did refinance one of the deals to be of floating rate debt that matures in 2027, we have the ability to refinance side also with no defeasance costs, but we put a cap in place to also hinder the upside. So we think we're in a good position on that on that metric as well as our net debt to adjusted EBITDA.
Our goal that we set short term was eight to nine times and we're going to stay within that range.
Thanks, that's helpful and just in terms of retained cash flow rate you have a lower payout ratio.
Relative to peers, obviously, not a U S. REIT would that incremental generated free cash flow will also be used for buybacks.
I don't think so I mean, I think we've got enough cash left over now to implement.
The NCI B, which was to buy two 5 million shares. So we'll get through that $2 5 million shares and then we'll reevaluate I think the cash that the business is throwing off probably will be used for acquisitions.
Right just at a more moderate pace.
Alright got it thank you.
Okay.
Your next question comes from the line of Adam Kramer from Morgan Stanley . Your line is open.
Hey, guys. Thanks for the question.
Hello, guys I, just wanted to ask about kind of the.
The JV.
Just got it in their share versus your share right. I think it is held in fairly consistent you guys just kind of share of acquisitions is about 30%.
Another way to kind of continuous with external growth or I, just to kind of scale down kind of your proportionate share of future acquisitions. So wondering what kind of your appetite is for that.
So if there is any kind of change in your thought process around that.
Yes, it's a great question.
Adam We go back and forth on this a lot and we arrived at the kind of 30% or one third ratio because it generates significant NOI and we want our shareholders get the benefit of that NOI and if you then look at the mix of revenue, it's about 80% NOI, 20% fees and we kind of like keeping it in that kind of ratio.
<unk>.
But look if we were in an environment, where where the stock prices.
And it.
It's very difficult to raise money and we might look at going with a slightly lower co investment I can tell you that our partners would have no issue with it we're the ones who want that.
<unk> third co investment they are not used to seeing that are used to seeing much lower co investment ratios. So it's not an issue from a capital raising perspective within the private markets. It's more of a tri Con request. So we do have flexibility to go lower there, but it probably wouldnt be our preference.
<unk>.
There is other options for example, we could also think about contributing some of our homes and our wholly owned portfolio in lieu of cash so thats another way to get the JV III Quaker we do have some flexibility if the markets arent there.
But it's something we'll continue to think about.
Got it that's really helpful and then just.
Looking at kind of the October leasing metrics.
Look understandably Orion kind of some seasonality here in kind of a new number but just wondering kind of what youre seeing on the ground in terms of kind of further deceleration of the new lease growth as we get into the holidays recognized occupancy stabilization is important Debbie you mentioned on your in your remarks, Gary, but let me just kind of hear what youre seeing in the new the new lease metric.
As we kind of get into November and towards year end here.
Okay, I'm going to pass it on to Kevin to give a little more detail.
Great. Thanks.
Yes, the world what we're seeing right now is really back to seasonality we it's.
It's something that Hasnt experienced for the last two years.
Pandemic and we're just going back to normal times and pre pandemic times, we would experience new lease rent growth decelerate, sometimes up to 300 basis points from what it was in July and August .
September October November so that's.
That's what happened, we got occupancy protective and.
In late August September to try to push our occupancy is up so at homes and be vacant throughout the winter.
And so we took our foot off the gas and we accomplished what we needed to we were $98.
<unk> October four months or 97, 9% today, so we can be aggressive.
As we can be in the winter. So I think we follow past patterns.
We will see a deceleration is still a little bit more.
Coming months, and then it will pick up again.
In the spring time, so I will just follow more cyclical patterns that we've had before.
We're fortunate to still to have that 15% to 20% loss to lease to fall back on.
We've been able to our renewal growth, we've been able to hit the very top of our upper limit ourself covenants.
And I think I remember I mean, we are still the demand side is still super strong where we have more demand than we had pre pandemic say 2019 by almost twice and still 4 million housing units short.
Do you think about our industry. Our average age cohort is 38% to 39 years old that's the leading edge of the millennial generation for Boulder that millennial generation is turning 30% to 31, so that leaves eight to 10 years of massive demographic strength, that's coming our way.
So I feel really confident with where we're going our business, which is going to be back to some of the cyclicality, but its staying strong and it's really great asset class.
Great. Thanks for the color guys really appreciate it.
Thanks Scott.
Your next question comes from the line of Jade Rahmani. Your line is open.
Thank you very much.
Projections for.
HPA.
Our 2023 full year for the overall market.
Barely touched on portfolio.
Jay Thanks for the question no I got to tell you I will I'll do my best but I think if I could truly predict HPA and interest rates probably wouldn't be sitting here, although I think we're doing okay.
I will try my best look.
I would tell you is that it's really surprising that with mortgage rates moving up from the two is to over 7% in a matter of months that home prices have been so stable. It truly is and I think it.
Kevin just talked about it it's an indication of how tight the supply is in the market. There's just no supply.
And in this type of environment when mortgage rates move that fast the market get shocked and people stay in place theyre not going to sell their homes right because why would they sell their home if they've got a 2% or 3% mortgage is not going to take on a 7% margin. So it just doesn't make any sense. So you end up getting a lot less listings and less supply and that keeps <unk>.
Steady and so we've probably only seen home prices drop.
3%, maybe 5% from the peak in.
In our 21 markets, that's it and by the way we have more we have better data than almost anyone I mean virtually no one's buying as many homes as we are in the country.
So we've got very good data on home prices, but again, they've barely come off the peak.
<unk>.
Next year, our team thinks maybe a little bit more softening, maybe they come down another 5%.
Maybe but we're not anticipating anything significant.
And if they do come down 5% by the way that's an opportunity for us because.
It means like on a 6% cap rate again, we get another 30 basis points.
Positive on the spread which is good but we're not we're expecting things to be fairly steady maybe down a little bit next year.
Thank you very much on the Capex side.
Check out and seems to have bucked the trend of what <unk>.
As <unk> seen with much higher R&M much more inflation pressure and also the accrual issue on property taxes, but yet the capex even on a same store basis was up dramatically. So some might interpret that as just moving things around.
The last thing versus expensing.
But are there any specific items that really triggered that shift.
Can you just give a little more color on that have gotten some yes, yes.
For sure and I'll, let Kevin answer the question on Capex and John maybe you want to weigh on kind of what we're seeing with property taxes, we haven't talked about that yet, but I think yes. There is definitely some of this is geography right because.
Again, if you look at the cost to maintain it is up 21% year over year and that did impact our <unk>.
Kevin maybe you want to kind of dive in a little bit and break that down for Jade and and then John over to you on property tax.
Sure. Thank you Gary.
So as Gary was saying our cost to maintain which is really more of a holistic look at what we're spending is up 21%.
40% of that roughly is due to inflationary inflation on trades and materials about 25% or a quarter of it is due to a higher volume of work orders and again I talked about it a little bit earlier and that we had a lot more people, calling and allowing us into their homes, allowing us on their properties now.
Pandemic is in the rearview mirror. So we had a lot more work orders than we did in the previous period and then it was the nature of the work orders because we hadn't been in the homes kind of.
Our backlog and people not calling us when we got into the homes.
The nature of the work orders were just more more.
Benson, which hit capitalization ratios.
Total our total cost to maintain I would say it can be 32 to $3300 in the near term and then once we get through this it should then drift back down again, maybe mid next year into the 3000 3100 cost to maintain in that way that encapsulates regardless of the Buck.
Or the geography, or total cost will drift back down as we get through some of these harder churns.
And some of our quarters, but things like Hvac's plumbing that repairs and they are all just more.
More extensive.
And on the turns of his flooring landscaping interior paint, we just did a lot more of that.
People, having lived in their homes 24 hours, a day and stay in their homes longer.
Hopefully, that's a little bit more color for you.
On the work order side was it more on.
More work orders generated by existing tenants than on homes that were turning because the turnover ratio declined year on year.
Yes, it's definitely on our occupied homes for the recurring Capex, we occupied homes.
Really contribute almost two thirds of it recurring capex. So it's people that are there they're calling us.
To do work in their homes.
Okay. Thanks.
Okay.
Go ahead.
John do you want to talk about the property taxes.
Yes, sure and I think we touched on this a little bit during the call, but we tend to take a very conservative approach to property tax accruals, especially in times, where we've seen rapid home price appreciation.
Thus far in our portfolio, we've seen essentially all of the property tax bills come in and Georgia, Arizona, and Nevada, California, and about 60% of Florida, We're still waiting for the rest of Florida, and most of Texas, but I would say for the bills that have come in so far in aggregate, we're probably a little bit on the better side of our accrual due to that conservative approach there.
We took at the beginning of the year so.
Into Q4, we're feeling good to very good about where we stand on properties property taxes, and again thats just because of our approach.
Thank you.
Your next question comes from the line of Stephen Macleod from BMO capital markets. Your line is open.
Great. Thanks, Good morning, guys.
Steve.
Good. Thanks, how are you good.
Just with respect to the securitization market, Gary you talked about.
Sorry.
It is frozen up a little bit. So just curious how reliant are you on securitizations to create room.
On your facilities to fund future same sing.
Single family rental acquisitions.
Yes, great question I'm going to have with Sam answer that Steve how are you all of the debt markets are very volatile today I know the last securitization deal that we did was up in July was up 541% that same deal today would be closer to six 5%.
The AAA spreads are close to 200 to 225. So that's why we're saying we're taking a pause of securitization. However, during this time with securitization market is not available we've seen a lot of new entrants are floating rate balance sheet loans that are available for <unk>, which provide short term bridge until less volatile markets you saw us do that.
In October we did a term loan it was a five year term loan extended.
Third on our warehouse facilities moved some of that debt, even though variable too to mature in five years from now remained kept the flexibility to refinance at anytime we want and put a cap in place. So I know, it's not fixed but it's quasi fixed in the sense that we have an upper limit.
So thats basically freed up some of our stuff and we're seeing a lot more entrants of floating rate balance sheet loans available to us now.
Expand on that to see that and have every crisis comes an opportunity in the past in a really good times, we were just going directly to the <unk> securitization market and now now we've really done a great job I think diversifying those financing sources and now have life goes that want to lend to us in the last year. There was some talk.
<unk> from Nomura.
Which is an Asian bank. So we're seeing a proliferation of lending sources, which just over time makes the industry better and helps that mature.
Okay, great. Thank you and then just with respect to the FSFR JV three.
Are there any limiting factors on the horizon that you could see that you see that could potentially limit.
The funds being raised for this fund.
I mean really the only thing is we got to get through JV too. So it's just really that it depends on the pace of our acquisitions, how fast do we go in 2023, we've talked about going a little slower in the first half and maybe a lot faster in the second half. So it really depends on that pace you have to invest the capital and.
And complete the investment period really before we can raise the next fund those are the limitations, but we're confident that whether we go slower faster. This is likely going to be a later 'twenty three 'twenty four event and as I said before our partners have expressed a willingness and support to raise another fund.
Okay, great. Thanks, guys. Appreciate it thank you.
Your next question comes from the line of tail will Lee from National Bank Financial Your line is open.
Hi, good morning.
No.
Okay.
Just wanted to ask quickly about performance fees I think.
You had sort of been continuing at the same clip in terms of purchasing you probably would've finished out JV to early in 2023.
Would there have been any performance fees recognized at that point and do you have a rough idea of what the quantum that would be.
No.
Well, yes, we do have a schedule in our supplemental which goes through the performance fees and I think that numbers, what about 280 million is that right with something that's about $280 million. So that that numbers that does include the sale of the U S multifamily portfolio. So.
The 100 millions in that $2 80, but.
But you could take a look at that now.
Now, but no I would see that the U S multifamily sale was unusual.
Because typically what happens is we have to wait to the end of the term in order to generate the performance fees. If we're in the money and the terms on the funds are typically eight to 10 years that was the case of the U S multifamily portfolio as well, we just made a decision with our partners to exit earlier and that's what triggered the performance fees that was the actual sale or disposition. So we.
Not really.
In terms of JV, one we don't expect any performance fees until 2026, and JBT would be 2028.
Perfect. Thanks, gentlemen.
Thank you.
Okay.
Your next question comes from the line of Brad Sturges from Raymond James Your line is open.
Hi, Brett.
Brad.
Sorry.
Yes.
Just on the trial and development pipeline, obviously leasing demand and trial has been quite robust and market rent growth has been really accelerating can you just talk about how you're expecting returns too.
To look like relative to initial underwriting expectations, just given some of the cost inflation, you're seeing relative to the.
The market rent growth.
Currently happening in the market.
Yes, good question I'm going to have Andrew Joyner break that down for you.
Hi, Brad.
We've got a very real time test tube, we just launched the Taylor.
Our project at <unk> last month.
And just to share how leasing is going.
We're about a third leased already.
We're already at our March 2023 absorption targets, so demand is incredibly strong.
And I think that's going to continue just given the favorable rent versus own dynamics in this higher rate environment in.
And Canada ramping up its integration now to 500000, a year each year through 2025 so.
We're seeing really robust growth.
And returns Youre talking about yields yes, we're going to deliver the Taylor north of five 5% in terms of development yields and I think.
We're going to continue to.
Five handles on our projects and continue to deliver in particular of 2023 as Canary landing comes online as well as the IV.
We're well ahead of underwriting in terms of rental growth and clearly absorption demand has exceeded our expectations. Yes, I would just I would say that projects are taking a little bit longer than we think based on underwriting costs are definitely up.
So we do a great job and locking in a lot of those costs upfront, but revenues are all sort of rents are above what we underwrite.
So all in all I mean.
We're looking to be in really good shape.
We're going to have some really tremendous value creation from this portfolio. So we feel great about it.
Okay.
Okay, that's great and just to go back on the acquisition program for FSFR.
Walk through the dynamics of moving from perhaps a green.
<unk>.
On the flip side, what would it take or what's the trigger to go to Red and maybe.
Maybe more prudently pause the program.
Yes, I mean, <unk> would just be the <unk>.
Fed going harder even harder than where they are at they continue to tightened faster if a tightened faster or they go longer.
Obviously, the fed funds rate is higher than what we think.
Isn't that that would be a signal for us. So we've got a slowdown more right.
It's really this is all predicated on the trajectory of the fed and ultimately where we can finance and take out the homes. We're acquiring on a warehouse facility. So those are the critical decisions and.
So.
If that gets tougher then we're going to have to go slower.
Okay.
Thanks, Tom I'll turn it back thanks, a lot okay.
Okay.
Okay.
There are no further questions at this time I will turn the call back over to Gary Berman, President and CEO of Tracon residential.
Thank you Colby I would like to thank all of you on this call for your participation. We look forward to speaking with you again in the new year discuss our Q4 and year end results.
Right.
This concludes today's conference call you may now disconnect.
[music].
Okay.