Tricon Residential Inc. Q1 2023 Earnings Call
Funded equity commitments.
On slide three as we spoke about at our Investor Day in April we continue to see a major valuation disconnect between our share price and our fundamental value drivers such as book value per share and NOI growth.
When we take a step back and look at our net operating income has grown at a compounded rate of 18% per year. Since 2019, our book value per share has also grown by 16% per annum. Since 2019, interestingly, though our stock price is now back to 2019 levels, which doesn't make much sense. When you look at the value that's been created since that time.
So now let's look at the interplay between private and public market cap rates on the right hand side of the page.
What's different about single family rental when compared to other commercial real estate sectors is this one of the largest most liquid asset classes in the world. There is no price discovery per se and Theres no bid ask spread. This is because every single day, there are thousands of transactions to validate pricing.
That's why we feel confident about our own internal valuation of a 5% implied cap rate based on stabilized NOI and 6% when including the loss to lease in our portfolio.
Green Street advisors, similar valuation or implied weighted average cap rate of four 7% for our market coverage through the cap rate observer publication.
It's true that right now, we're acquiring homes close to a 6% cap rate, but that's only because we're buying a small volume. If we wanted to go back to acquiring a large volume of homes every year or let's say eight or 10000, we believe the cap rate would be closer to 5.25%.
So, let's compare that with the public market <unk> currently trading at a seven 5% implied cap rate based on stabilized NOI.
You include the loss to lease in our portfolio were closer to 9%. This shows a massive disconnect between where the public and private markets are trading we think that over time that public market should catch up there seems to be a lot of value to unlock for our shareholders and we believe that this is a tremendous opportunity to own for icon for those that have a longer term investment horizon.
Moving to slide four.
Demand for our rental homes continues to be robust.
So this we focus on two key indicators monthly leads and monthly applications per available home.
You can see the seasonality was more pronounced in Q4 than in prior years with leads and applications different.
However, the rebound in Q1 and into April has been very healthy with leads and application even higher than what we were seeing before the pandemic. This makes for a very supportive demand backdrop as we head into the busy spring market.
Turning to slide five.
You can see that the rental supply has been increasing post pandemic. We think this is partly due to the lock in effect of low in place mortgage rates, which is incentivizing some homeowners to rent out their homes rather than selling them. What's interesting is the supply looks like it's starting to stabilize at levels that are slightly below what we saw pre pandemic anecdotally this financing.
With research that was recently published by the National rental home Council showing that over the past decade, the proportion of single family rentals within the overall single family housing market has actually shrunk by one 4% when taken together the combination of rising demand for rental housing in stabilizing supplies rental homes provides a compelling backdrop for our business.
Yes.
On slide six you can see how this translates into rent growth, which remains well above pre pandemic levels that were already strong to begin with our rent growth in April remains resilient and is slightly ahead of Q1, featuring a 11, 9% growth on new leases and six 5% on renewals for blended rent growth of seven 6%.
Turning to slide seven let's talk about the general state of the housing market and what the opportunity set looks like for acquisitions.
Within our target markets prices of homes that meet our buy box have declined roughly 4% year over year, while rents are actually up 3% together. This combination of moderated home prices and slightly higher rents as led to an expansion in cap rates of about 30 basis points. While this is directionally positive MLS listings volume in our market has declined roughly 20 <unk>.
That year over year, given homeowners reluctance to sell and forgo there are attractively priced in place mortgages, thereby reducing our buying opportunity.
The good news is both prices and rents seem to have stabilized since the beginning of the year and to pure and appear to be moving back up. Moreover, listings volume has increased roughly 20% since January and should enable us to acquire homes at a faster pace as we head into the spring and summer months.
As you can see on slide eight Q1 was a relatively slow quarter for <unk> acquisitions, but it's on target with our expectations as we look out to Q2, we expect seasonally higher listing volume to provide the opportunity to double our acquisition pace from Q1, while remaining disciplined in our acquisition criteria.
Recall that we are targeting cap rates of five 5% to 6%, albeit with a preference closer to 6% to match, our expected cost of debt financing and to help us generate a mid teens IRR as we expect in our joint ventures that being said foreign costs come down and we will shift our criteria to a lower target cap rate, let's say five and a quarter to $5 three.
<unk> percent, we could buy a lot more homes with that I'll now turn it over to our CFO with San Francis to discuss our financial results.
Thank you Gary and good morning, everyone. We delivered another solid quarter of financial results and I want to thank our exceptional team for their hard work and dedication.
As we focus on process improvement and cost containment across our business.
Let's turn to slide nine to review, our key financial metrics for the first quarter.
Net income from continued operation was $29 million compared to $150 million last year, which includes $12 million of fair value gains on rental properties against a very strong comp of almost $300 million last year.
Home price appreciation has moderated in recent months.
Core <unk> per share was <unk> 14, which is consistent year over year and <unk> per share was 11 also consistent with last year, providing us with ample cushion to support our quarterly dividend with an <unk> payout ratio of 48%.
Lastly, our <unk> book value stands at $13 96.
Or $18 89, and Canadian <unk>.
Almost 19% year over year.
I will also note that our book value does not factor in the value of our fee streams.
Let's move on to slide 10, and talk about the drivers of core <unk> per share.
Our single family rental portfolio delivered 18% year over year growth in tricorn proportionate NOI.
This figure reflects 17, 2% revenue growth, which was driven by five 6% increase in proportion of rental home count.
One 1% of higher occupancy and eight 7% increase in average rent.
Our same home NOI also increased by a solid six 2% this quarter.
<unk> from fees increased by 3%, primarily driven by higher Johnson development fees, including $3 5 million earn.
Large bulk sale a commercial lens.
This was partially offset by a lower property management fees. Following the sale of the U S multifamily rental portfolio in October .
In our adjacent residential businesses the year over year decrease of 6% in <unk> reflects the strong results in residential development driven by healthy for sale housing demand offset by lower off a full following the sale of the U S multifamily portfolio.
I want to highlight that both of our U S residential business and our Johnson business are great read through into the overall housing market and from what we can see today housing demand is holding up exceptionally well.
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.
Meanwhile, corporate overhead expenses decrease from last year, because of lower AIP outfit and performance fee expense, which was partially offset by higher G&A and stable salary expense as.
As we mentioned last quarter, we are laser focused on cost containment in this period of slower growth.
And as we see we are delivering on this commitment.
Lastly, the diluted share count this quarter was <unk>, 5% lower than last year due to the impact of our share repurchase program.
We have repurchased over one 7 million shares so far.
Let's now turn to our proportionate debt profile on slide 11.
We have been proactively addressing our near term debt maturities and floating rate debt exposure as we said we would.
In Q1, we repaid or refinanced over $140 million of near term maturities.
With plans in place to refinance or repay all of our remaining 2023 maturities in the coming months.
These near term maturities include two JV subscription lines that are used to fund acquisitions, which will be fully repaid this year by calling on JV capital commitments or we will be refinancing into longer term debt.
We also have a bank term loan with an extension option and we have already exercised their option to extend this loan by another year.
During the quarter, we also refinanced $101 million of floating rate warehouse loans maturing in 2025.
Fixed rate loans maturing in 2028.
This has helped bring down our floating rate exposure from 29% of total debt last quarter to 26% this quarter.
As a reminder, we use floating rate warehouse lines to fund acquisitions in the short term.
This is not a permanent part of our capital structure and as an exposure we seek to actively term out.
And roll into fixed rate instruments.
Over time as we continue to grow our percentage of floating rate debt. We will also continue to go down.
I also want to highlight that more than 74% of our floating rate debt is subject to caps, which is explained on slide 12.
Rising interest rates have been a headwind for our floating rate debt as.
As well as new fixed rate debt used to grow the business.
But we mitigate some of these higher desk costs with interest rate caps that are now in the money.
As you can see on the bottom right hand chart, our interest rate caps saved us approximately $1 4 million of interest rate costs in Q1.
If we sensitize the sulfur rates for an increase of 25 or 50 basis points, you will see that our hedging program effectively pushing two third of that increase.
I'll finish off with slide 13 to note that our guidance for 2023 remains unchanged from the initial guidance that we issued last quarter.
We believe we are on track towards our guided range for the full year.
As Gary mentioned, our acquisitions are on target so far with the expectation of seasonal acceleration in summer months.
<unk> per share and same home NOI growth are also on track.
Even though the components of same home revenue growth and expense growth, where both light this quarter against the prior calls we expect this to normalize in the year ahead.
And now to give more insight into our same old metrics I'll turn the call over to the wind beneath my wings, our chief operating officer, Kevin Walbridge.
Thank you Sam and good morning, everyone.
Our strong first quarter performance is very much a testament to the dedication of our amazing team our people first approach and our best in class operations.
Had a great start to the year and we're only getting started.
Let's move to slide 14 to talk about the drivers of our same home NOI growth of six 2% for the quarter.
On the top line revenue growth was driven by a seven 4% increase in average in place rents that were partially offset by a 60 basis point decrease in occupancy as we shifted slightly towards the rent growth bias going into the spring months.
Our rent growth remains healthy with blended rent growth of seven 2% during the quarter underpinned by 10, 3% growth on new move ins and six 5% on renewables.
Our renewals reflect our policy of self governing which maintains rent growth below market levels for existing residents, helping them stay in their homes longer and as a byproduct keeps our turnover low.
As we moved into April we saw demand continuing to strengthen with rent growth coming in at a healthy 11, 9% on new leases six 5% on renewals and seven 6% on a blended basis.
Our bad debt expense, which is embedded in the revenue numbers has been tracking around one 2% compared to 5% in the first quarter of the prior year. When we benefited from a significant government rental assistance payments.
I should note that our bad debt has improved significantly from a pandemic high of two 9% and.
And looking ahead, we continue to target bad debt of 1% of revenues by the end of this year.
Finally, other revenue decreased by 13% from last year. This was driven by lower late fees as our collections have improved coupled with more conservative provisioning for resident recoveries to reflect actual collections rather than build amounts.
This was partially offset by revenues earned from services that enhance our resident experience like smart home and renters insurance, which.
Increased adoption year over year over.
Over time, we do see a path to increasing other revenue as we continue to focus on rolling out additional services that add value to our residents.
Let's now turn to slide 15 to discuss our same home expense growth of 2%.
The slight rise in expenses was driven by property taxes, which were up 10% from last year, reflecting meaningful home price appreciation in our markets.
We still expect property taxes to be up around 8% for the full year, but are comping against a relatively low accrual in Q1 of last year.
On the other hand repairs and maintenance expenses were down this quarter by 25%.
Although we experienced higher work orders as well as cost inflation, we were able to offset this by cost containment initiatives refining our work scopes and undertaking more work orders in house.
We now have about 75% of our available work orders completed in house and are on track towards our goal of 80% by the end of the year.
We also benefited from higher refunds in the quarter through our vendor rebate program, which helped to bring down R&M expense.
Turnover expenses were also meaningfully down as our turnover remained low at 16, 8%.
Thanks to our focus on superior customer service, along with a greater proportion of the costs being capitalized given the more extensive work being done on homes with longer resident tenures. Likewise, we've put it in place process improvements and cost containment initiatives that have brought down the combined expense and capitalized Turner.
<unk> costs by 14% compared to last year.
Next <unk>.
Owners associations costs increased by 14, 5%, reflecting about 5% inflation in the HOA dues as well as a heightened level of violations and posed by HOA is coming out of the pandemic, which drove higher penalties.
And finally other direct expenses increased from having a higher penetration of smart homes in our portfolio and increased utility costs.
We remain focused on the things that we can control to offset rising costs, while keeping an emphasis on creating the best experience possible with this I wanted to walk through our proactive approach to managing our cost to maintain on slide 16.
I am pleased to report, we reduce the cost to maintain by 3% year over year, we really think of three main areas of savings.
First our national procurement program, we're focused on negotiating price reductions on materials to help offset inflationary pressures.
Next our scope management, where we actively refine and manage work scopes.
And finally, our internalization efforts, where we use our in house team to undertake a higher number of work orders versus using outside vendors are in house technicians cost per work order is about $400 cheaper than using a vendor for similar work.
We are also seeing a stabilization in the mix between capitalized and Expensed items recall that over the last few quarters, we have seen a higher mix of capex compared to the prior year given the more extensive work required to turn and maintain our homes. This was partially driven by longer resident tenure, which is almost a.
Year longer than it was at this time last year and it's also a function of people spending 24 hours a day in their homes during the pandemic.
Which created more wear and tear.
We're starting to lap those comps and so the mix of Capex versus opex should be less of a driver of expense areas going forward.
Turning to slide 17, I am thrilled to introduce to you our proprietary resident App, which some of you saw at our recent Investor day.
We're super excited about the SaaS as it provides a one stop shop for our residents where they can control their smart home devices pay their rent submit maintenance requests and track their work order progress all in a single sign on App.
They can even monitor our maintenance technicians, while the transit to their home in an Uber style function, which we think is really cool and as an elevated level of convenience and transparency to our resident experience.
Our goal is to invest in technology that improves the lives of our residents and we're happy to see this app going live in nine markets. So far.
Serving over 5000 residents and counting.
We have plans to rollout to all markets within the next year.
We're not only innovating in our operations and resident experience, but also in our pursuit of our ESG objectives as shown on slide 18.
We recently released our third annual ESG report one of the highlights in this report is the progress we've made on addressing our environmental footprint.
We developed an industry first energy consumption model to estimate the baseline environmental footprint, and our <unk> portfolio and attract future improvements as we make our homes more sustainable.
Given that the utilities in our homes are controlled by our residents we don't directly control the energy use in each of our single family homes.
However, with our consumption model, we can now measure and meaningfully improve the energy usage and emissions of our homes through the choices, we make on our systems and components, we install when we build and renovate.
Secondly, we officially launched our down payment assistance program and made our first down payment contribution to our Atlanta resident Kelcey.
This program provides $5000 to qualified tricorn residents, who want to purchase a home of their choice.
We could not be happier for Kelsey and a new chapter as a homeowner and we wish her all the best and since then I'm also pleased to report that we have had another five residents benefit from this program and another one who is currently in escrow.
<unk>, we are deeply committed to providing housing optionality for our residents, including the ability to either rent or own a home as we aim to be part of the solution in addressing America's significant shortage of housing options now I will turn the call back over to Gary for closing remarks.
Thank you Kevin before we close things off I did want to highlight the incredible multifamily portfolio that we are quietly building in trial as showcased on slide 19. The portfolio is advancing quickly with close to 1300 units delivering this year and the majority of projects already under construction.
Our latest project with Taylor is currently three months ahead of schedule, achieving 64% lease up by the end of March with average monthly rents of $4 55 Canadian per square foot.
As this portfolio has stabilized over the next few years, we estimate it will have a gross asset value close to $3 2 billion, creating a lot of strategic optionality for Tri Con. Moreover, the book value for share of our stake in this portfolio is expected to double from 89.
To $1 74 per share upon stabilization, creating meaningful value for our shareholders.
To finish off on slide 20, as we look ahead to another exciting year, we want to emphasize the following messages for you first the value of our company is underpinned by our <unk> portfolio, which continues to perform extremely well and is reflected in our book value per share that is well above our share price.
We believe in responsible growth we are prudent in our capital allocation discipline with our cap rate criteria and laser focused on cost containment. During this period of slower growth and finally, we have the platform people technology and available capital to grow much faster. When the time is right I will now pass the call back to the operator to take questions with sand.
And I will also be joined by John <unk> on slide any harmony and Andrew Joyner to answer questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question is from the line of Mario <unk> with Scotiabank. Your line is open.
Thank you and good morning.
Hi, Mario.
A quick question on the guidance.
It was maintained and I may be reading too much into this but the reiteration of the guidance seem to be caveat with an early days reference.
Does that reference pertained to the uncertainty over there.
U S economic weakness, which you havent seen thus far.
Alright possible acceleration in acquisitions, which could be a key towards hitting the upper end of your guidance range.
Yes, it's the latter.
Peter I mean, we don't see any weakness in our fundamentals at all.
The on the ground.
The economy and the fundamentals for rental housing are extremely strong.
They've moderated obviously, a little bit since the pandemic, which was really an anomaly.
But as we explained in our presentation are stronger than where we were in 2018 in 2019, which we would characterize back that it is very strong. So we feel great about the fundamentals, but really I would say to hit the upper end of the guidance on <unk> for sure Mario It really does depend on us going faster.
Being able to buy more homes, and obviously, having the cost of capital to do that so that's really where the early days caveat lie.
Wise, but but from everything we can see today things are heading in the right direction and as we've been clear.
We feel very confident about our ability to double acquisitions in Q2.
If we can continue that continue that let's say 800 per quarter in Q3, and Q4 essentially sets us up to launch JV III and really complete the investment program ran for JBT and homebuilder direct over the course of the year. So we feel really good about that the housing market is clearly stabilizing.
Cost of debt for us seems to be coming in we've talked about green shoots.
Appearing we see that today, so we feel really good about being able to go a little faster over the course of the year.
Perfect. That's great. Thanks for the clarification and then just on the cost of debt.
What's your sense of where it is today on kind of some near term.
Hi, Yes, hi, Mario So Sam when we look at securitization market. It is it is open but for lower Ltvs right now if youre looking at a 6% to 65% LTV.
It ranges from five five to almost six so thats kind of the range of the cost of debt today.
And we're seeing it more closer to like depending on the day yesterday had repriced yesterday a deal it would have been around 556 or something like that.
Got it and then can you remind us of where those where the problem happens it could have been three months ago or so.
Would have been a bit higher.
Yes, yes, Mark I would say probably around <unk>.
Easily could have been upwards of six 5%. So that's significant movement right. I mean, if you look at the five year Treasury today, I think it's about three 5% three 5%.
Spreads look it looked like at 60% LTV at about 200 basis points or Youre looking at five 5% that's a big movement.
In three to six months and again that reflects my earlier comments, which starts to set us up for the ability to go faster because we're buying cap rates really at high fives.
If we can borrow it at $5.
We're really in the money, we get that spread and it allows us to go faster. So now we will say look the debt capital market has been incredibly volatile and they have enough oscillating from week to week, but from where we sit today and we definitely see green shoots.
Perfect. Okay, and then maybe a question for Kevin just on the bad debt expense.
One 2% of revenue this quarter still targeting 1% by the end of the year.
What factors do you foresee driving that ratio down a bit relative to Q1, and what would be expected to kind of link to income ratio be embedded within the 1% target.
Hi, Mario Yes, we are.
Still expected to get to 1% by the end of this year. The difference between this quarter over quarter last year really is Q1 of last year. We had a lot of government rental assistance money that came in it was three five times, what we got this quarter.
In addition to that we also received last year a lot.
Past due balances will receive that quarter and we also had a number of payment plans where teams we have tried effectively.
Last quarter of last year.
That said, we're still continuing to improve during the middle of the pandemic, we were at two 9% bad debt.
One two were improving last quarter in Q4, we were one three so even in Q1 a bit like this past quarter, we had half the.
The government rental assistance that came in we got last quarter and yet our bad debt improve.
So we continue to see it improving I think some of the headwinds are we still see some reports that are backed up a little bit right now.
And then with the government rental assistance, you'll really coming to an end.
Also keep us from getting there faster.
On a rent to income.
We're still really at 23% interestingly over the periods.
As rents of clients.
<unk>.
Income of our residents were now in the trial.
And in 12 months, we've been gas and 95100 and the average household income for resin.
Increase in its kept that rent to income.
Same.
Our resident profile has strengthened.
FICO scores have also improved so we see ourselves getting back down to it.
1% towards the end of the year recall prior to the pandemic we were at that point.
8% or 25 months in a row. So we hope ultimately to get there someday that you were hoping to get to 1%.
Got it Okay last one for me just on the same store expenses.
The growth came in much lower than peers.
Identified cost containment is a key focus for you.
But you also mentioned that the R&M benefited from a vendor rebate program higher refund on that can you quantify what the year over year change was for that maybe a bit more color on the drivers.
Yes, yes, so I mean.
You think about if you think about the vendor rebate program, which is kind of an ongoing thing I mean, if we were to isolate that and we would remove the impact of the vendor rebate program.
The R&M would've been.
Savings essentially compared to last year would have been cut in half.
The way that we would think about it Mario is instead of expenses growing 2% again, if we remove the impact of the rebate expenses would have grown by 4%.
So that gives you and again thats, a little bit closer to where our guidance is and we see that kind of normalizing over the course of the year.
Kevin also talked about the impact of bad debt rate. We also had a bit of an anomaly given that in the previous period bad debt was much lower so if we isolate that for that our revenues would have grown closer to 6% and overall same home NOI would've grown at seven 5%.
So again, it's a little bit of noise in those Q1 numbers, but we.
We do think they stabilize over the course of the year and we feel really good about where the guidance is.
Alright, if I can add just a little bit of color.
On the vendor rebates, we have several.
Relationships like that with a lot of our national vendors and they come in throughout the year. This one just happened to be a little bit bigger than ones in the past, but it's essentially it's based on what we buy from our vendors of the year. Prior and then calculate what that was and then we start getting rebates as a percentage of purchases.
Q1 Q2.
Okay, and then in terms of those rebates.
The expected rebates for 'twenty three.
What percentage of that would have been.
In Q1.
Yes.
How much of that was already recognized.
Probably 50%.
Yes. This is the biggest one that we will get.
Your next question comes from the line of Brad Heffern with RBC capital markets.
Yes, thanks, good morning, and preventing continuing on the expense front I think most people are surprised at how low the figures are this quarter, but also how long they've been for several quarters now so I'm curious how much of that do you attribute to these streamlining and cost containment initiatives and how much incremental room is there for us.
Additional savings from those programs.
So.
I would say the great majority of what you're seeing is due to the cost containment programs, we've worked really hard.
We get our expenses down I mean these are this is one of the things that we can really control right. So we have programs.
Sure.
Both on the on the <unk>.
<unk> and the turnover.
Using more internal labor that we did before and we're finding that on a like for like work order, we're saving about $400.
When we do something in house, we're now up to 75% of our work orders.
Our in house by in House Labor and up to 15% of the work that's done to insurers are now adjourn by enhance labor where last year. It was zero. So we're really seeing a pick up there. We've also worked hard with our vendors we have.
This book that we used throughout the country.
Assistance, so that we're all using the same type of pricing and we've been able to get savings on over 670 <unk> line items.
Save about $1 3 million for the year.
And then in addition, there were.
Look into.
Yes, just to work with our vendors and improve.
And then we've also been working on our scope.
<unk>. So we have the delegation of authority that we have compressed. So we're looking at all scopes. In addition to just working to repair more than we replace.
Parent HVAC unit.
Replace it we're looking at haven't workout longer also will do like touch ups versus paying a whole wall are painting a whole house.
To help that.
<unk> really well clean and functional savings, we will look at carpet replacement, whereas before we might have replace carpet throughout the whole downstairs and now it just needs wounds.
So the scope refinements that we've been working on as well as the price book.
The radio more people to do in house is really brought the cost down.
Okay got it thanks for the detailed answer there.
Gary I think you mentioned JV three in your prepared comments I guess is there any update on how those conversations have been going with your partners.
And is there still the potential that that could include a lower leverage target.
Yes, we've had very good conversations.
Obviously, we're in touch with our partners all the time on the existing programs JBT Homebuilder direct are happy with how that's going.
I think they are optimistic about us launching another fund later in the year.
So very positive conversations are investors love the asset class they like how we are performing.
They've got capital to do more so it's really just a question of us being able to get through the existing investment program and staying disciplined on our cap rate criteria, which is important so.
That's all I would say everything is going well second quite what was your second question again there Brad.
Hello, Jamie.
Yes on lower leverage, yes, I would say, yes, we will likely when we get the JV three we will likely look at lower leverage targets.
The leverage targets and homebuilder direct and <unk> have been really in that 65% range and I would expect for JV threes, we get closer to that later in the year that leverage would probably come down about 5%, so we might be 55% to 60%.
Okay got it and then last one for me just on.
Lack of REIT status I know in the past you've talked about how.
Sort of the subsidiaries are generating sufficient losses that you wouldn't anticipate paying taxes anytime soon I am curious.
If that's still the case and just any broader thoughts about the need to potentially convert at some point.
Yes, I think thats still the case.
We're not we're not a taxpayer cash taxpayer any significant level right now.
So if that becomes more of a headwind and that's a reason to convert but we don't see that at this point in time and.
And we don't really think that rather being a corporate or read is really an impediment, let's say from index inclusion. So it's not really an IR factor either its really about really optimizing cash flow.
And at this point.
I think we're fine obviously is of course, we get the benefit of being able to reinvest more capital. So we're I think we're finding the a court.
At this point in time.
Down the road in the future. If you were to re domicile. That's it that's a different question.
If you did then it might make more sense to be a REIT.
Your next question is from the line of handles <unk> with Mizuho. Your line is open.
Hey, there thanks for taking my question.
The first one I guess for with them on the leverage ticked up.
Think about a turn eight two.
It seems like some of that might have been tied to the loss of the JV EBITDA.
Can you talk all about leverage how you think about leverage in this current environment with a target leverage that you are.
So up to and when do you think youll be able to get there. Thanks.
Great. Thank you when.
When we look at leverage if you really look at our long term target, which we've mentioned publicly it's eight to nine times net debt to EBITDA.
So we will get their ideas to get there over a period of time and also during this period of growth if I look at what's outstanding today and I look at our near term maturities over the next 12 months, we have one maturity, which is a term loan that we just that we mentioned that where we've extended we submitted our extension notice to extend at our option.
By one more year.
The other two would be one of them would be refinance and looking at doing.
Some sort of refinancing around June or July timeframe in one subscription line will also be paid off.
Next year, we have one securitization of maturing in 2017 Dutch too. So we've got two plants. There one is doing.
Refinancing probably later on this year and do another securitization deal if the market happens to be close we have a backup financing already in place at the extended by another two years, obviously not extending the securitization you pay it off and you do a term loan for another two years and then you.
Youll see what the right time is.
Well we're focused on.
Is really reducing the percentage of our short term debt and also reducing the percentage of our floating rate debt exposure. Obviously, we have caps in place already in some of those cops mature ended this year, but it's also those exact same deals that we're looking to refinance at the long term fixed rate debt ideal target again is eight to nine times, we're going to ebb and flow we're going to be in.
The higher end or lower end of that range on a quarterly basis.
On a full year basis, ideally, we'd like to be between eight to nine times for now as we continue to grow if at any point, we decided that we're going to halt growth completely.
We could use our <unk> proceeds after dividends and delever over a period of time as well.
That's great color I appreciate that and not to nitpick, but maybe a follow up on the decision to pay off the warehouse credit facility versus.
Subscription line, which I think Harry.
Our higher effective interest rate is that just to maintain more financial flexibility, maybe some color on that decision.
Yes part of it is maintain flexibility the other part of it is just sizing as well so.
The window, that's larger that's where refinanced that.
Even though it matures in 2025, but it's better to extend that by another.
Do a fixed rate deal for five years.
The subscription lines, we have to pay off because they are in lieu of equity just to reminder, we use subscription lines instead of calling on equity from our JV partners, we use them as a as a tool to allow us to to just calling the cash and control. The cost. So subscription line always has to be repaid one warehouse lines. The idea is extend that into longer term fixed rate debt.
Your next question is from the line of Eric Wolfe with Citi. Your line is open.
Hi, Thanks. Good morning, you talked about your stock trading around the nine cap rate you are buying homes and that sort of high 5% range.
I know that yields higher when you include the fees, but maybe help us understand how you're thinking through your capital allocation choices, what would cause you to pull back on acquisitions if anything.
Yes for sure we'll do not include the loss to lease so I'm not sure really that's a fair comparison I think the comparison is more probably an implied cap rate of closer to 775.
Versus where we're buying.
Homes it at closer to a six and then I would say if you add in the fee income, which is which can be substantial over time that gets us to about 707, five so it's basically neutral.
And then the other way we look at it is if we look at a single home. We showed this model before where we are acquiring in an ethical multiple basis.
And at the current time, we're acquiring at an <unk> multiple of about 12, and we're trading at 2014.
So we think thats accretive to continue to allocate capital to growth. So that's the that's the way we think about it we do have.
It's a small buyback program in place, but in order to do substantially more than that we'd have to use leverage.
And we don't think that makes sense. We don't think this is an environment, where we should be levering up to buyback our stock.
Again, the previous point, we run the math on that and it's not accretive given where we borrow today and so we think the best course of action is again to grow but grow at a more moderate pace complete the investment programs for JV Q and homebuilder direct which are investors are very happy with and then prepare ourselves for JV III.
Got it and I think we're about halfway through the quarter at this point would you say that you've already bought or under contract for the vast majority of the data on the rounds that you guided to.
This quarter effectively if you could maybe share the cabinet for Arizona.
Post capex basis.
Yes, John do you want take that yeah, sure, we're tracking well to that kind of 800, plus target as <unk> seen and as we talked about in our materials as well we've seen listing volume.
Pick up this quarter sequentially versus Q1, which certainly is.
It is helping also from a rent perspective, we're seeing much more stabilization or actually modest growth sequentially month over month from a rent perspective, which certainly is helping our cap rates in terms of where we're buying on a nominal basis.
It's really targeting that high fives low 6%.
Point in time, and so again, if we were as Gary mentioned earlier, if we were to target call. It 10000 homes a year, we buying closer to five five and a quarter five five range, but given our targets this year and our guidance range, we're much closer to 6% right now.
Your next question is from the line of Keegan Cole with Wolfe Research. Your line is open.
Guys. Thanks for the time here, maybe first on on turnover.
Obviously it remains incredibly low so just kind of curious is it simply just lower renewal rates that are driving this or is there something more what's your expectation throughout 'twenty three on your total turnover.
Yes, certainly I think that.
We self govern on our renewals and I think that has an effect, but we also have we pride ourselves in having superior customer service and we really take care of our residents were.
Many calls we are immediately we're trying to get the people within 24 to 72 hours and we tried to exceed expectations.
You've talked about being a people first company and we.
We have a lot of different programs that we are helping them with and so we think that really hasnt stickiness.
We also have seen the number of families that are in our portfolio to grow and that creates a stickiness factor.
Having said that we're also still have somewhat remnants of the pandemic I think as we come into this next.
The leasing season in the summer season, we will see that turn level will kind of move up a little bit into the 20 low 20 percents.
Ben now, but that's still really low compared to multifamily or where the industry has been in the past.
And then on the topic of rental rates through April spreads were truly impressive, especially on the new lease growth. Just curious what you guys sent out for May and June as far as both new and renewal lease rates.
Yes, so on the renewals we've.
We're sending amount it really at our CAD, 75%, 72%, 75% of our of the renewals go out at the cap rate or at a cap.
Depending on where people are on the loss to lease.
<unk>.
We're really.
Yes.
Yes, theyre going out like in the mid to high single digits, which is where our renewal cap rate is unless somebody is right.
As at market.
A little bit more into.
In the low single digits.
Yeah. So just I mean, let me just clarify.
The renewals are going out at six 5% plus.
Okay, and then and then and then and then the new leases are in the high single digits.
And that's that's really where we would guide to the really for the rest of the year right. So if you look at that if you assume as Kevin just said turnover of about 20%.
This is a blended rent growth in the low sevens right. So we're little bit ahead of that in April and so far in may.
But I think we feel comfortable with.
<unk> really to low sevens on blended rent growth, which is very very strong.
Your next question is from the line of Adam Kramer with Morgan Stanley . Your line is open.
Okay, maybe just a clarification question on your prior comments there Gary.
Just on the renewals I would just remind us where the cap is.
And then are there exceptions are if all goes well under market. It's been there for a long time.
But are there exceptions to the cap.
Just how youre thinking about the renewal cap.
Going forward because it could move around or is it pretty stable where it is.
Yes, we don't we don't have exceptions.
But we have moved the renewal cap up overtime, given the significant loss to lease in the portfolios. We are taking that into account, but we don't go home by home or market by market, but.
But we've essentially moved the renewal cap up to roughly 7%. So that is moving up and that provides you with a little bit more clarity why why why the renewal spreads are also taking out and why we think that instead of being at $6 five they might be a little bit higher over the course of the year. So hopefully that provides you with a little more clarity.
That does yes.
Paul maybe just on the new lease side.
Similar to a prior question, but if I just look at kind of April new lease versus where kind of February March were implied based on your prior January disclosure it looks like a pretty pretty good if we can accelerate acceleration in April versus February March.
Is that just kind of.
That's kind of what the market's a lot to do with that kind of more of a conscious decision so it'd be pushed new lease.
Maybe at the expense of occupancy is the wrong way to phrase it but kind of pushout, maybe optimize for new lease not not occupancy maybe just walk us through that and then if you could just remind us where the loss to lease as well that'd be really helpful.
Yes.
Sure. This is Kevin love to lease currently is about 15%.
And regarding to the occupancy and the increases we set ranges depending on where we are in a demand supply slight demand or economic conditions and so we will set.
Occupancy rates and to the extent, we get to the higher end of that occupancy range that we feel comfortable we start pushing rents and thats, where we were really.
We have been.
And if we get into that lower end of the occupants raised and we backed off on rent growth and so youll see from quarter to quarter, we will try to stay right now we're trying to stay kind of in the 97%.
Occupancy range, plus or minus and so.
When we get to the top of that right then we'll push rents harder and we should start getting below that.
Pull back on some debt so youll see that over time.
Yeah, and Adam the only thing I would add to that is the thing you have.
To remember is it really depends on the on which leases or tenants are rolling over and what's the tenor of that of that of that lease right and so where youre seeing a bit of variation from month to month and new lease growth really depends on the tenor of the leases that are rolling over right and so if we have more short.
Term tenor leases rolling over Youll see lower new lease rent growth. If we have higher tenure leases rolling over you'll see a higher new lease rent growth if that makes sense. So that's why in January we had significantly higher new lease growth because of the mix.
In February and March and moderated and now back in April it's accelerated again again, partly because of the mix of what's rolling over but the key thing remember over time is the loss of lease which is 15%. So we should recover that.
Should recoup that over time.
Your next question comes from the line of Stephen Macleod with BMO capital markets. Your line is open.
Great. Thanks.
Thanks, guys good morning.
Couple of questions here lots of great color. Thank you.
I just wanted to clarify the Q2 acquisition pace.
More than doubling is that largely due to just seasonality or is a portion of it also due to <unk>.
Better acquisition math, I think you sort of alluded to both in your in the Q&A. So just wanted to confirm.
Yes, it's largely because of the seasonality we've seen a pretty significant increase in listings, obviously, they're down.
<unk> year over year, but if you think about where the listings are from January they increased about 20%. So that basically allows us to.
That hits, our buy box and allow us to go faster. So that I would say is a key reason as to why we go faster from let's say 400 to 800 in Q2. The biggest governor overall, though is the cost of capital is the cost of debt right and so as we get confident that we can borrow at five five or lower than we can acquire at lower cap rates, which allows us.
To go faster and faster so again I think things are heading in the right direction.
But the Q2 guidance to 800 is largely predicated on.
Increased listings and.
And then to go faster than that it means we need a lower cost of capital.
Okay, great, let's clarify so thanks Gary.
And then just.
Just could you give a little bit of color around NOI margin in the <unk> business, just how you see that evolving through the year.
Yes, I mean, the NOI margin I think I think we feel pretty I mean look we never thought I don't think we ever thought Kevin right that it would get up to 69, 5% or 70% of you never in a million years. So.
It's far exceeded our expectations initially.
The initiatives that Kevin has talked about.
In terms of.
Cost prevention and some of the really exciting things, we're doing on the controllable expense side.
Are really driving that.
But I think I would just say over the course of the year, we probably feels stable right and that kind of high 69, or 69% rate change in order for us to ultimately have a seven handle on the margin, which I think is clearly possible. It does mean that revenues have to grow faster than expenses and I would say in our guidance.
Basically this year, we're assuming that revenue over over expenses is roughly the same which would mean that youre not really going to be able to drive margin expansion. This year.
But over time I think we're hopeful that we can.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Next question is from Jade Rahmani with <unk>. Your line is open.
Hi, This is Jason <unk> on for Jade.
So what are the implications.
Rates continue to stay high due to stick employment and inflation would you consider either reaccelerate acquisitions, but focusing on higher cap rate assets or considering raising third party capital and investing on leverage.
While we're not we're not going to buy it we're not going to chase yield.
Not something we're going to do.
We're very disciplined on the quality problem that we buy is extremely consistent.
And the market ultimately dictates what the cap rates are but we're not going to go out there and try to buy six five or 7% cap rates in order to make the math work and by an inferior quality home with lower household income. We're just we're just not going to do that so we are somewhat beholden to where the market's at.
Could we ultimately look at our model, where we where we go on Levered path as possible.
But I think as with Sam talked about we're probably just better off just to use less leverage rather than go unlevered. So that rather than go to 65%, maybe we're just better to go to $55 to 60% and from what we see today, we are seeing positive spreads again that could change.
But from what we see today, we are able to hit that positive spreads. So we feel great about that and we're just going to monitor kind of week to week month to month.
Great. Thank you.
There are no further questions at this time I'll turn the call back over to Gary Berman, President and CEO of Tri Con residential.
Thank you Brent I'd like to thank all of you on this call for your participation and we look forward to seeing many of you in June at the NAREIT Conference and speaking with all of you again in August to discuss our Q2 results.
Okay.
This concludes today's conference call you may now disconnect.
Okay.
Hum.