Tricon Residential Inc. Q1 2023 Earnings Call
Good morning, My name is Brent and I will be your conference operator today.
After the Speakers' remarks, there will be a question and answer session.
He would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question Press Star. One again. Thank you I'd now like to turn conference over to your speaker today.
Wojciech <unk> managing director of capital markets. Thank you. Please go ahead.
Thank you operator, and good morning, everyone and thank you for joining us to discuss <unk> first quarter results for the three months ended March 31, 2023, which were shared in the news release distributed yesterday.
I would like to remind you that our remarks and answers to your questions may contain forward looking statements and information.
This information is subject to risks and uncertainties that may cause actual events or results to differ materially for.
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 would also like to remind everyone that all figures are being quoted in U S dollars unless otherwise stated. Please note that this call is available by webcast on our website and a replay will be accessible there. Following the call. Lastly, please note that during this call we will be referring to a slide presentation that you can follow by joining our webcast or you can access directly through our website.
Can find both the webcast registration in the presentation in the investors section of track on residential Dot com under news and events with that I will turn the call over to Gary Berman, President and CEO of triangle.
Thank you for taking good morning, everyone. We got a great start to 2023 and I'm excited to discuss our Q1 results with you.
Turning to slide two so I can share with you our key takeaways for today's call.
First we delivered another solid quarter of operational performance with no evidence of economic weakness in our single family rental business.
Same home NOI growth of six 2% and near record NOI margin of 69, 5% high occupancy of 97, 3% low turnover 16, 8% and consistently strong blended rent growth of seven 2%.
Second we continue to grow responsibly acquiring 409 homes during the quarter.
In response to significant demand for our homes, we plan to double our acquisitions in the second quarter as the MLS listing volume increases during the spring selling season.
We remain committed to growing our business over the long term and our strategic and responsible way.
Third we are focused on process improvement and cost containment. During this period of slower growth by driving cost savings and corporate overhead and property operating expenses.
At the same time, we strengthened our balance sheet by refinancing over $100 million of near term maturities on a proportionate basis, and reducing our floating rate debt exposure to 26% from 29% last quarter.
And finally when market conditions do improve we are well positioned to grow with about $55 million of annualized <unk> less dividends and $2 6 billion of available capital, including liquidity on our balance sheet and third party unfunded 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.
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%, France is 2019, interestingly, though our stock price is now back to 2019 levels, which doesn't make much sense. When you look at the value has 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.
It'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 there is 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 excluding the loss to lease in our portfolio.
Green Street horizon, similar valuation or implied weighted average cap rate of four 7% for our market coverage through their 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 to 10000, we believe the cap rate would be close to 5% quarter percent.
So, let's compare that with the public market Franco is currently trading at a seven 5% implied cap rate based on stabilized NOI.
They 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 overtime that public markets 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 tricorn for those that have a longer term investment horizon.
Moving to slide for demand for our rental homes continues to be robust just show. This we focus on two key indicators monthly lease and monthly applications per available home.
You can see the seasonality was more pronounced in Q4 than in prior years with leads and applications.
However to 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.
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 up what's interesting is the supply it looks like it's starting to stabilize at levels that are slightly below what we saw pre pandemic anecdotally just finally brief.
With research that was recently published by the National rental home castle, 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 and stabilizing supply of rental homes provides a compelling backdrop for our business.
On slide six you can see how this translates into rank 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, our rents are actually up 3% to gather this combination of moderated home prices and slightly higher rates I would like to an expansion in <unk>.
Rates of about 30 basis points. While this is directionally positive MLS listings volume in our market has declined roughly 20% year over year, given a homeowner's reluctance to sell if we're growing up 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 just pure and appear to be moving back up. Moreover, listings. Following 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 is 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're targeting cap rates of five.
Five 5% to 6%, albeit with a reference closer to 6% to match our expected cost of debt financing 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 in the quarter, the five and three quarters percent, we could buy a lot.
More homes with that I'll now turn it over to our CFO , Sam 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.
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.
Or $18 89 in Canadian dollars.
Up almost 19% year over year.
I'll 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 dry cough proportion 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.
As a bolt from fees increased by 3%, primarily driven by higher Johnson development fees, including $3 5 million earn from large bulk sale of commercial Lance.
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% and <unk> reflect the strong results in residential development driven by healthy for sale housing demand offset by lower F. A fall 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 output 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 had floating rate warehouse lines to find acquisitions in the short term.
This is not a permanent part of our capital structure and as an exposure we seek to access will be term out.
And roll into fixed rate instruments.
Over time as we continue to grow our percentage of floating rate debt will also continue to go down.
I also want to highlight that more than 74% of our flip floating rate debt is subject to caps, which is explained on slide 12.
Rising interest rates had been a headwind for our floating rate debt as.
As well as new fixed rate debt used to grow the business.
While we mitigate some of these higher desktop 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 right for an increase of $25 150 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 well 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, We've 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 renewals.
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.
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 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 saw 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, we're also leaning it's laid down as our turnover remained low at 16, 8%. Thanks.
Thanks to our focus on superior customer service, along with a greater proportion of costs being capitalized given the more extensive work being done on homes with longer resident tenures likewise with putting in place process improvements and cost containment initiatives that have brought down the combined expense and capitalized.
Over costs by 14% compared to last year.
Next homeowners associations costs increased by 14, 5%, reflecting about 5% inflation in HOA dues as well as a heightened level of violations imposed by HOS 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 costs 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.
Then 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 are seeing 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.
It's created more wear and tear.
We are 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 they transit to their home in an Uber style function, which we think is really cool and adds 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 in county.
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 Kelsey.
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 <unk> benefit from this program and another one who is currently in escrow.
At <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 Americas 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 <unk> portfolio is expected to double from 89 to.
<unk> 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 Kevin.
I will also be joined by John <unk>, Andy Harmony, and Andrew Joyner to answer questions.
Okay.
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. It with an early days reference.
Does that reference pertained to the uncertainty over thank you.
U S economic weakness, which you havent seen thus far or a possible acceleration of acquisitions, which can be a key towards hitting the upper end of your guidance range.
Yes, it's the latter.
Walter I mean, we don't see any weakness in our fundamentals at all.
On the ground.
And the fundamentals for rental housing are extremely strong.
Moderated obviously, a little bit since the pandemic, which was really an anomaly, but as we explained in our presentation is stronger than where we were in 2018 in 2019, which we would characterize back then 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> per share.
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.
<unk>, but but.
From everything we can see today things are heading in the right direction right and as we've been clear.
We feel very confident about our ability to double acquisitions in Q2.
And 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 seem.
To be coming in we've talked about green shoots.
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 five to kind of seven year 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 60% 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 were the five five to six would have been three months ago or so.
<unk> been a bit higher.
Yes, yes, Mark I would say probably around.
Easily could have been upwards of six 5%. So that's significant move in right. I mean, if you look at the five year Treasury today, I think it's about three 5% three 5%.
Spreads look at look like it's 60% LTV at about 200 basis points that 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 remain 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.
2% of revenue this quarter still targeting 1% by the by the end of the year what factors do you foresee driving that ratio down a bit relative to Q1, and what would the expected kind of rent 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 our government rental assistance money that came in was three five times, what we got this quarter.
In addition to that we also received last year a lot of.
Past due balances will receive that quarter and we also had a number of payment plans where gains we try effectively.
And last quarter of last year.
That said, we're still continuing to improve during the middle of the pandemic. We are at two 9% bad debt. So at one point too we're improving last quarter in Q4 were one three so even in Q1 of this past quarter, we had half the.
The government rental assistance that came in that we got last quarter and yet our bad debt improve.
So we continue to see improving I think some of the headwinds are we still see some of the sports that are backed up a little bit right now.
And then with the government rental assistance, you'll really coming to an end that is going to.
So keep us from getting there faster.
On a rent to income rate.
Bill really at 23% interestingly over the periods.
As rents have lines.
The income of our residents were now in the trailing 12 months, we've been gas and 95100 thousands has been the average household income for residences. It's increase in its kept the rent to income.
<unk> really.
Our resin profile has strengthened.
Over the FICO scores have also improved so we see ourselves getting back down to.
1% towards the end of the year recall prior to the pandemic we were at <unk> eight.
8% or 25 months in a row. So we hope ultimately to get there someday, but we're hoping to get to 1%.
Got it okay. The last one for me just on the same store expenses.
Where the growth came in much lower than peers.
<unk> identified cost containment of the key focus for you.
You also mentioned that the R&M benefited from a vendor rebate program higher refunds on that can you quantify what the year over year change was for that and maybe give us 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. So 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 close 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 mara.
If I can add just a little bit of color just on the vendor rebates we have several.
Relationships like that with a lot of them are 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.
You expected rebates for 'twenty three.
What percentage of that would have been achieved in Q1.
Yes.
How much of that have you 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, everybody 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 it.
Additional savings from those programs.
So I.
I'd say the great majority of what you're seeing is due to the cost containment programs, we've worked really hard.
The other expenses down I mean these are this is one of the things that we can really control right. So we have programs.
Sure.
<unk> on the on.
The R&R.
R&M and the turnover.
Using more internal labor that we did before and we're finding that on a like for like work order where savings of about $400 per work order when we do something in house, we're now up to 75% of our quarters.
The house by in House Labor and up to 15% of the work. That's done on turns are now done by in house 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 a price book that we use throughout the country that assistance. So that we're all using the same type of pricing.
We've been able to get savings on over 670 <unk> line items.
It is going to save about $1 $3 million for the year.
And then in addition, we're working to.
Yes.
Work with our vendors and improve.
Yeah.
And then we've also been working on our scope.
Refinement. So we have the delegation of authority that we've compressed. So we're looking at all scopes. In addition to just working to repair more than we replace so we'll repair and HVAC unit.
Replacement, we're looking at haven't workout longer also will do like touch ups versus painting, a whole wall are painting a whole house.
To help that.
Still live really well clean and functional and the same is we will look at carpet replacement for before we might have replaced carpet throughout the whole downstairs and now it just needs winners.
So the scope refinements that we've been working on as well as the price book.
Integrating 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 III.
In your prepared comments I guess is there any update on 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 thats 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.
Probably come down about 5%, so we might be 55% 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 thats 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 in 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.
I think we're fine obviously is of course, if we get the benefit of being able to reinvest more capital. So we're I think we're finding the court.
At this point in time.
Down the road in the future as you know if you were to re domicile. That's it that's a different question, where if you did then it might make more sense to be a REIT.
Your next question is from the line of Handel St Juiced with Mizuho. Your line is open.
Hey, there thanks for taking my question.
The first one I guess for with them on the leverage share ticked up.
By about a turn 82.
It seems like some of that might have been tied to the loss of the JV EBITDA, but can you talk about are all about leverage how you think about leverage in this current environment.
What the target leverage that you.
We'd like to sell to and when do you think you'll be able to get there. Thanks.
Great. Thank you.
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 there the idea is 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've submitted our extension notice to extend at our option by Phil by one more year.
The other two would be one of them will be refinanced on looking at doing it.
Some sort of refinancing around June or July timeframe in one subscription line will also be paid off.
Next year, we have one securitization is maturing in 2017 does 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 is not extending the securitization you pay it off when you do a term loan offer another two years and then you use.
See what the right time is.
What 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 caps mature end of 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 wed like to 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 appreciate that and not to nitpick, but maybe a follow up on the decision to pay out the warehouse credit facility versus.
Friction line, which I think Harry.
Our higher effective interest rate and 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 some deal does the window, that's larger that's where refinance that.
Even though and 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 constant control. The cash. So subscription line always has to be repaid first 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 implied cap rate. When you are buying homes, and then sort of high 5% range.
I know that before 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. It will not include the loss to lease so I'm not sure. That's a fair comparison I think the comparison is more probably an implied cap rate of close to seven 7%.
Versus where we're buying.
The homes that are closer to a six and then I would say if you add in the fee income which.
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 show this model before where we acquiring on an <unk> multiple basis.
And at the current time, we are acquiring at an <unk> multiple of about 12, and we're trading at 2014.
So we think that's accretive to continue to allocate capital to growth. So that's the way 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 the 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 our investors 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 date on turnarounds that youre guiding to.
This quarter effectively and if you could maybe share the cap rate for Arizona.
Post capex basis.
Yes, John you want take that yeah, sure, we're tracking well to that kind of 800, plus target as you've 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.
He 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 are buying on a nominal basis.
It's really targeting the high fives and low <unk> at this 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 and a half range given our targets this year and our guidance range, we're much closer to 6% right now.
Okay.
Your next question is from the line of Keegan coal with Wolfe Research. Your line is open.
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 board whats your expectation throughout 'twenty three on your total turnover rate.
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.
On many calls we are immediately we're trying to get some people within 24 to 72 hours and we tried to exceed expectations.
Talk about being a people first company and we.
We have a lot of different programs that we're helping them with and so we think that really has a stickiness factor. We also have seen the number of families that are in our portfolio 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'll see that turn level will kind of move up a little bit into the 20, low 20, percents and where we've been 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 was truly impressive, especially on the new lease growth. Just curious what you guys sent out for for May and June as far as both new and renewal lease rates.
Yes, so on the renewals we've.
We're sending them out it really at our CAD, 75%, 72%, 75% of our of the renewals go out at the cap rates are at our at our 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.
Is at market.
A little bit more.
In the low single digits.
Yes, So just 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% that.
That gives us a blended rent growth in the low sevens right. So we're a little bit ahead of that in April and so far in may.
But I think we feel comfortable with.
Guiding 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.
Hey, maybe just a clarification question on your prior comments there Gary.
Just on the renewal can you just remind us where the cap is and then kind of you are there are exceptions, but if a home is well under market.
For a long time.
Are there are exceptions to the cap.
Then maybe how youre thinking about the renewal cap.
Going forward kind of 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 portfolio. As we are taking that into account, but we don't go home by home or market by market.
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 they weren't wildly widely renewal spreads are also taking up 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.
And 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 significant acceleration in April versus February March.
Is that just kind of.
That's kind of what the market was that kind of more of a conscious decision to maybe push new lease.
Maybe at the expense of occupancy is the wrong with Fraser, but kind of a push maybe optimize for new lease not not occupancy maybe just walk us through that and then if you could just remind us what the loss to lease as well that'd be really helpful.
Yes.
Sure. This is Kevin love to lease currently is about 15%.
Regarding to the occupancy and the increases we set ranges, depending on where we the argument 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.
Where we've 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 like in a 97%.
Occupancy range, plus or minus and subsidies that we get to the top of that right. Then we'll push rents harder and we can start getting below that.
Yes.
So youll see that over time.
Yeah, and Adam the only thing I would add to that.
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 tenure 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 keeping remember over time is the loss to 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.
A questions here lots of great color. So 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.
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 seasonality we've seen a pretty significant increase in listings. Obviously they are down meaningfully year over year, but if you think about where the listings are from January they've increased about 20%. So that basically allows us to.
That hits, our buy box and allows us to go faster. So that I would say is the key reason as to why we go faster from let's say 400 800 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 that.
<unk> increased our listings.
And then to go faster than that it means we need a lower cost of capital.
Okay, Great Thats clarifies and thanks, Gary.
And then just.
Could you give a little color around <unk>.
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.
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.
It's far exceeded our expectations.
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 or.
Are really driving that.
I think I would just say over the course of the year, we probably feel it's 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. What it does mean that revenues have to grow faster than expenses and I would see in our guidance.
Basically this year, we're assuming that revenue over <unk> 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. Your next question is from Jade Rahmani with K VW. 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 re accelerating 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 of home 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 unlevered path as possible.
But I think as with Sam talked about we're probably just better office 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 Tracon 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.
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