Q2 2023 Tricon Residential Inc Earnings Call

Good morning, My name is Sarah and I will be your conference operator today at this time I would like to welcome everyone to the Tracon residential second quarter 2023 analyst conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like.

To ask a question during this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question simply press Star One again I'd now like to hand, the conference over to your speaker today, Wojciech Nowak managing director of capital markets. Thank you. Please go ahead. Thank you operator and good morning.

And thank you for joining us to discuss.

On second quarter results for the three and six months ended June 30th 'twenty, 'twenty, three which worked bear to menu was really attributed yesterday.

I would like to remind you that our remarks and answers to your questions may contain forward looking statements and information system.

This information is subject to risks and uncertainties that may cause actual events or results to differ materially.

More information please refer to our most recent management discussion and analysis.

The annual information form which are available on SEDAR, Edgar and our company website.

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.

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 along by joining our webcast or you can access directly to our web site.

You can find both the webcast registration in the presentation in the Investor that's been off track on residential dotcom.

Under news and events.

With that I will turn the call over to Gary Berman, President and CEO of Trigon.

Thank you avoid tag our very own top gun and good morning, everyone.

During the second quarter, we continue to benefit from exceptional demand for our homes and solid operating performance, which in turn led to strong financial result for our company. These results would not be possible without the efforts of our dedicated employees I want to thank all of you for your commitment to excellence integrity and teamwork in serving our residents and community.

Let's turn to slide two I can share with you our E takeaways for today's call.

We delivered another great quarter of operational performance with same home NOI growth of six 3% NOI margin of 68, 3% occupancy of 97, 5% turnover of 19 point Super debt and consistently strong blended rent growth of seven corporate debt.

Second we remain focused on process improvement and cost containment.

We reduced our cost to maintain by 5% year over year.

Third we continue to grow responsibly, achieving our target of acquiring 805 homes during the quarter at a high 5% to 6% cap rate.

We also successfully closed the securitization transact in July at a weighted average yield of five 8%. This represents.

The relatively attractive cost of financing that is in line with your acquisition cap rate graph the bar homes in the current market environment.

I can also help to reduce our floating rate exposure and term out our debt maturity profile.

Looking ahead to the second half of the year, we plan to slow acquisition to about 400 homes per quarter in order to complete the investment programs per active joint ventures with lower overall leverage while selectively buying homes at a higher cap rate.

We've also tightened our full year guidance for core as appropriate fair to 55 to 58 that theme.

Same home NOI growth of six 7%.

And finally when debt financing conditions do improve we are well positioned to grow faster with about $60 million of annualized <unk> of about dividend $462 million of liquidity and most importantly, strong interest from private and institutional capital invested at the bar.

Turning to slide three let's step back for a minute to put her as the par business in protective demand for housing is outstripping supply and with skyrocketing 30 year mortgage rates. The case for rental has never been more compelling in fact owning a single family starter home today costs $1000 more per month than renting the same home.

Renting with crank on an affordable and attractive opt in for many American families.

We serve the need for rental housing by acquiring single family homes renovating them to a high standard and providing a hassle free lifestyle for our residents our acquisition program in NASDAQ for bonds to the demand we see everyday for accessible housing alternatives.

So, let's now turn to slide four to talk about the acquisition opportunity.

Within our target market prices of homes didn't meet our buybacks have declined by roughly 4% year over year, while rents have increased by about 1% taken together the combination of moderated home prices and slightly higher rents as well.

I predict vantiv cap rates by about 25 basis points compared to last year.

At the same time MLS listing volume in our markets has declined by about 30% compared to last year, given homeowners reluctance to sell and forego their attractively priced in place mortgages.

As a result, the buying opportunity is smaller than it was a year ago, but it's improving seasonally as we get into the summer months listing volume have increased by over 90% from December lows, which provides us with ample opportunity to achieve our acquisition targets.

With that being said, we intend to lower pace of acquisitions in the back half of the year to approximately 400 homes per quarter as shown on slide five.

We've made that has taken with our joint venture partners to complete the investment programs of JV too and homebuilder direct with overall loan to value target of 55 to 60 per debt rather than 60% to 65% previously.

This means we will buy fewer home, but still invest the same amount of equity.

Slowing the pace of acquisition, we can be even more selective in pursuing high cap rate without sacrificing our home quality or location.

We've seen that the securitization market is much more receptive to debt instrument that feature lower ltvs, which should translate to lower financing rates and better execution as demonstrated by our latest securitization transaction.

Interestingly with this shift towards the lower leverage model and our JV, we are seeing a convergence between private and public markets appetite for leverage which makes our strategic capital model all the more compelling for public shareholders.

Lastly, on slide deck I'd like to share with you an update on our Canadian multifamily built a core portfolio they continue to evolve and Steve new milestones.

Our latest project. The Taylor was recently awarded development of the year and recognize them with resort quality amenities exceptional living spaces and sustainability leadership. Among other features the building is three months ahead of its original leasing schedule, achieving 89% leased up by the end of June with average monthly rents of $4 63.

Canadian per square foot.

The Selby are fully stabilized building is also performing very well with blended rent growth of 7% this quarter and occupancy of 97, 8%.

I'm also delighted to announce that our latest project with proactive product much needed housing supply of both market rate and affordable apartments.

Steve Kroft selected <unk> and our partner Kilmer group to develop and operate at 725 unit purpose built rental apartment community in Toronto that Kobe City Center neighborhood, which will include 30% affordable unit.

<unk> now has nine projects totaling 5000, plus units in preconstruction or active construction.

As this portfolio stabilizes over the next few years, we estimate it will have a gross asset value close to $3 2 billion Canadian creating a lot of strategic optionality for tricorn. Moreover, the book value of our Bacon as portfolio is expected to double from 94 to $1 90 per share upon stabilized data and over the next three or so years.

Creating meaningful value for our shareholders.

With that I'll now turn it over to our CFO with damn granted 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 a world class team.

And you to focus on process improvement and cost containment across our business, while delivering an exceptional resident experience day in and day out.

Let's kick things off with a review of our key financial metrics on slide seven.

Net income from continued operation was $47 million compared to $406 million last year, which includes $124 million of fair value gains on rental properties against the very strong comp up.

$396 million last year as home price depreciation has moderated in recent months.

Core <unk> per share with 14 tonnage down to year over year.

<unk>. There was 11 also down <unk> <unk> from last year, but still providing us with ample cushion to support our quarterly dividend with an <unk> payout ratio of 47%.

Lastly, our <unk> book value stands at $14 nine.

Or $18 64 times in Canadian dollars up almost 7% year over year.

And I will note that our book value does not factor in the value of our strategic Apple.

Let's move to slide didn't talk about the drivers that contributed to our <unk> per barrel.

The year over year decrease can be attributed to strong NOI growth in the <unk> portfolio being offset by higher borrowing costs lower performance fees and then after the core <unk> from the U S multifamily portfolio, which was sold in Q4 2022.

Specifically.

Our single family rental portfolio contributed three tenths of incremental <unk>, reflecting NOI growth of 14, 9%.

This was driven by a seven 3% increase in average rent, 1% higher occupancy and three 6% increase in proportionate rental home count.

That's helpful.

Fourth the negative impact primarily driven by lower performance fees from the legacy residential development businesses.

A reduction in acquisition fee as a result of fewer at the par acquisition as well as a decrease in property management fees. Following the sale of the U S multifamily portfolio.

Our adjacent businesses added one reflecting strong results in our residential development as housing fundamentals remain robust.

This was partially offset by lower F. F O. Following the sale of the U S multifamily portfolio.

I do want to highlight that both our U S residential development business and our Johnson business are a great read through into the overall housing market and from what we can see housing demand is holding up exceptionally well.

Interest expense was up three times.

As we have higher debt balance to support the growth of our single family rental portfolio, along with higher average interest rates.

Meanwhile, on corporate overhead tax and other items. There was a one time positive impact because of lower compensation related expenses and a favorable tax recovery offset by higher DNA.

Let's turn to slide nine to talk about proportional debt profile.

We've been very proactive with addressing our near term debt maturities as we said we would.

I am pleased to report that as of today, we have repaid or extended all remaining 2023 met parity.

This includes the <unk> joint venture to subscription line, which was used to fund acquisition.

We have fully repaid debt by calling JV capital commitment.

As well as a bank term loan with an exciting extension often though we have exercised that in order to extend this loan by another year.

Subsequent to quarter end, we also use the proceeds of our latest securitization to repay the $124 million of floating rate debt that was temporarily used to fund acquisitions within as the part D V too.

And we extended the maturity out to 2028.

Although I'll dive more into this transaction on slide 10.

On July 11th we closed a $416 million <unk> transaction at 586% interest rate, which is an attractive cost of financing and in line with our acquisition cap rate for single family rental homes.

The securitization generated strong demand from 26 investors, which included four new investors to try calling and what three five times subscribed.

A key reason behind the strong demand and attractive pricing was the loan to value of 57%, which is relatively low compared to our prior offerings and underscore our fifth toward the lower leverage model with our JV partners.

Of note. The proceeds of this transaction helped to reduce our floating rate debt exposure by an additional 300 basis points.

29% in Q2 to 26% of total debt on a pro forma basis.

Let's move to slide 11 to discuss our capital allocation plan for the rest of the year.

Over the remaining two quarters, we plan to allocate capital towards the acquisition of around 800 homes.

This represents 125 million dollar investment for <unk> and will include 500 homes for the joint ventures, and 300 on balance sheet homes.

Part of our capital recycling program to replace older noncore homes and less attractive market.

With newer and higher quality homes in our core markets that our residents can enjoy.

We are finding that we can dispose of homes at mid four cap and reinvest the proceeds into the home at a high five to six cap, which makes for a compelling opportunity to recycle capital, while maintaining a stable balance sheet portfolio.

The acquisition program will be fully funded with a total of $130 million from operating cash flows and noncore dispositions.

Note that we also have available liquidity of $462 million on top of all this.

I'll end here with slide 12 to note, though we have updated our 2023 guidance this quarter.

This reflects a slower pace of acquisition and tightening of the expected range of our stay at home metrics.

This belief the tightening the core <unk> per share and maintaining the midpoint of this type of poker spare guidance.

Either guidance for same home metrics reflect a continued trend of low resident turnover.

Would lead to slightly lower rent growth as well as lower ancillary revenue such as early lease termination fees.

On the flip side, we benefit from lower turnover expenses and are finding success in reducing our controllable expenses.

This was partly offset by continued pressure on non controllable expenses, such as property taxes insurance and HOA.

In terms of our core <unk> per share guidance the midpoint remains unchanged.

Bringing up the lower end of the guidance is driven by strong at the bar and Brookdale housing fundamentals underpinning both U S residential development in our Johnson land development business.

The tightening on the upper end of the range to reflect the lower acquisition expectation.

By reducing our acquisition pace down to 2000 homes versus the prior midpoint of 3000 homes.

As we head into the second half of the year, we remain laser focused on cost control balance sheet flexibility and prudent capital allocation.

While keeping an emphasis on creating the best president experience possible.

And now to give you more insight into our same home metrics I'll turn the call over to the man, who had me Hello, Our Chief operating officer, Kevin Ball grid.

Thank you Sam and good morning, everyone I wanted to start today by recognizing the incredible effort of our operations and customer service teams, who delivered another exceptional quarter I continue to be blown away by our team's unwavering commitment to resident service and operational excellence and how they.

Keep raising the bar.

Let's move to slide 13 to talk about the drivers of our same home NOI growth of six 3% for the quarter.

And the topline revenue growth was driven by a six 7% increase in average monthly rent that was partially offset by a 50 basis point decrease in occupancy as we shifted slightly towards our rent growth bias into the spring.

Our rent growth remained healthy with blended rent increasing seven 4% during the quarter underpinned by nine 8% growth on new move ins and six 6% on renewals.

Our renewals reflect our policy of health governing would typically maintained 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 July we saw sustained levels of demand and rent growth coming in at a healthy eight 2% on new leases six 8% of renewals and seven 2% on a blended basis.

Our bad debt expense, which is embedded in the revenue numbers has continued to inch down due to successful collection efforts and is now near of pre pandemic levels at 0.9% versus one 8% in Q2 of last year.

Finally, other revenue decreased by seven 8% from last year.

Driven by lower late fees as our collection efforts 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 the services that enhanced our resident experience like.

Like smart home and renters insurance.

With the increased adoption year over year 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 resident experience.

Let's now turn to slide 14 to discuss those same home expense growth of seven 2%.

Horizon expenses was driven by property taxes, which were up nine 9% from last year, reflecting meaningful home price depreciation in our markets, we expect property taxes to be up around 10% for the full year, and possibly higher which is above our original forecast of 8% to 9%.

This forecast is based on assessments that have come in for key markets, including Texas, and Atlanta, which together represent 50% of our same home tax bill in.

In Texas, we feel good about the prospect of capturing some relief on millage rates.

But Atlanta is unknown at this time.

If we do achieve relief on melody grades we could end up at the low end of our expense guidance for the year.

Moving to other expenses repair and maintenance expense was down this quarter by three 9%.

In addition to experiencing a lower volume of work orders than in the comparable period, we drove cost savings by managing scope undertaking more work orders in house and achieving price reduction on numerous materials in our price book.

Turning all of our expenses are also down due to cost containment initiatives, such as focusing on repairs versus replacement.

Compressing the delegation of authority to put more eyes on scope, including increasing centralized review of larger jobs.

Next homeowners association costs increased by 36%, reflecting in placed in an HOA dues as well as a heightened level of violations imposed by HOA is coming out of the pandemic, which drove higher penalties.

And finally other direct expenses increased primarily from our monthly cost of providing same home technology to more resident and increasing utility costs.

With this I wanted to walk through our proactive approach to managing cost maintained on slide 15.

I am pleased to report that we achieved a 5% reduction in cost to maintain year over year.

While continuing to deliver an outstanding resident experience with an industry, leading Google score of four six stars.

We really think of three main areas of savings first our natural procurement program, where we focused on negotiating price reductions on materials to help offset inflationary pressures.

Next our scope management, where we actively refine and manage work scope, we aimed to repair versus replace or where possible and we focused on the 80 20 rule driving down the cost of the top 20% of turns that account for about 80% of the total cost.

And finally, our internalization efforts, whereby we use our in house team to undertake a higher number of work orders versus using outside vendors.

We have about 75% of our work orders completed in house and are on track towards our goal of 80% by the end of the year.

Our in house technical cost per work order is about $400 or 45% cheaper than using a vendor for similar kinds of work.

Not only are we reducing the cost to maintain but we are also seeing a stabilization in the mix between capitalized and expense items.

Recall that over the past 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 homes.

This was driven by longer average resident tenure and people spending 24 hours a day in their homes during the pandemic, which created more wear and tear.

We are now lapping those comps and so the mix of Capex versus opex should be less of a driver of expense variance going forward.

Turning to slide 16, and rail to give an update today on crank on vantage and the amazing progress we've made controlling out this novel industry leading programs.

We are really walking the walk on this one.

Icahn vantage is our cornerstone program aimed at providing our U S residents with a suite of tools.

Net financial goals and enhance the long term economic stability.

Since launching just over a year ago, we have made some exciting progress in every aspect of the program.

A few highlights include our financial literacy program, where we offer free access to workshops coaching and other resources to.

To help residents achieve their financial goals.

One thing we have provided over 263, one on one coaching sessions.

Our credit builder program, which has already helped over 2100 residents improve their credit score by an average of 53 point.

And finally, our down payment assistance program.

It does awarded 11 residents of past grant of up to $5000 or the purchase but their very own home.

All in all of these programs are meaningful and impactful to our residents.

Tracon warehousing provider that puts our resident first.

And their well being is at the core of how we operate.

Now I'll turn the call back to Gary for closing remarks.

Thank you, Kevin and closing it was a solid quarter and I want to acknowledge all of the outstanding efforts of our World class operations team, who continued to deliver unmatched resident experience while containing part.

As we head into the second half of the year. We're excited for what's ahead as demand remains extremely strong for professionally managed homes I will now pass the call back to the operator to take questions with that Kevin and I will also be joined by Don Allen <unk>, Andy Carmody, Andrew Joyner to answer your questions.

Thank you at this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.

One question one follow up.

The part of analysts limit. Please we'll pause for just a moment to compile the Q&A roster.

Yeah.

Your first question comes from the line of Eric Wolfe with Citi. Your line is open.

Hey, Thanks for taking my questions.

It looks like Youre expecting seven 3% same store revenue growth in the back half and I'm just trying to understand why the same store revenue would accelerate from the $6. Six you did in the second quarter. So can you just help us bridge that.

So the question is from what six 6% Youre, saying in the first half to seven 3%.

Well I think you had five seven in the first half. So just the math would say on a year to get to $6 five midpoint, you need 73 and.

In the back half that you put up six six in the second quarter and you show your drivers here lower occupancy and lower other revenue.

So I guess I'm trying to understand what changes in the back half of the year to kind of see that acceleration from the six six in the second quarter to seven 3%.

Yes, Okay I understand higher so I think one key thing is clearly bad debt write about the bad debt is stabilizing and I think we see that as really being a tailwind as we as we get into the second half of the year. Our collections through 30 days now are very close to where they were pre <unk>.

<unk>, it's 60 days I would say, they're at or even better than pre pandemic. So we've made significant progress on bad debt and that will act as a tailwind as we get into the second half of the year.

If you look at kind of where we were in 2022 bad debt was as high as 2%.

This quarter was 1%, we're expecting it to be in the low ones, but again that provides some of the difference and I think the tailwind in the second half.

Okay.

And then in <unk>.

You've been asked this question in the past, but the 8% new lease you saw in July and I get why that would be lower than your 15% Mark to market. If it's mainly driven by units or mark to market last year, So you're not you're not getting to some of those longer stained residents, but I guess I would also think that if you look at those longer duration tenants.

You know that the mark to market would have to be continuing to grow there. So maybe you can just tell us for that call it 80% of tenants that arent turning over.

How long are they staying on average how has that changed and what is the mark to market is just continuing to build there.

Will the loss to lease in the portfolio is 15% so it's staying pretty.

Constant at the same time, we're renewing close to 7%. So I think we think that's really positive.

But I think.

You should never look at one month, I think that makes a trend right because it really comes down to what the mix of the the residents that are turning and in July we had a majority of those residents turning with tenors less than 24 months and we don't have the same loss to lease on let's say tenors under 24 months. So that's why you are really seeing a new.

Lease growth only at about 8%.

And it's going to vary really from month to month, but what hasnt changed is the loss to lease and so we continue to feel confident about new new lease growth and that kind of 8% to 10% range, but it might be closer to eight.

Depending on the mix.

Yeah.

Your next question comes from the line of handles Sanjay with Mizuho. Your line is open.

Hey, good morning to you.

Yeah, Hey, there so maybe more on the decision to slow the home buying here in the past I know you've talked about.

Cap rates are cost of capital, even with the tight spread being good enough to hit the target IRR for your JV partners at.

Today's call, you're clearly changing the messaging a bit here slowing the pace wanting higher cap rate. So can you talk a bit more about the shifts why the ship now and where cap rates and IRS would need to be for you to be a bit more.

Thanks.

Yes, yes for sure I mean look we're just trying to be cautious I mean, we're operating in a very volatile environment, where interest rates in the benchmark rates are really oscillating pretty significantly from kind of week to week or quarter to quarter right. So what we really don't like is negative leverage we're allergic to negative leverage we want to make sure that we can.

Buy at cap rates that are at or above where we can finance and obviously, what we've seen the last few weeks as those benchmark rates have moved up since we did the last securitization, which was extremely successful so to extent that changes.

Then we were in a position again to go faster and I think the other decision that we've really made with our joint venture partners is let's complete the investment programs for both JV too and homebuilder direct but let's do it with lower leverage lower lower leverage parameters. We put the same amount of equity out we obviously buy less homes, but we do it with less leverage we think that makes sense because you read.

We don't get paid to take on leverage above 60% today we're.

We're seeing one of our private peers did a securitization at 72% and the cost of that incremental debt from 60 to 72 was closer to 10%. We just don't think that makes sense right.

So really at the at the end of the day, we want to keep the leverage from what we can see today at or below 60% and then and in doing so it makes sense to go slower, but I think I think the good news and al is that we're on track to complete the investment program for both of them by the end of the year.

We think we're gonna have still very solid returns and those funds are investment partners are very happy with the progress, we're making they're very supportive of our new funding and re upping.

And so as soon as it makes sense to go faster I can assure you we will be going faster.

I appreciate the color there and unsecured Ization since you mentioned it had a follow up on that front.

Can you talk a bit more about the decision to do a five year term here versus maybe longer term and potential appetite for more than what you're seeing in the market. Obviously youre looking at that piece of securitization debt maturing next year I'm wondering.

What's the plan I'm, assuming another securitization, but maybe some comments around the market what youre seeing in a decision to do shorter securitization of Universal Lager one thank you.

Yes, no problem. Thanks for thanks for the question.

The reason why we did that specific securitization as it was related to JV too and we have the time to securitization to the maturity of the joint venture. So the five years. The most we could have done in that specific case, because it just timing of maturity.

Our own securitization potential transactions I know, we have 2017 dash two maturing early next year, we would look to do longer than that obviously because that is all balance sheet homes, and therefore, we would potentially be looking at longer term maturities.

The idea is also spreading our maturity schedule and really moving stuff subs.

Subsequent to 2028 and moving stuff over to there we don't want any maturity in a single year. So obviously, we're going to be focused on that but.

But for the joint ventures, yet the coupled with the timing of the joint venture.

Your next question comes from the line of Brad Heffern with RBC capital markets. Your line is open.

Hey, Thank you good morning, everybody.

Another question on the guidance this quarter, both the acquisition and the NOI Guide has moved lower it didn't look like any of the guidance items that you provided would have provided a tailwind. So I'm curious what the offset was to those two items that kept the midpoint of the guidance from decreasing.

So are you asking where that where the tailwind.

Well I mean, I think I mean on the expense side, we're doing a great job controlling costs.

So we really we really expected at this point for controllable expenses to be roughly flat year over year, which is a really pretty incredible year I think given the environment. We're in so we feel really really good about that.

Just focusing on what we can control the lower turnover as Britain been persistently lower and that might sound negative is actually a real positive because if we can keep our residents in our homes for longer that's really what we want to do but that lower turnover.

Obviously means lower expenses it means lower revenue too, but it does mean lower expenses and I think those are those are the <unk>.

I think the question really at the end of the day and I think the major factor, which will determine how we do on the same home NOI is property tax right that that's obviously, 50% of our expense.

In Q2, we exceed 10% to really hit the lower end of the expense range, we needed to be at about 10% for the year.

If it's going to be 11, or 11, 5%, which is possible then.

We're going to be the higher end of the of the expense range right. So that's really the question.

We're trying to be conservative there. That's another reason why I think we've tightened.

The guidance because we have some concern.

Based on the assessments, we've seen to date that the property taxes could be higher than 10% and we know we're going to get relief in taxes on millage rates.

We're hoping we get relief in some of the other markets, but until we get that relief. We don't know right. So it's just rather we'd be a little bit more conservative.

And Brad if I can add a little bit I think what youre asking is why do we bring up the low end of <unk> guidance and what might be helping us. Another thing to note is the for sale housing business is doing tremendously well. We went into this year thinking we were going to have a housing recession caused by how high interest rates that hasnt happened. So for sale housing is doing well Johnson is doing well.

You can see that in the numbers and we expect that to continue to be a tailwind.

Okay got it thanks for that.

And then on the next gave me is can you just talk about how those conversations have been going and should we also read this lower leverage strategy into what's likely to happen with us.

Yes, I mean, the conversations have been really positive all our existing partners are excited about their investments.

They are under allocated I think single family rental they see it as a kind of a core part of their portfolio going forward. So I think we feel great about our partners re upping and creating a new fund.

We expect to be able to launch that by the end of this year or maybe early into next year.

And I think on leverage.

I think that remains to be seen but I think if we're in a current environment, yes, we're more likely to have leverage parameters at 60% or lower as opposed to 60 or 65% and we're fine with that I mean, we've always said, we're agnostic to leverage.

If it makes sense to use lower leverage in the funds will do that and obviously, we like it from a public market perspective, because it creates more conversions with the with the leverage metrics.

Your next question comes from the line of Adam Kramer with Morgan Stanley . Your line is open.

Hey, yes, thanks for the time guys.

Ask about insurance expense.

And I guess more specifically around kind of your insurance renewal for 2023, just remind us kind of when that was how much of a premium one up and then also if you adjusted your kind of your coverage levels deductible as well.

I'm, Adam I'm going to pass it on to Kevin.

Sure. Thank you Adam yes.

Our insurance at the end of the year December one is when we did it for 2023, we think it gives us a little bit more visibility by that time the.

Hurricane season is behind US there is a lot more things that are there are known I think it helps us a little bit with.

With our costs.

Compared to others and we did in fact, we did adjust our deductible a bit which helped.

And then we brought down a little bit south of insurance was brought down to compensate for that.

I think that one of the reasons, we've done well so far.

We are very proactive in our communications with our insurance companies, especially during weather events, we were on the phone early and often.

We also brought them into our offices, we toured them around and see how we engage technology. How we go through all of our processes. We're also we're buying newer homes for our own portfolio.

And have put water sensors and so all of those things are really helping I think with the with our pricing. So we've found that half of the increase was due to home values going up and the other half due to rate increases.

Got it that's really helpful. And then just I guess it ties a little bit back to tariffs kind of initial question, but just thinking about.

Can you give us some with central revenue drivers and I guess, specifically double clicking on bad debt.

Wondering kind of what.

It looks like it kind of moved a lot year over year, I think it moved quarter to quarter to quarter as well and I think part of that may be driven from the kind of rental assistance that you received a year ago.

<unk> 2021 'twenty two to 'twenty, two maybe just remind us if you have those numbers handy the rental assistance.

And $1 22, and <unk> 22, just maybe you can kind of get a better sense for kind of a year over year comp on bad debt.

Yeah. So.

Adam first of all I think on bad debt I mean, we only got about 500000 rental assistance this quarter and I think we got about $3 million in the previous period. So that's a big difference and that's it that's the thing I just caution you on I'm looking at some of the comps not just for us but it appears it's really noisy when you go back and look at the pandemic because of the amount of rental assistance that was received and it can really.

Differ from quarter to quarter, and then there might've been different approaches to collection processes during that time too. So I think we're now getting to a point, where we're starting to see a stabilization and I talked about that earlier in terms of kind of looking at delinquency after 30, or 60 days or how much rent. We collect so I think we're in a really I think we're in a really good spot, but thats, explaining I think some of the noise.

In bad debt and again I think the overall messages is collections are going back to normal on residents are able to pay and rental assistance is burning off.

Which is again, creating the noise in the comp but overall, we're in really good shape. One other thing I'd just tell you on insurance So insurance is.

Is up 12% in our same home but.

But it's only up about 10% on the total portfolio and a difference just in the same home as we've got a little more exposure to Texas and California. So that just to complete the answer to your last question.

Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

Your next question comes from the line of Keegan call with Wolfe Research. Your line is open.

Yeah. Thanks for the time guys. So first one here just what was the blended rate increase the Senate for August and how should we think about your trajectory of blend blended spreads throughout the balance of the year.

Hey, Kevin you want to take that.

Sure, Yes, we're looking.

Much like July it's we're keeping in the same level that we're in July we're really looking at kind of high high single digits for new leases.

We're trending towards that six 9% to 7% on renewals going forward that will probably follow up a little bit as we get into the winter, but for the next couple of months, we're going to be in the same same range.

Got it that's fair yes.

I'll just add to that I think turnover on turnover, we're looking at probably about 20% for the year. Its obviously ticked up a little bit in July .

But that 20% is kind of lower than where we thought it would be we thought it'd probably be between 20, and 25%, but that's really driving the blended rent spreads to be closer to seven or in the low sevens.

Yes, and also an assurance on rates or demand is still really strong our leads per available home or per marketed home. We're up over what we were pre pandemic.

Quarter to quarter, we're up.

Over 30% in leads per available home and that remained in the July and we're seeing the same strength into August so demand is super strong.

Uphold our occupancies and rent growth.

Got it and then on the speaking of demand and just kind of curious what sort of level of financial health are you seeing your new applicants.

New applicants and how does that compare to a year ago.

I'm sorry, Kevin over to you talking about the demographics like the financial health of our residents Yeah. Yeah, No. Your new applicant specifically the people that are applying now sort of where does where does the rent coverage ratio stood out and how does that compare to a year ago.

Yes, interestingly the rent coverages remains static its at 23% rent to income.

But the household income has grown as rents have grown casino in order to keep the same ratio. So where we are like 90 596000 on average on the portfolio in the last couple of months.

Really seen applicants out of $100.

Per household so there has increased.

FICO scores have also increase where the average is around 650 654 were in the 670 672 for the current applicants. So we see strength continuing strengthening in the African pool.

Okay.

Okay.

Okay.

Your next question comes from the line of Jade Rahmani with <unk>. Your line is open.

Hi, This is Jason <unk> with.

With respect to third party equity under management in your view, what areas will drive growth over the coming years.

What will drive the growth in third party capital strategic capital.

Yes over the next year.

Yes, I mean, it's going to come from the launch of JV three right. So we feel really good about that as I as I talked about in previous Q&A.

Started having conversations with our existing investors.

They've all given us positive signs or indicators that they'd like to re up and.

So we're really anticipating a launch of that fund at the end of this year early next year, and obviously that will drive.

Hopefully a fairly meaningful increase in the third party AUM.

Got it got it thank you.

With regards to the ancillary businesses are.

Are you seeing any acceleration in <unk>.

Drive a decision to potentially monetize earlier.

Well the for sale housing business.

<unk> is being monetize naturally as we sell lots and homes and that business is going exceptionally well we talked about how we were worried about that coming into the year.

But the business is doing better than we than we thought and is certainly providing a tailwind to our core <unk> earnings. So we feel great about that we had a really strong contribution from this quarter.

And that's just going to naturally wind down over the next few years as we just liquidate the remaining portfolio, but we only have if you look at the for sale housing business, we probably only have about 90 or $100 million left on balance sheet.

The other business being our Canadian multifamily is also doing exceptionally well we talked about some of the operating.

Parameters at the Salve in the Taylor.

We're hitting all the development milestones in the construction projects. So we think within the next few years, we're going to have a significant.

Portfolio thats going to be unique very valuable and stabilized and I think theres an opportunity at that point to consider different options I don't know what those are going to be.

But I will tell you that if we wanted to lift it or do or monetize it we would have that opportunity. We just remain confident that we never gonna created a real a lot of value and harnessing that portfolio, one way or the other.

Your next question comes from the line of Jonathan Culture with TD Securities. Your line is open.

Thanks, Good morning first question.

Guys seem to be more active in terms of buy homes on your own balance sheet. Both both this quarter and then your guidance for the rest of the year, maybe you can give us a little bit of color on that.

Yes, Hi, John Yeah for sure I mean look we've gone a little more leeway from our partners too.

To buy homes on the balance sheet, because we're disposing homes that are wholly owned right and we think it's just a great use of capital right now to sell homes wholly owned homes, where we can sell those at low four mid four cap rates and then take that capital and replace it.

We cycled it into homes that are closer to a six cap. So that's essentially what we're doing we're also high grading the portfolio.

As we do that because we're exiting southern California in southeast, Florida, where we have an older portfolio of those homes have a higher capex burden and were able to rotate that capital back into other areas in the country.

That are with newer homes and lower Capex. So we think it makes a ton of sense, we're going to continue that in the second half of year. That's why we're saying of the 800 homes roughly 300 of.

Those acquisitions are going to be wholly owned and they're going to largely be funded by dispositions.

Just add to that Jonathan as well as a part of the disposition proceeds also we benefit from the 10 31 exchange, where we could use the we can save on the taxes on the wholly owned portfolio of homes that we sold so we could take that and put it in new homes as well.

Okay. That's helpful. And then just secondly on the on the Taylor.

And I guess, you're leasing it up at around $4 63, a square foot is that is that market rent or are you going a little bit under just to get the building flolan and you'll get a good bump.

<unk> next year.

I would say that slightly under market.

Because obviously when youre doing when youre doing a lease up and we are using some concessions were using up to four weeks.

But I would say mark its probably closer to four and three quarters or $5 in that in that location. So it's a little bit low.

So we're building a little bit of loss to lease in there, but I think over time, we'll capture that.

There are no further questions at this time I will turn the call back over to Gary Berman, President and CEO of Tracon residential. Thank you operator, I would now like to thank all of you on the call for your participation. We look forward to speaking with you again in November to discuss our Q3 results.

This concludes today's conference call. Thank you for joining you may now disconnect your lines.

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