Q3 2023 Tricon Residential Inc Earnings Call
Good day my name is Karen and I'll be your conference operator today at this time I'd like to welcome everyone to the Tracon residential third quarter 2023 Analyst Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.
You'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question press the pound key.
I would now like to hand, the conference over to your speaker today, well Votek Nowak managing director of capital markets. Thank you. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us to discuss strike on third quarter results.
Three months and nine months ended September 32023, which was 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.
Information are 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.
Can follow by joining our webcast or you can access directly through our website.
You can find both the webcast registration on 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 Boyd and good morning, everyone before we start I want to take a moment to thank our exceptional team who play a critical role in the strong results. We are presenting to you today, our team's unwavering dedication to our residents and the communities. We serve is fundamental to our culture and I believe it's one of the key reasons, our company continues to perform well quarter after quarter.
Let's turn to slide two so I can share with you our key takeaways for today's call.
First we delivered another great quarter of operational performance with same home NOI growth of 6% NOI margin of 68, 5% occupancy of 97, 4% turnover of 18, 8% and consistently strong blended rent growth of six 8%.
As always we remain laser focused on driving sustainable long term shareholder value amidst a volatile capital markets backdrop by recapturing our as if our loss to lease driving overhead efficiency and advancing our Canadian multifamily developments.
Third we remain disciplined with acquisitions, we acquired 410 homes in the quarter largely through our capital recycling program, where we essentially selling at a low 4% cap rate and reinvesting the capital it fixed caps I'm also happy to report that we've now substantially completed the investment programs of <unk>, JV too and homebuilder direct joint ventures.
And are now gearing up to launch <unk> three.
In terms of guidance, we maintained our full year outlook for core <unk> per share of 55 to 58 sets tightened our same home NOI growth of 6% to six 5% and slightly lowered our full year acquisition guidance to 1850 hubs.
And finally, we are well positioned to grow with about 60 million of annualized <unk> less dividends $433 million liquidity and most importantly, strong interest from private institutional capital to invest in that so far.
Institutional investors remain enthusiastic about the fr and are increasingly viewing the sector as a core or core plus investment opportunity, which should enable us to raise strategic capital with lower leverage parameters and are higher for longer environment.
Turning to slide three I want to step back for a minute and touch on our compelling fundamentals that underpin our <unk> business. While we are clearly operating in a difficult macroeconomic environment. At this time, we believe <unk> remains one of the most attractive real estate investment opportunities. This decade the.
The story is very simple.
Man for housing is outstripping supply demand is being driven by demographics and right now the millennial demographic cohort is in its prime years of household formation.
Millennials represent a larger group than the baby boomers and they need quality affordable homes in good neighborhoods as they form their own families mean.
Meanwhile, the supply of new housing is not keeping up with demand ever since the great Financial Crisis America has been under building homes and housing intensity as measured by housing starts per thousands persons remains below prior recessionary levels.
As a result of this demand supply imbalance homeownership has become less accessible as shown on slide four over.
Over the past 20 years, the median price of a home in the U S has grown from three nine times average household income to a far less affordable five two times average household income today.
This increase was mitigated somewhat by ultra low interest rates over the past few years, but now thats no longer. The case is the 30 year mortgage rate has skyrocketed towards 8% and such a distorted environment for homebuyers. The case for rental is more compelling than ever in fact, what's astonishing is that owning a single family starter home today costs $1000 more per month.
And renting the same home. This is what makes single family rentals, so compelling for many American families.
So turning to slide five it's no wonder that as if our operating fundamentals remained so solid some might ask why buy when you can rent a professionally managed home for much cheaper with.
What's interesting is that notwithstanding the turbulent times, we are living in as if our operating performance remains remarkably steady.
Key indicators, including NOI growth occupancy and turnover remained robust and consistent when compared to the same metrics two years ago. When we were emerging from the COVID-19 pandemic and enjoying extremely low interest rate environment.
Whereas <unk> steady as she goes housing affordability has eroded significantly and the capital markets backdrop has been dismal the broader U S. REIT index is down by over 30% in two years, while the U S. Five year Treasury yield has more than quadrupled and its very dislocated environment. We're doing what we always do focusing on the things we can control.
We'll.
First on the list as acquisitions as you can see on slide six we're being thoughtful with acquisitions and are focusing our efforts on our capital recycling program rather than growing the portfolio, we've been able to sell older homes in less desirable locations at very attractive cap rates near 4% and recycle the proceeds to acquire newer vintage homes in our core markets that <unk>.
Just a growing demand for our renters require less capex to maintain entering going in yields of 6%.
So far this year, we sold 533 homes with gross sale proceeds of $191 million and in turn acquired 546 homes for a gross investment of $170 million and by matching dispositions with acquisitions, we expect to save $20 million and tax expense. This year through a tax efficient 10 31 exchange program.
We remain focused on external growth over the longer term, but won't ramp up acquisitions again until we officially launched our new <unk> JV and.
In a period of slower acquisition growth, we've been able to focus more on the revenue and expense performance of our existing portfolio are.
A key opportunity in this regard is embedded loss to lease, which we discussed on slide seven.
Our policy of self governing on renewals coupled with longer resident tenure has resulted in an estimated loss to lease of about 11% across our total proportion of the portfolio and around 14% in our same home portfolio.
Most of that loss to lease is sitting with residents that had been in our homes for three years or more and represents an opportunity of about $40 million in annualized revenue.
We haven't captured much of this loss to lease on recent lease trade outs because the same residents are staying in our homes longer and represent only one third of our turnover in a given quarter or.
Our plan to recapture the sizable mark to market is to push renewal rent growth, which has been trending up post pandemic and to responsibly raise rents above our self imposed caps in situations, where residents have significant loss to lease we're still being thoughtful in our approach with residents for seeking a strike the balance when the delta between existing rent and market rent is large.
But more importantly, we believe the loss lease opportunity provides a multiyear runway for sustained rent growth on renewals, which is a key driver of overall revenue and NOI growth for Tracon.
Looking at slide eight.
I want to point out that the long term benefits of our resident friendly approach to revenue management over time, our renewals have been below those of our industry peers, but new lease growth has been stronger and turnover has been much lower resulting in low turnover costs. These factors have combined to produce industry, leading same home NOI growth over the longer term, which we believe is the crux of it.
Drive sustainable long term shareholder value.
And finally in thinking about the things we can control I would like to share with you on slide nine and update on our Canadian multifamily built a core portfolio that continues to evolve and achieved new milestones I'm delighted to announce that the Taylor chief stabilized occupancy of over 98% in the quarter and 100% occupancy in October reflecting its resort quality moneys.
Exceptional living spaces and sustainability leadership. Among other features I'm also thrilled to introduce our latest project the IV, which will begin its initial occupancy by the end of the year and finally, the launch of <unk> continues to be extremely successful with 30% of the building already pre leased since launching in Q3, Triton now has nine projects.
Totaling over 5000 units in lease up preconstruction or active construction as shown on slide 10, and as this portfolio stabilizes over the next few years, we estimate it will have a gross asset value close to $3 6 billion in annualized NOI of $50 million Tri Con share, creating a lot of strategic optionality as Canada's premier multifamily portfolio with <unk>.
<unk> scale. Moreover, the book value of our stake in this portfolio is expected to double from 93.
To $1 87 per share upon stabilization, creating meaningful value for all of our shareholders 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 Q.
Q3 was a solid quarter for Tri Con I don't want to thank our exceptional team will continue to focus on process improvement and cost containment across our business, while continuing to deliver a world class resident experience.
Let's start with a review of our key financial metrics on slide 11.
Net income from continuing operation was 81 million compared to $178 million last year, which includes $73 million of fair value gains on rental properties against a strong comp of $107 million last year as home price appreciation has moderated in recent months.
Core <unk> per share was <unk> 14 down one penny year over year.
<unk> per share was 11% for last from last year, providing us with ample cushion to support our quarterly dividend with <unk> payout ratio of 46%.
And lastly, our <unk> book value stands at $14 30.
That is $19 30 in Canadian dollars, just up over 4% year over year and I will note that our book value does not factor in the value of our strategic capital fee streams.
Let's move on to slide 12, and talk about the drivers that contributed to our <unk> per share variance.
The year over year decrease of one penny can be attributed to strong NOI growth from the <unk> of our portfolio being offset by higher borrowing costs lower performance and acquisition fees and the absence of core <unk> from U S multifamily portfolio, which was sold in Q4 2022.
Specifically.
Our single family rental portfolio contributed <unk> <unk> of incremental <unk>, reflecting revenue growth of 10, 5%.
This was driven by a two 2% increase in proportionate rental home count.
Five 9% increase in average rent and 0.5 higher occupancy.
<unk> from strategic capital had a <unk> <unk> negative impact primarily driven by lower performance fees from legacy residential developments.
Acquisition fees as a result of fewer <unk> acquisitions.
And lower property management fees following the sale of the U S multifamily portfolio in Q4 of last year.
Our adjacent business added one reflecting strong result, and residential development as housing fundamentals remained robust.
Interest expense at a <unk> <unk> negative impact mainly due to higher average interest rates on our debt.
And lastly, there was a one positive impact driven by lower overhead expenses compared to last year.
On that note I want to take a minute and then dive into our corporate overhead expenses turning to slide 13.
At a high level, our corporate overhead expenses support a world class operating platform that we have built over the years.
This platform is a source of competitive advantage and creates a moat around our business that is difficult to replicate.
It means having a strong local market presence to provide an exceptional resident experience through internal property management and maintenance capabilities. Our strong service offerings has earned us an industry, leading Google score of four six stars.
It means being a people first company and fostering a purpose driven culture. So that our employees will go above and beyond to serve our residents, which in turn leads to lower turnover and strong NOI growth.
It also means being a leader in innovation.
In order to drive operating efficiencies continually improve our resident experience and scale, our business efficiently and cost effectively.
When we break down our corporate overhead expenses on slide 14, you can see that they support both our <unk> operating platform as well as our adjacent businesses, whose overhead costs are more than offset by fee revenue earned from managing strategic capital associated with these businesses.
If we just looked at our <unk> overhead and compare it to our largest peer.
There is still a delta in terms of efficiency.
Recall that we had set our goal of reaching 50000 homes by 2024 and built a platform to support such scale, but the goal has been pushed out given the rapid increase in interest rates and the need to pull back on acquisitions for the time being.
That said, we'll continue to see tremendous opportunity in <unk> and we are laser focused on keeping overhead costs relatively stable. So then we could reach a competitive level of overhead efficiency as we grow the portfolio towards 50000 homes.
So on slide 15, our near term focus is to drive operating efficiency and reduce overhead expenses, where possible in the current lower growth environment.
Over the past year, we've made some progress, including a 4% reduction in gross overhead expenses year over year.
As we look ahead into 2024, you will see three main areas that will help us drive additional efficiency by reducing overhead and growing fees.
First we anticipate launching our new <unk> joint venture in early 2024 to add scale as well as strategic capital fee streams.
Recognizing that the interest rate environment is still challenging we expect the new joint venture to accommodate buying homes with lower leverage parameters.
What changed over the past year or so is that our institutional investors are increasingly open to lower leverage or no leverage joint venture structures with the expectations of core or core plus returns.
Impaired to opportunistic returns expectations in the past.
This goes to show, how SSR has matured into an attractive and stable institutional asset class.
Next we continue to optimize our workforce to fit our current needs, which included reducing our staffing by approximately 5% over the past several months and reallocating the operating staff from servicing vacant homes and acquisitions to servicing occupied homes and.
And finally, we are containing G&A costs.
By focusing on key growth projects and on a central activities only.
Now, let's shift gears and talk about our debt profile on slide 16.
We have been proactive with addressing our near term debt maturities as we said we would and.
And I'm happy to report that we have repaid or extended all of our remaining 2023 maturities.
As we look ahead into 2024 maturities are 2017 dash to securitization.
It is on track for refinancing before its maturity in January.
And we expect to repay or extend our wholly owned portfolio of term loan before its maturity next October.
From there we can look ahead and start tackling our 2025 maturities as well.
I'd like to end by discussing our 2023 guidance that we have updated on slide 17.
We are reiterating our guidance range for core <unk> per share of 55 to 58.
We have tightened up the expected range for the same home metrics to six to six 5% for revenues expenses and NOI.
The revenue guidance reflects softer rent growth on new home move ins as well as lower turnovers as turnover tends to skew to residents with shorter tenure.
Partially offset by gradual increase in rent growth on renewals.
The expense guidance is a function of elevated property tax offset by successful reduction of controllable expenses, such as property management repair and maintenance and turnover expenses.
Kevin will provide more insight into these items later on the call.
The outlook for the same home metric is coupled with expectations for ongoing strong results in the U S residential development business, which gives us confidence in the overall outlook for the <unk> per share.
We've also taken the pace of acquisition down slightly to 1850 homes as investment programs for JV II and JV HD are substantially complete and we are buying homes purely as part of our capital recycling program.
As we head into the end 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 resident experience possible.
And now to give you more insight into our same home metrics I'll turn the call over to our Chief operating officer.
He is just Kevin anywhere else he'd be a 10, but for US he is under 11, Kevin Baldridge.
Thank you Sam and good morning, everyone.
First and foremost I want to give a big thank you to our <unk> operations and customer service teams, who helped deliver this quarter's outstanding results.
To be so impressed with our extraordinary team and the exceptional care. They provide our residents day in and day out.
Let's move to slide 18 to talk about the drivers of our same home NOI growth of 6% for the quarter.
On the top line revenue growth was driven by a 6% increase in average monthly rent that was partially offset by a 20 basis point decrease in occupancy.
Which remains well within our targeted range of 96, 5% to 97% as we balance rent growth versus occupancy through the seasons.
Our rent growth remains healthy with blended rents increasing six 8% during the quarter underpinned by six 9% growth on new move ins and six 7% on renewals.
As we moved into October demand remained consistently strong with rent growth coming in at six 8% on a blended basis supported by six 6% on new leases and six 8% on renewals.
Our bad debt expense, which is embedded in the revenue numbers has continued to inch down as we thought it would do to the successful collection efforts of our team in the field and is now near pre pandemic levels.
9% versus one 4% in Q3 of last year.
Finally, other revenue decreased by <unk>, 9% down slightly 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 cash collections rather than build amounts.
This was partly offset by revenues earned from services that enhance our resident experience.
Smart home and renters insurance, which both saw increased adoption year over year.
Let's now turn to slide 19 to discuss our same home expense growth of seven 5%.
The rise in expenses was primarily driven by property taxes, which were up 10, 5% from last year, reflecting meaningful home price appreciation in our markets today.
To date, we have received 50% of the tax bills for the same home portfolio and expect another 25% in November 19% in December and the balance early next year.
So far we have seen higher than expected assessed value increases in Atlanta, Texas, and the Carolinas, which account for about 60% of our tax expense.
This has been partly offset by millage relief and successful appeals, but not to the extent that we would like.
From where we sit today, our best guess is that taxes are up 12% year over year, which would put us near the high end of same home expense guidance, yet if we see favorable millage rates and appeals, we could end up at the low end of expense guidance.
Moving onto the other expense lines repairs and maintenance expense was up this quarter by two 3%. This reflects an 8% increase in completed work orders, which was partially offset by our ongoing cost containment efforts.
And our turnover expense continues to remain low a strong testament to our policy of self governing on renewals.
And industry low turnover rate as well as cost containment efforts.
Next homeowners association costs increased by 25%, reflecting inflation and HOA dues as well as a heightened level of incidents violations and posed by HOS coming out of the pandemic, which drove higher penalties.
And finally other direct expenses increased primarily from the upfront costs, providing smart home technology to more residents and increased utility costs.
I'm also pleased to report that we achieved a 14% reduction in cost to maintain in this quarter compared to last year, which includes repair and maintenance turnover and recurring capex.
Our team has been proactive and successful in achieving price reductions to our national procurement program, reducing churn scopes, where we aimed to repair versus replace where possible and driving higher utilization of our in house team to undertake more work orders versus using outside vendors.
We now have over 77% of our available work order is completed in house and are on track towards our goal of about 80% by the end of the year.
Our in house technicians cost per work order is about 45% cheaper than using a vendor for similar kinds of work.
As we head towards the end of the year, we remain focused on the things we can control to offset rising costs, while keeping an emphasis on creating the absolute best resident experience possible.
Now I'll turn the call back to Gary for closing remarks.
Thank you Kevin It was another great quarter for <unk> and I want to conclude my prepared remarks by saying that I feel truly honored to work alongside such a world class team, who deliver an unmatched resident experience every single day as we approach the end of the year and look forward to 2024, we're excited about the numerous catalysts that should drive sustainable long term shareholder value.
We've talked about on this call and summarized on slide 'twenty, including launching a new JV driving overhead efficiency continuing to deliver strong rent and NOI growth and advancing our Canadian multifamily portfolio towards stabilization I will now pass the call back to the operator to take questions with Sam Kevin Wojciech and I will also be joined by John Allen Swag and Andrew Joyner.
To answer your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Please limit your questions to one and one follow up we'll pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from the line of Brad Heffern.
Hey, good morning, everyone.
Obviously, you brought to Actavis presentation out can you just give your thoughts on their primary recommendation. So is being quickly marketing the rents to market, reducing overhead and exiting the Canadian multifamily business.
Brad we don't comment on any specific conversations that we have with with any of our shareholders. We're always we're always open to constructive feedback from anybody any shareholder.
But we don't we don't comment on any kind of specific items related to strategy. The only thing I can say that at this point that we agree with this that the stocks mispriced and there's significant opportunity for those that are going to be patient make a lot of money, but that's all I can really comment on.
Okay fair enough.
For the next JV, presumably the partners would want an investment pace that's above what's been being executed of late do you think that Thats correct first of all and then how would you think about funding your capital commitments at faster paces indeed needed.
Yes, I mean, that's we really arent, making much in the way of acquisitions right now everything is largely focused on balance sheet and through our capital recycling program and Thats, because obviously, both as if our JV too and homebuilder director now is essentially complete so yes, as we as we launch a new JV, let's call. It <unk> three.
Hopefully early next year that will increase the pace of acquisitions.
That is what would be expected by our by our investors, but keep in mind, we typically have a three year investment period and once they commit to a fine there's no.
There is no pressure to put that money out immediately we can determine at what pace, we want to put out and do so when we think it makes sense. So we may form of fund and take our time to put the capital out.
And I think in terms of funding.
Our share I think one thing you can expect is that the new fund will be sized to the opportunity our co investment will likely be smaller we.
We will use lower leverage as we've talked about extensively on the call and our investors seem to be fine with that and then we should be able to fund our co investment with any <unk> less less dividends right. So we talked about that being $60 million a year, that's going to obviously ramp up as we grow our <unk> and so we should have ample cash to fund our.
Co investment over the next three years.
Okay. Thank you.
And your next question comes from the line of handle thank Dusty.
Your line is open.
Hey, good morning.
My first question is on the January refinancing with Sam you talked about being on track, maybe you could give us a bit more color on where you think the refi costs would be the cost of new debt and what sources youre, considering and the likely timing. Thanks.
Yes, no problem. Thanks for the question. So we liked the deal last night I'm sure. Some of you might have seen that and that deal is really to refinance the 2017 dash one.
Sorry, 2017 dash to right now I can't really comment on the spread but I can tell you we're getting indications similar to last time until the last deal. We did reminder, the last deal that we did.
The all in rate was 586%, but the spread was about 178. So we're getting similar indications in terms of spread in.
And the five year Mark is sitting at $4 60 today. So all in we're thinking it's going to be between $6, two and maybe six four depending on the day, we price it.
But so far it's all been positive indications and we sit we feel very confident that this will come through over the next several weeks.
Great I appreciate that color.
You guys talked about.
I think you will seek to responsibly raised renewals above the self imposed caps.
With the loss of leases sizable so can you talk a bit about what portion of the portfolio today broadly that meets the threshold and how high youre willing to go on pushing renewals up with us. Thanks.
Yes, so the way we think about the portfolio on proportionate rising is essentially 45% and we outlined this in the presentation and 45%.
He had been with us for one to two years and 55% had been with us for three years plus.
And we're going to continue to self govern across the board, but we'll take two approaches to self governing compared to the one to two years and those that are three years, plus and what I mean by self governing is will continue to set rents below market.
Slightly below market. The idea there is obviously to keep our residents in our homes, which lowers turnover turnover expense and we've seen drives NOI growth, but to take a more aggressive stance on self governing with those who've been with us more than three years right. So that will mean, we will push through our caps are not going to give any detail as to how that will work.
But I think what's most important is we think we've got several years tailwind with us on renewal rent growth, where we'll be able to recapture that loss to lease. So when we talked about that $40 million revenue opportunity. We think we can recapture that over a few years and it could very well mean renewal rent increases of about let's say six or 7% per year.
For the next few years, so that that's in the current environment. Obviously, if there is a economic recession things could change.
But we think we could have industry, leading renewal rent growth over the next few years because of the sizable loss to lease that we can recapture.
Yeah.
And then one quick one sorry, you mentioned the loss to lease, but do you guys or can you provide an estimate of what the earnings for next year. Thanks.
Yes, the earn in.
As of today the earnings 3% I think if we factor in Q4 rent growth is going to be about 4% heading into 2024.
Thank you.
Your next question comes from the line of Stefan Steven Mcclain, Steven Your line is open.
Great. Thank you good morning, good morning, guys.
Just a couple of questions here.
Just thinking about the acquisition pacing for next year.
With having Q4 coming down to that $2 50 range.
Self funded.
Just wondering if you can give us sort of a starting point for how you expect acquisitions to to flow through the <unk> next year, given the timing of the new JV.
Yeah.
Yes, I mean, we're not going to give guidance any kind of portal formal guidance today, Steve for 2024, including on acquisitions and obviously.
The amount of acquisitions will really depend on the timing and the size of our next fund.
But it's fair to say that once that fund gets forms.
We will be able to ramp up acquisitions.
And those acquisitions certainly in the short term can be funded on an all equity basis or low leverage basis.
I wish I could give you more detail, but I'd just to say that you should expect acquisitions to ramp up next year.
Yes, okay.
Fair Gary Thank you.
And then just when you think about I'm sorry underlying.
Organic acquisitions, what do you need to see in the marketplace to two sort of unclog.
Make the math work for acquisitions.
Is it rates stabilizing is it rates coming down.
And just kind of getting just trying to get a sense of what of what goalposts. You are looking for you would need to see.
Well I mean, the math already works right. So it certainly works on our recycling capital program, because we've been selling homes at let's say high three or four caps and taking that capital and reinvesting at six cap. So that works all day long, we can't do that forever.
But certainly we continue to recycle out older homes with higher capex into newer homes. So we're going to continue to do that youll see more of that this quarter Q4, and a little bit into next year and then the other factor. It is not really the size of the market. The size of the market is still huge even though it's 25% smaller than last year the opportunity to buy homes is still significant the issue is really the key.
Cost of capital.
In an environment, where one we don't have a fund right. So we've now completed those funds and two when we do have a new fund we need to make sure that it's a lower leveraged vehicle right. So it's really it's just really the cost of debt we don't like.
We don't like negative leverage or investors don't like negative leverage, but if you can buy homes at a six cap.
Which we're doing and we think there'll be a significant opportunity to do that next year and you can put on low leverage even no leverage in some cases, and then grow your NOI four 5% or 6%. We think that's a very compelling opportunity. So the opportunity is still significant we just need to make sure that we align our capital structure with the opportunity and Thats the evolution.
Taking place right now.
Great. Thanks, Gerry appreciate it.
Okay.
Your next question comes from the line of Mario Sarak Mario Your line is open.
Alright, Thank you and good morning.
Alright. My My question. My question is a broader one then it just comes to slide 12.
On the call deck, and just looking at <unk> year over year growth variances.
I appreciate.
They are not all principally for guidance today, presumably have to do that with Q4 results next year, but.
But just conceptually if I looked at all the puts and takes on this chart.
<unk> things seem to going as good as they've been in terms of NOI growth.
Presumably on the performance fee acquisition fee side, you can't get much worse.
On a year over year basis than it did this year based on some of the commentary that I'm hearing.
In terms of <unk> <unk> three.
The year over year comp in terms of the multifamily portfolio sales gone, we'll see what the residential development operations look like.
Then when we look at the interest expense of about 80%.
Of your debt I think has hit silver cups.
When they come up a little bit given where rates are today, but the <unk> was quite meaningful during Q3, and then with Sam touched on kind of lower corporate overhead expenses.
Limitation, there through 'twenty four.
Higher level is that kind of a reasonable way to think about it on this chart the negatives kind of disappear.
The positives are still there next year.
Yes, I think so I mean, I think it's a thoughtful question I mean, there is a lot to unpack there and we want to be careful not to give any kind of 2020 for guidance, but I think Mario what you can expect and this is what's really exciting is that our interest expense profile is stabilizing right and if you think about the interest expense is basically doubled.
Over six quarters, and we think as we head into 2024 that largely stabilized as per quarter, and if you're able to contain your overhead costs, which we talked about and we intend to do then essentially any NOI growth and we continue to think thats going to be very fast, obviously going to really drop to the bottom line.
So that we think are super exciting and so we go from a year, where we kind of been running to stand still and dealing with much higher interest expense to a year, where it starts to look in 2024 things start to look a lot more positive and I think as you layer on a new fund that obviously means.
More more accurate, obviously more acquisition fees.
And I think the other thing I would say is in the same home portfolio. We should also start to see more growth in ancillary revenue right.
So overall I think youre right 2024 is going to be a year, where the positive should outweigh the negatives.
Yes.
Got it Okay and just my follow up just on the overhead on slide 15.
<unk> 15.
Sam was talking about noting the optimization has started happening over the last couple of months.
It showed the expected optimization is already in your Q3 run rate numbers.
I can take that Mario very few are in the Q3 run rate numbers. They are really going to start seeing them come through in Q4, and really next year just to give you perspective, the reduction really spanned multiple buckets, which is both NOI capex and overhead.
So even though it's a 5% reduction in force, it's really not all engine and compensation expense part of it could be an NOI and overhead so youre going to see it come through all the different buckets next year.
Yes.
Got it Okay. That's my one follow up I'll turn it back.
Thank you.
Okay.
Your next question comes from the line of Keegan Carl Keegan Your line is open.
Yes. Thanks for the time guys. Maybe first just wondering if you could provide an update on your plans to exit markets, such as California, and Southern Florida.
Yes, sure so in southeast, Florida, we're nearly done.
We've got about 60 homes left in southeast, Florida, So that that should be done relatively soon and I'm incredibly proud of the.
The team because we literally sold 600 homes over time, almost one by one so a great result.
And then in southern California, probably take the better part of next year to dispose of the homes.
Got it and then I guess, maybe specifically on markets I was a bit surprised to see your Las Vegas performance is really strong compared with some of your peers have been saying in the quarter I'm just curious what would have driven this.
Hey, Kevin do you want to take that.
Yes, I mean Las Vegas.
It has been a strong market for us we've continued to see good in migration and now us although.
Although we took this summer.
And we felt the strengths and we decided to really push rents. So our lease trade outs, there were close to 9%.
So we were able to harness that occupancy dropped a little bit, but it's now it's come back again, so it's just.
We have a really good revenue management team, we look at <unk>.
Trends were Comping every home we.
And then we will put the house up on the market will look at what's happening with.
Applications with leads well adjust those rents and so we're just really attentive to what's going on with demand seasonality of reliability and we do it on a home by home basis. So I mean, a testament to our revenue management team and how theyre looking at the market.
Got it thanks for the time guys.
Thank you.
Your next question comes from the line of Eric Wold, Eric Your line is open.
Hey, Thanks, you mentioned that interest expense should stabilize.
Going into next year, assuming rates stay somewhat flat from current levels, but given that youre able to sell homes at about 4% cap rates on why wouldn't you just do more of that pay off a significant percentage of your floating rate debt. Since there is like a 250 basis point spread there I realize theres going to be some tax implications, but I assume there are also some percentage of your <unk>.
With with less capital gain where it might be efficient to do that so I understand why not just sell off.
More than 4% caps attack that six and a half.
Yes, I think youre going to see us do more of that Eric that's what we're going to do I mean, we can't do that in perpetuity right you can't do that forever.
Because we only really have that kind of 4% cap home in certain markets. It's not in all markets. So you have to keep that in mind, but yes. It absolutely makes sense to sell homes at forecasts in and take that capital and either paydown data by the way even potentially buy back our stock.
So I think we've got a kind of a good.
Cabot I didn't talk about in answering kind of Marios question. I think there is also a good capital allocation problem.
Good capital allocation opportunity next year.
Where we can continue to sell homes.
At relatively high prices, certainly compared to where our stocks trading and buyback stock or pay down debt.
Got it and I guess, you mentioned that.
Only available for some percentage of the homes can you put that in context sort of which which markets are you able to sell at 4% what's the difference between the.
The other markets more like in the fives or I guess, even with <unk>.
I understand like well get some more of that would sell it for.
Yes, it's more of the coastal markets right. So I mean, obviously in California, we've got low cap rates. There, we've got probably some low cap rate opportunities in Nevada certainly.
Southeast, Florida, although we've worked through a lot of that so.
So it might be I don't know, maybe another kind of a thousand or maybe a couple of thousand homes, but thats, probably the extent of the opportunity and I would just add sorry. This is John I would just also add the nature of the dispositions, we're making are really in a lot of cases homes. We bought in 2012, 13, 14, and we might have been buying homes at a 100 to 150000 and now they are.
<unk> to call it $500000 plus so in many cases the homes that we're selling are not exactly consistent with the type of home for buying today, which are more 300, $350000 homes and so theres been a bit of a shift I would say in the type of homes are selling versus what we're buying today as well.
Okay.
Got it thank you.
Your next question comes from the line of Adam Kramer, Adam Your line is open.
Hey, guys. Thanks for the time.
Just wondering.
You don't mind, giving kind of the new lease.
Kind of monthly figures.
Each month in the quarter, it's interesting to see how that trends over the course of the quarter.
In Q4.
Q3, I know you disclose October obviously in the full quarter, but just the monthly for Q3.
Hey, Kevin do you have that available.
Uh huh.
For each month I don't have it right now three chip that can get back which in fact, hey, Adam.
Yes.
Yes, yes, yes, we'll get that after the call for you.
Yes, just maybe maybe on the on the guidance.
You kept the <unk> range intact, but there is sort of a modest modest lowering of the same store NOI I wonder if there is something you could kind of comment on that that's kind of the offset below the NOI line that keeps <unk>.
Keeps keeps default range intact.
Yes, absolutely I mean, we are going to get some contribution from obviously as far in the Q4 over Q3, so thats part of it but I think the big factor is.
We're continuing to see real strength and our legacy for sale housing business and we expect that to continue from Q3 into Q4, and one thing I'll say is that in our master plans. Many of them are very advanced we are seeing higher home prices higher assessed values and that results in more bonding capacity you might remember.
Adam that we use infrastructure bonds in Texas are called months.
To really finance and recover the infrastructure cost of these masterplan communities and when you assess value goes up you get more bonding capacity and that that additional bonding capacity essentially drops to the bottom line. It's just cash so that means more cash coming back you've seen that in Q3, youre going to see that again in Q4 and that also translates into higher per.
<unk> fees.
What you'll also see in Q4, so that should offset.
If youre looking at your model, that's where the offset is going to come.
Great really appreciate it thanks guys.
I have the numbers that you asked for.
You want them.
So the blended rent growth numbers for July.
Sure.
Seven two and July six eight.
On August six five in September blended to a six eight for the quarter.
Thanks, Kevin.
Yes.
Sure.
Okay.
Your next question comes from the line of Jonathan Culture, Jonathan Your line is open.
Thanks.
Just on the JV three.
Do you have a targeted size for that for that fund and how much.
You said you were going to be committing less to that one but how much.
Total targeted commitment.
You are thinking about.
Yes, I can't I can't I wish I could tell you that John.
I just can't I can't share that right now, but obviously.
Obviously, we have an idea of how much we're going to raise we're just not going to share it.
At this point, but.
I'll say this that the fund is going to be a likely smaller than what we've done in the past because it's going to be size of the current opportunity which is also smaller.
There will probably be.
More than one close.
Certainly going to use less leverage.
We've been targeting in the past leverages, 65% plus that that could be 50% or lower so that's going to be a big change and I would say our co investment instead of being in a kind of one third might be closer to 20% right or 25%. So that's all I can tell you at this point.
And hopefully we'll be in a position to release details of that at the end of the year early next year.
Okay.
And then secondly, just on the ERP system that you guys are implementing and have some costs in the quarter. What was the total cost of the projected maybe give us some color on the benefits that you expect from it.
Yes, Thanks, Sean.
So on the ERP implementation system.
It's basically a new system that we're putting in to consolidate all of our <unk> the cost.
Is could be again, depending on the.
The things that we activate it could be about $7 million to $10 million full cost.
You're going to see that run through in Q3 was a little higher again, you saw some of that come through in nonrecurring G&A.
To start seeing that dove down probably by Q4 really getting into Q1 next year most of the investments has already occurred.
This year <unk>.
Being some last year and youre going to see very little on the investment front going forward whats going forward is really about creating efficiency and creating process improvement in the system and you guys see some of that process improvement occur next year as we finish the implementation of really focus on stabilization of the system.
Okay, so that would be mostly in the G&A.
It could be a part of it partially yes part of it would be in G&A part of it would be really in compensation, what youre going to see is you're going to see as the company continues to grow our overhead remains flat to stable to down and that's what we're going to create the efficiencies that we talked about remember our overhead is geared and we geared towards 50000 homes.
Today and today, obviously, we're not we're short of that target and we're going to rightsize the company as the company gets bigger.
So youre going to see less increases throw the overhead line item.
Okay. Thanks.
Your next question comes from the line of Jade Rahmani Jamie your.
Your line is open.
Hi, This is Jason <unk> on for Jade. So for my first question what proportion of your customer base is multifamily a substitute product.
Or does the apartment demographic has little overlap. So in other words, although performance has been resilient. Thus far are you seeing competition from multifamily supply and slowing rent growth in the sunbelt.
John I'll, let John take that yes, Jason that's a great question, we see actually is very little overlap when we see our survey our residents.
And look at where they are coming from.
Maybe moving out for multifamily, but in many cases, our residents aren't shopping multifamily and if you think about the nature of both unit sizes as well as locations for the families that are moving into try console and there's not really a perfect substitute multifamily is often located in more let's say commercial oriented parts of our cities are of neighborhoods and wholesale schools.
Tend to not be as strong as the homes that we're buying and so when we're targeting school scores, let's say in the five six or seven.
<unk> find the same for multifamily with a similar rent. So our resins are really looking as if our only when they're shopping.
Got it thank you and as a follow up does it make sense to wait incremental capital deployment towards self developing communities and targeting a more opportunistic return.
Or to continue acquisitions at a more moderate pace until that until economics become more attractive.
Probably the latter I mean, I think on a on a capital allocation. The best thing we can do as we talked about right. Now is is our capital recycling program, which we're doing.
Debt repayment and probably buying back some stock that thats the right thing to do on the development side. We're just not seeing the yields that did make a compelling rate we're buying.
We're buying homes off the MLS at a six cap.
In order to make development.
I think pencil and make it compelling we probably need a spread to that of at least 50 to 100 bps and we're not seeing that.
We're looking at a lot of build to rent deals. We just we just can't make the numbers work. So I think we're in an environment right now where.
Development doesn't make a ton of sense, we have to be patient and acquisitions will be largely focused on existing homes. When we raised a new fund and also probably buying homes from builders.
Great. Thank you.
Okay.
Yeah.
Again, if you'd like to ask a question. Please hit Star and then the number one on your telephone keypad.
We'll wait another moment for more questions.
Alright, there are no further questions at this time I'd like to turn the call back over to Gary Berman, President and CEO of <unk> residential.
Thank you operator, I would like to thank all of you on this call for your participation. We look forward to seeing many of you at the fall NAREIT Conference and speaking with you again in February to discuss our Q4 and full year results.
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Yes.