Tricon Residential Inc. (NYSE:TCN) Q4 2022 Earnings Conference Call March 2, 2023 11:00 AM ET
Wojtek Nowak – Managing Director, Capital Markets
Gary Berman – President and Chief Executive Officer
Wissam Francis – Executive Vice President and Chief Financial Officer
Kevin Baldridge – Chief Operating Officer
Jonathan Ellenzweig – Chief Investment Officer
Andrew Joyner – ND, Investments
Conference Call Participants
Chandni Luthra – Goldman Sachs
Nick Joseph – Citi
Mario Saric – Scotiabank
Brad Heffern – RBC Capital Markets
Adam Kramer – Morgan Stanley
Jade Rahmani – KBW
Tal Woolley – National Bank Financial
Dean Wilkinson – CIBC
Jonathan Kelcher – TD Cowen
Good morning, my name is Rob, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Tricon Residential Fourth Quarter 2022 Earnings 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. [Operator Instructions]
Wojtek Nowak, Managing Director, Capital Markets, you may begin your conference.
Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Tricon’s fourth quarter results for the three and 12 months ended December 31, 2022, which were shared in the news release distributed yesterday.
I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. For more information, please refer to our most recent management’s discussion and analysis and Annual Information Form which are available on SEDAR, EDGAR and our Company website, as well as the supplementary package on our website.
Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A. I would also like to remind everyone that all figures are being quoted in U.S. dollars unless otherwise stated. Please note that this call is available by webcast on our website and a replay will be accessible there following the call.
Lastly, please note that during this call we will be referring to a slide presentation that you can follow by joining our webcast or you can access directly through our website. You can find both the webcast registration and the presentation in the Investors section of triconresidential.com under News and Events.
With that, I will turn the call over to Gary Berman, President and CEO of Tricon.
Thank you, Wojtek, and good morning, everyone. 2022 marked another record-breaking year for Tricon as we adapted to a difficult macro environment to deliver on our business plan, implement bold strategic initiatives and go above and beyond for our residents. We are exceptional performance to our world-class team and their unwavering commitment to our residents and the communities we serve.
As a people first organization our goal has always been to prioritize our employees, so they in turn can provide our residents with inspired customer service. We know that when our residents are fulfilled they rent with us longer, treat our properties like their own and refer other customers.
On slide two, I wanted to highlight that I’ve taken time in my 2022 annual letter to shareholders to explain how this virtuous philosophy of doing business leads to strong operations and ultimately good financial results. The letter also provides some interesting insight into project journey for the sale of our U.S. multifamily business. Our learnings from managing both U.S. multifamily and single-family rental property operations, the benefits of having one foot in the public market and one foot in the private market. How we can use technology to make our business more efficient and improve the customer experience, and our belief that a kinder form of capitalism is the best approach for managing rental housing over the long-term. It makes for some decent bedtime reading. I hope you all time review it, when it’s released later this week.
Let’s turn to slide three, so I can share with you our key takeaways for today’s call. First, we delivered another rock-solid operational quarter with single-family rental same home NOI growth of 9.7%, a record high NOI margin of 69.8%. Near record occupancy of 98%. Record low turnover of 12.2% and consistently strong blended rent growth of 7.4%.
Second, we remain disciplined on acquisitions and grow our portfolio by selectively acquiring 815 homes during the quarter. Although we are starting to slow acquisitions into 2023, we remain committed to growing our business over the long-term in a strategic and responsible way. At this time, that means slowing the pace of our acquisitions, until it makes sense to accelerate once more.
Third, we are focused on cost containment during this near-term period of slower growth by driving cost savings within corporate overhead and property operating expenses. At the same time, we are encouraged by green shoots emerging the debt markets, as dislocation in the securitization market phase and pricing improves, we may be able to accelerate great growth later this year.
And finally, when market conditions do improve, we are well positioned to grow with nearly $3 billion of available capital, including liquidity on our own balance sheet and third-party unfunded equity commitments. What I love about our model is that we can scale our acquisition program up or down very quickly depending on market conditions. And we will lean in and deploy that capital responsibly and when the time is right.
On slide four, we reflect on the past year and our first foray into setting guidance. We are proud to report that we delivered on what we promised and largely exceeded our initial financial targets. By all accounts 2022 was a fantastic year for Tricon, with core FFO per share of $0.76 and same home NOI growth of 10.4%, both well above the high-end of our initial guidance.
In a period of capital market uncertainty and lower transaction volume, we are fortunate to sell the remaining interest in our U.S. multifamily portfolio, generating $319 million of gross proceeds to Tricon and simplifying our business in the process. We also acquired a record of more than 7,200 homes largely one at a time, expanding our portfolio by over 23%. If our cost of capital hasn’t deteriorated in the second-half of 2022, this number would have been even higher. And we recently commenced lease up on our second Canadian multi-family property, The Taylor, which is tracking months ahead of schedule with over 41% of units leased at an average monthly rent of CAD4.42 per square foot, as at December 31, 2022.
Last but not least, we continue to prioritize the well-being of our residents by introducing industry-leading Bill of Rights. The first of its kind for U.S. single-family rental, outlining our commitment to providing quality move-in ready homes with caring and reliable service. We also launched our flagship Tricon Vantage program, a suite of programs and resources available to our U.S. single-family residents to help them realize their financial goals, including the goal of home ownership if they so choose.
As you can see on slide five, this year’s accomplishments have added to a long track record of creating value for shareholders. Through our consistently strong operations in active acquisition program, we’ve grown our proportionate NOI and book value per share at a compounded annual rate of 17% and 18%, respectively. It’s clear that real cash flows is driving and underpinning our book value. And we think that a serious disconnect exists between our depressed stock price and the fundamental value of our underlying real estate and operation. We know that the markets can be inefficient in the short-term, but over time this valuable surface and be realized for our shareholders.
Let’s take a look at the current state of our business fundamentals on slide six. The demand for our rental homes continues to be very strong with leads per available home well above pre-pandemic levels. At the same time there is evidence of higher rental supply in our markets, partly caused by would-be home sellers opting to rent at their homes, given the challenging mortgage environment and having attractive legacy mortgages locked in place at very low rates.
Taken together, the combination of strong demand, but higher supply of rental listings over recent months has contributed to a moderation of rent growth on new move-ins. Although rent growth in our same home portfolio remain strong by historical measures and has shown signs of strengthening into 2023. We believe we have a long runway to capture industry high re-leasing spreads, given the 15% embedded loss to lease in our portfolio, which we’ve accumulated by self-governing on renewals over the past few years. And so, we feel good about our revenue trends for the year ahead and believe we can grow same home revenues by 6% to 7.5% in 2023.
As we turn our attention to expenses on slide seven, we remain focused on cost control, especially during this period of slower acquisitions. We see opportunities on two fronts. One is leveraging our existing corporate overhead platform, which we’ve expanded over time to be able to handle a much larger number of homes. This means being very prudent with hiring and G&A costs, while earning incremental property management fees as we grow and complete the investment program for our JV partners. With this, we expect to save $0.03 of core FFO per share and corporate overhead expenses this year compared to last.
The second opportunity is to capture efficiencies of scale and our SFR portfolio by bringing more work orders in-house. Leveraging our national procurement programing and using technology to become more efficient, which should help us continue same-home expense growth in the range of 6% to 7.5% this year.
Turning to external growth on slide eight, let’s talk about what the opportunity set looks like for acquisitions. Within our target markets, home prices that meet our buy box criteria have declined by over 8% for mid-year 2022 peak, while rents are down about 5% and stabilizing into January. This is resulting on a slight expansion acquisition cap rates. At the same time MLS transaction volume is down materially, which is largely related to the lock-in effect caused by existing home owners not wanting to trade out of their low mortgage rates. This makes it more difficult for us to acquire a meaningful number of homes that meet our cap rate criteria which is currently in a 5.5% to 6% range, albeit with a preference for cap rates close to 6%.
As you can see on slide nine, staying disciplined with this criteria, means that we often need to bid for homes at a meaningful discount to the asking price to make the math work. Consequently, we end up buying fewer homes today than in the past, often losing out to individual home buyers, who do not buy homes with a cap rate in mind. That being said, if we were to shift our criteria to lower target cap rates, let’s say 5.25% to 5.75%, we could buy a lot more homes.
And see you might be asking what’s the magic behind a 5.5% to 6% cap rate. We step back for a moment, our general strategy is to acquire homes at cap rates that are equal to or greater than our cost of debt financing in order to generate potential low teen gross IRRs in our JVs, and potentially higher IRRs for Tricon when we factor in the fees we earn. So, it’s really the cost of available debt financing that dictates our acquisition parameters.
With that, I’ll turn it over to Wissam to talk about where the debt markets are today.
Thank you, Gary. Good morning, everyone. The main take away of acquisitions, is that as financing rates decrease, we can lower our target cap rates and go back to buying more homes.
So, let’s turn to slide 10, and see how this is evolving. The debt markets were essentially closed for business from August to January. And then as we moved into February, we were encouraged to see some green shoots with one of our peers completing a transaction at a yield of 5.74%. As Gary mentioned, we generally aim to acquire homes at cap rates that are equal to or greater than our cost of debt financing, in order to meet our target returns. We also have a good sense of the depth of the market at various cap rates. And so, if we assume both debt financing and cap rates of 5.75%, we should be able to buy between 800 and 1,200 homes a quarter, like we did in Q4.
In order to go back to higher acquisition volumes, we would need one of two things. Either see the financing costs revert to 5.25% to 5.5% or we would look towards financing at lower loan to values where the debt costs are cheaper. This is a real possibility and it’s something we are discussing with our joint venture partners. Either way, we are optimistic that slightly lower financing cost will allow us to accelerate acquisitions later this year.
Let’s turn to slide 11, to review our key financial metrics for both — for the fourth quarter. Net income from continuing operations was $56 million, compared to $110 million last year, which includes $56 million of fair value gains on rental properties against a very strong comp of $262 million last year, as home price appreciation has moderated since.
Core FFO per share was $0.31, an increase of 107% year-over-year. AFFO per share was $0.28, up 133% year-over-year, providing us with ample cushion to support our quarterly dividend with an AFFO payout ratio of 18%. Both core FFO and AFFO per share benefited from net performance fees earned on the sale of the U.S. multi-family portfolio this quarter, which amounted to $0.16 per share.
Lastly, our IFRS book value stands at $13.89, that’s CAD18.83, up almost 24% year-over-year. I will also note that our book value does not factor in the value of our private funds and advisory fee streams.
Let’s move to slide 12 and talk about the drivers of core FFO per share. Our single-family rental portfolio delivered 24% year-over-year growth in Tricon’s proportionate NOI. This was driven by an 8.9% increase in proportionate rental home count and 9.7% increase in the same home NOI. FFO from fees increased materially due to the $100 million of performance fees received upon the sale of the U.S. multi-family portfolio.
In our adjacent residential businesses, the year-over-year decrease of 63% in FFO reflected the sale of the U.S. multi-family portfolio and lower results from the U.S. residential development as market conditions have normalized versus a very strong comp in prior year.
On the corporate side interest expense was up, as we have a higher debt balance to support the growth of our single-family rental portfolio along with higher average interest rates. Meanwhile, corporate overhead expenses increased from last year, due to the $50 million of performance fees related LTIP and performance fee expense associated with the sale of the U.S. multi-family portfolio.
If we would exclude these expenses, overhead cost is actually down year-over-year by $2 million, as we continue to focus on cost containments in this tougher operating environment. Lastly the diluted share count this quarter was 2% higher than last year, from the residual impact of the U.S. IPO, capital raising initiatives in the prior year.
Now let’s turn to proportionate debt profile on slide 13. Our near-term debt maturities consists of two subscription lines used to fund acquisitions, as well as the bank term loan, which we will expand later on this year. In terms of leverage, we ended the quarter at 7.2 times net debt to adjusted EBITDA, which is below our near-term target of 8 times to 9 times and excludes the impact of our performance fees earned in the quarter.
Our floating rate debt exposure notched down to 29% of total debt, compared to 31% last quarter. As a reminder, we use floating rate warehouse lines to fund acquisitions in the short-term. This is not a permanent part of our capital structure and is an exposure that we actively seek to term out and roll into fixed rate instruments, when we have a large enough pools of homes to do so.
I also like to highlight, that more than 73% of this floating rate debt is subject to caps, which are explained on slide 14. While rising interest rates have been a headwind in 2022, our interest rate caps have also recently started to kick in. And we should help mitigate some of the impact of rising rates in 2023.
And now to get more insight into our same home metrics, I will turn the call over to our very own David Hasselhoff, our Chief Operating Officer, Kevin Baldridge.
Thank you very much, Wissam, and good morning, everyone. I wanted to start out by giving a big shoutout to our amazing front line operations team for their hard work and tremendous commitment to enriching the lives of our residents this past year. I’m incredibly proud for the operating metrics we’ve been able to achieve, while remaining true to our values and taking care of each other, our residents and our communities.
Let’s move to slide 15 to talk about the drivers of our same home NOI growth of 9.7% for the quarter. On the top line revenue growth was driven by 7.7% increase in average in-place rents and a 20-basis point gain in occupancy. Blended rent growth increased by 7.4% during the quarter supported by a 11.5% growth on new move-ins and 6.8% on renewals. Our renewal spreads reflect our policy of self-governing, which typically maintains rent growth below market levels for existing residents, which in turn helps keep our turnover low.
Over time, the last lease of about 15%, that we’ve built up in our portfolio has allowed the renewals to pick up, while still offering our residents below market rents, which is a win-win in our books. And as we moved into the new year, I’m pleased to report solid demand trends continuing, with 13.9% new lease growth and 7.3% blended rent growth in January.
Our bad debt expense which is embedded in the revenue numbers has been tracking around 1.3%, compared to 1.8% in the prior year. And we aim to move it down to pre-pandemic levels of 1% or lower by the end of this year. It’s hard work and we rely on the tremendous efforts of our collections teams to ensure collections are on time, while being compassionate to our residents individual situations. And working with them towards in agreeable solution.
Other revenue decreased by 18% from last year. This was partly driven by improved collections, which helped to reduce our bad debt, but also results in lower late fee revenue. As well our record low turnover is resulting in lower ancillary revenue for things like early lease termination fees and resident recoveries on turns. However, over time we do see a path to increasing other revenue, as we continue to rollout value added programs such as smart home technology and renters insurance, which are embedded in these numbers and increased by almost 20% year-on-year.
Let’s now turn to slide 16 to discuss our same-home expense growth of 0.8%. The slight rise in expenses was mainly driven by property taxes, which were up 10.7% from last year, reflecting meaningful home price appreciation in our markets. We were a touch conservative on our tax accruals during the year and have trued up in Q4, based on final tax assessments, which resulted in a 13.4% increase for the full-year.
On the other hand, repairs and maintenance expenses were down this quarter by 11.6%. Although the portfolio experienced higher volume of work orders, as well as cost inflation post-pandemic, we were able to offset this in part by completing 75% of our work orders in-house or 6% more year-over-year, which in turn saves us about $400 per job.
Turnover expense was also down significantly as our turnover rate decreased by over 310 basis points to a record low of 12.2%. Thanks to our occupancy bias and focus on superior customer service, and what is already a seasonally slow period for move-outs. Because of our longer resident tenures and people generally spending more time in their homes during the pandemic, we had more extensive turn, such that a greater proportion of turn costs ended up being capitalized. You can see in the table on the right that our same-home cost to maintain, which includes expensed and capitalized activities rose by 14% for the full-year.
Next on property management expenses, we’re seeing inflationary pressures and labor costs offsetting some of the efficiencies of scale that we’ve achieved as our portfolio has grown. And finally, homeowners’ association costs increased, as it was a year-end true-up of HOA bills. But we also are seeing a heightened level of restrictions imposed by HOAs coming out of the pandemic, which drove the higher HOA fees.
In this higher interest rate environment, our focus remains on continuing the expenses that we can control. This includes the leveraging our national procurement program, driving efficiencies through technology, and making operational improvements wherever we see the opportunity. All the while creating the best resident experience possible.
Let’s turn to slide 17 to dig deeper into more recent leasing trends and give you some insight into how we manage revenues. Demand trends were solid in Q4, but you can see the slight moderation in new lease rent growth, as we took an occupancy bias to lease up homes in the seasonally weaker holiday period.
As we rolled into January, we shifted back towards the rent growth bias, keeping homes on the market a bit longer to achieve our target rents with a minor loss of occupancy. This way we can effectively capture our loss to lease on new leases, while continuing to self-govern on renewals for existing residents. We expect these rental trends to persist, as we anticipate a relatively strong leasing season into the spring.
Now I will turn the call back to Wissam Francis to introduce our 2023 Guidance.
Thank you, Kevin. Moving on to slide 18, I’m pleased to introduce our 2023 Guidance, which brings together many of the themes and messages we’ve discussed on today’s call.
Core FFO per share is expected to be between $0.54 and $0.59 in 2023. Compared to last year, we leased about $0.16 from the net performance fees from the U.S. multi-family transaction and another $0.04 related to the recurring fees in FFO from this U.S. multi-family portfolio. Net of overhead savings, bringing the total impact to $0.20, this creates a baseline for FFO of [$0.16] (ph) as a starting point.
We expect NOI growth to contribute $0.13, which is being largely offset by higher interest expense of $0.12. Roughly half of this is already baked into our Q4 run rate and the remaining half comes from incremental debt to fund acquisitions. Hence the impact of NOI less interest is $0.01 for the positive, getting us from $0.56 baseline to $0.57 guidance midpoint.
Aside from this, we expect $0.03 of overhead cost savings at the corporate level, offset by $0.03 of income tax variances and lower acquisition fees. Note that the income tax was recovery in 2022 and we expect a minor tax expense in 2023.
Getting to the high end of guidance from the midpoint is largely driven by the higher end of same-home NOI guidance and the higher end of acquisition guidance, which drives the acquisition fees.
Our same home metrics are expected to moderate from 2022 levels, but will still remain very robust. Same home revenue growth of 6% to 7.5% assumes rent growth on new leases and the 9% to 11% range, and rent growth on renewals near current levels of 6% to 7% as we continue to self-govern on renewals. We also assume occupancy near 97% and turnover nudging up towards 20%.
Same home expense growth of 6% to 7.5% assumes property taxes increasing around 8%, and controllable expenses inflating at a mid-single-digits. We should see less of a benefit from the turnover costs being capitalized versus expense as we lap the heavier post-pandemic turns. And we expect turnover expense to be fairly flat. Taken together, this leads us to same home NOI guidance of 6% to 7.5% with stable margins around 68% to 69%.
On the acquisition front, we are planning for 2,000 to 4,000 acquisitions this year, including only 400 acquisitions or so in the seasonally low Q1 period and potentially accelerating into the summer. The low-end of our guidance simply assumes seasonal strength in MLS listings until the summer, but no real change in the acquisition environment. The higher end of the guidance assumes a more significant acceleration of — in the second half of the year, assuming favorable cap rates and available financing rates both around 5.5% to 5.75%.
With that, I’ll turn the call over to Gary for final remarks.
Thank you, Wissam. As we look ahead to another exciting year, we want to emphasize the following messages on slide 19.
First, the value of our company is underpinned by our SFR portfolio, which continues to perform extremely well and it’s reflected in a book value per share that is well above our share price. Next, we believe in responsible growth. We are prudent in our capital allocation, discipline with our cap rate criteria and laser focused on cost containment during this period of slower growth. And finally, we have the platform people technology and available capital to grow much faster when the time is right.
I will now pass the call back to the operator to take questions. Wissam, Kevin and I, will also be joined by Jon Ellenzweig, Andy Carmody and Andrew Joyner to answer any questions.
[Operator Instructions] Your first question comes from the line of Chandni Luthra from Goldman Sachs. Your line is open.
Hi, good morning. Thank you for taking my question. So, you know, third quarter you talked about seeing a shift from OpEx to CapEx, because more costs were getting capitalized. Now obviously you gave some color on it that a lot of work orders are being done in-house this year or rather more recently. But could you help us understand what happened in fourth quarter, why is it that the total cost to maintain homes was lower? Why was CapEx lower? And how should we think about CapEx going into 2023?
Kevin, I’m going to turn that over to you.
Sure. Yes, thank you. Thanks for the question. Yes, we have spent the last six to nine months really focused on cost containment. Our teams out in the field and across the country and we’ve done a number of things. We’ve really tightened our scopes such that we’re able to rain in what the costs are on all the terms to whether we’ve done things like — or before we might see ceilings for instance, on the turn when we didn’t really need to, so we’ve tightened that up. Or we pride ourselves in providing really good service in homes to our residents. And sometimes we had a little bit of scope creep like an HVAC maintenance guy would want to add zones to a house in the HVAC. And we think that’s a little bit overboard, so we’ve cut that back.
So, we’ve turned a number and we’ve really tightened our scopes. We’re also doing more even turns, we’re using in-house people now that we’re not buying quite as much, we’ve repurposed some of our maintenance teams, to help you in-house turns. As well as we’ve increased the number of work orders that we do in-house. We’re now doing 75% of work orders on in-house and we’ve found that when we do work orders ourselves, we’re saving about $400 a job, with conscious about $160 a work order, when we do it in-house for instance $500 to $600 a work order if we bend it out, so that’s lowered our cost as well.
And then we’ve also negotiated prices down. We have a price book that we use across the country and we’ve negotiated 670-line items down that we — all of our maintenance techs and supervisors have. So, between bringing down the prices and doing more work orders in-house, really looking at the scope, we’ve been able to drop our costs or our cash cost the turn, a home dropped from like $5,200 in September to $3,800 in February, that’s a 27% decrease in the cash cost to turn a home.
And we’ve also dropped just the maintenance expenses, our cost to maintain homes by doing work orders by about just under 7%, 6.7%. And we hope to bring that down for the rest of the year, so while there is some inflationary pressures out there, mainly with our vendors on labor, we’ve been able to, you know, bring cost ourselves, just by being — by scrutinizing more, we’re doing on scope and our costs.
And Chandni, the only thing I would add to that is that, it’s important to look at everything over a longer period of time. There could be noise in a quarter, it’s always better to look at the full year. If you look at the full-year cost to maintain, which includes both expensed and capitalized items, that was up 14% in the same home portfolio. We think in 2023 that same cost to maintain number will be up about 7%. So still in an inflationary environment, but we are seeing moderation and part of that is because of the scope improvements and cost containment that Kevin talked about.
That’s very helpful. Thank you. And for my follow-up, could you guys talk about what sort of conversations are you having with your JV partners? As you think about accelerating purchasing homes later in the summer, you gave some thoughts around bringing down the loan to value, but could you give us an update on where price to FFO multiples are at the moment for homes that you did acquire in the fourth quarter? And where that could potentially go, where it becomes feasible for you again?
Well, so what we need to do in order to get to the next fund raise, we essentially need to get to roughly the mid-point. So, if we can buy roughly 3,000 homes and the breakdown of that would be 80% JV-2, 20% Homebuilder Direct, we will be at a point where that existing venture single-family rental ventures will be fully committed. And that allows us to then go and raise a follow-on fund. We started to have those conversations with our JV partners. I could tell you; they are very confident, I think in the overall strategy and in our performance and they feel bullish about the future for single-family rental.
And so, we’re going to start fundraising imminently and hoping that if we can again hit the mid-point, will be in a position to launch, let’s say JV-3, later this year or at the end of the year or maybe early into 2024, but the hope would be, at the end of the year. And that’s really our goal. We think it’s very much viable. All of our existing major investors have indicated that they would like to re-up and they’d like to put more money to work.
And I think they’ve gotten around, I mean, obviously, there’s a lot of dislocation in the equity capital markets, but there is a couple of things happening. One is in the debt capital markets, that dislocation is going away. I would say, it’s probably halfway back now, so that’s an improvement we talked about green shoots. And we had our representatives at the securitization or ABS conference in Vegas, last couple of days and very positive response from buyers of CMBS, so it feels like that’s opening back up, which is helpful.
But then also the JV partners are starting to say, look we’re somewhat agnostic to debt. So, the way they think about it is, if you can buy homes at a 5.5% cap rate and then get NOI growth of 4% in perpetuity, that’s a 9.5% return and they’re happy with that. They’ll take that all day long. We obviously we do better than that because we get the impact of the fees. And from that point forward, it’s only a decision of how much more incremental leverage you want to put on to make — to improve the returns a little bit more. So that’s a big difference right now, I would say between private capital markets and public capital markets, which are in a state of angst I would say about what the cost of capital is, private capital markets are looking through that.
Thank you so much.
Our next question comes the line of Nick Joseph from Citi. Your line is open.
Thank you. Appreciate all the comments on the buildup to the same-store guidance for this year. Just wondering why 6% to 7% is still the right renewal cap, just given the broad macro environment today?
Well, there’s always an arc into thinking about how to set a renewal cap. The key thing for us is always try to set rents below — slightly below market, so that we benefit our residents and they don’t have anxiety, that whether they have to move out or whether they can afford the homes, that’s incredibly important to us. And we’ve shown over time that actually leads to great results, not just for our residents, but also our shareholders and investors as well. So, it’s a bit of an arc, Nick, but I would say, that if we kind of think about where we’re seeing wage growth, we’re seeing that moderate probably from about 8%, I would say with our frontline workers narrowed down to maybe 5% or 6%. And as a result, we think that kind of 6% to 7%, especially given the loss to lease in the portfolio makes sense.
Thanks. That’s helpful. And then just on capital allocation, I know it was pretty minimal in the quarter in terms of the buybacks, but how are you thinking about those going forward, given current valuation and the sources and uses of capital in ’23?
Yes. So, we’ve got a buyback in place, we currently bought about 1.5 million shares, will probably fulfill the existing buyback which is 2.5 million. But then after that, we’re probably inclined to really reserve our capital for future opportunities and growth. We don’t think it’s the right thing to do right now, is to return capital to shareholders in the way of higher dividends or to buy back our stock. We’re a smaller company, we have a great future, we have commitments in our JVs and we would not want to rob those opportunities and future growth by buying back our stock in spades. So that’s the way we’re thinking about it.
Thank you very much.
Your next question comes from the line of Mario Saric from Scotiabank. Your line is open.
Hey, good morning. Just two quick ones on the guidance and then one on the acquisitions. In terms of — so I appreciate the color and the commentary you provided comparing a cap rate to the debt cost and how that drives capital allocation going forward. So is it fair to say within the guidance as it stands today, like you expected refi rate or debt cost rate in ’23 is kind of in a final three quarters, 6% range, which you listed on Slide 10.
Hey, Mario. Yes, that’s the expectation is given what’s happening in the capital markets and the debt financing rates today, we expect to refinance between 5.75% and 6%. Obviously, we’d hope to do better, but that’s where we’re guiding towards.
Got it. Okay. And then within the same-store revenue growth of 5% to 9%, talk about the cap on renewals, 6% to 7%, what type of turnover are you thinking about at the midpoint?
Yes. We’re assuming occupancy of 97% from actually low to high in the guidance and turnover 20%, so we’re holding that constant. So, we’re assuming that the turnover hedge is up, it was obviously extremely low in Q4, but 15% for the year in 2022. So, we’re assuming that moves up to 20%. And obviously it’s accretive for us to have more turnover, is not what we’re trying to achieve, but that’s essentially what we’re modeling.
Got it. Okay. Then my last question just in terms of the book value per share. And Gary, your comment on the extreme disconnect between the trading price and $14. So, what’s the implied SFR cap rate using the 23, expect same-store NOI, reflecting the $14?
Yes, I would say, I think, well it depends on how you measure it. I think if you’re using in place, you’re probably at a very high 4, close to 5, if you’re using 23 you’re probably in the low-fives. And I think that makes a lot of sense to us. And I think again that valuation is certainly underpinned by what we’re seeing in the market. If we wanted to go out and buy 2,000 homes a quarter today, you’d be looking at 5.25% cap rate. That’s one home at a time.
And we think this type of business, once you’ve accumulated portfolio and those homes are stabilized deserves a premium. There is been a couple of transactions in the market. Those look like they’re trading based on high four, low five in place cap rates, obviously it’d be higher on a mark-to-market.
And remember, we have a significant loss to lease in our portfolio, Mario, of at least 15%. So that has to be taken into account. And the only other data point I would give you is that, we sold nearly 300 homes in 2022, we’re planning to sell about 400 homes to a bit of capital recycling in 2023. We’ve got almost half of those already under contract, and those prices all about 10% above our fair value. So, the market is nowhere close to not only our book value, but where homes are actually trading in the market.
Got it. Yes. So, the counter to the comment that you’re buying at 5.5% to 6% caps and you’re using a low 5% cap based on ‘23 expected NOI is really the 15% embedded mark to market in the portfolio?
Correct. Correct. And it’s probably a little higher than that, but yes, we’re using 15%.
Got it. Okay. Thanks.
Your next question comes from the line of Brad Heffern from RBC Capital Markets. Your line is open.
Hey, good morning, everyone. Wissam, I was wondering if you could just talk through the funding plan for 2023, presumably, there is no equity but expected cash flow dispositions and that would be great.
Yes, no problem. There certainly is no equity at our current share price. So, if I look at what we need for going forward for 2023. Based on the guidance that we provided of buying 2,000 to 4,000 homes, assuming 60% LTV is pretty standard numbers. You’re looking at commitments for SFR between $80 million to $160 million on a full-year basis. On top of that, adjacent business is probably need about $50 million of funding and CapEx is probably another $40 million of funding. So in total, our cash flows and our need going forward is probably about $170 million to $250 million, depending on what side of the guidance you’re on.
Now, where do we get that from? We get that from three different sources. Source number one is, our FFO less our dividends on a run rate basis, generates around $60 million of cash for us. Source number two is, as Gary mentioned, we’re looking to probably sell around 400 homes in 2023, that’s probably going to gross proceeds of about $100 million. And let’s not forget that we have $207 million of cash on our balance sheet today and another $500 million of liquidity on our credit facility. So added altogether, we’re in pretty good position to take advantage of opportunities as they come up going forward.
Okay. I appreciate that. And then your comments on supply about kind of mom-and-pops renting out their existing homes because of the low locked-in mortgages. I’m curious how much you see that as really competing supply for you guys? And then how much do you think supply is being driven by build-to-rent and things that are more institutional?
Kevin, you want to start with that and maybe I’ll chime in after.
Sure. We have seen supply come up for the obvious reasons, lot of people can’t sell their homes. But supply is still not what it was pre-pandemic. It’s clearly higher than it was during the pandemic, but it’s not higher than say 2019 and 2018 [Technical Difficulty] well. So I don’t really feel — our portfolio, well it’s out there, it’s not a big driver. I mean, a lot of the old mom-and-pops, maybe they don’t have the websites to review, they don’t have the maintenance teams that we do, they can’t advertise as much. And so it’s not — it hasn’t been a really big impact for us.
And I think that some of the people that if they didn’t sell their home and they’re running it out, they had to go move somewhere. So they took some — another home off the market or some of the homes that they are now running would have been bought by other small investors or people like ourselves and would have come on the market anyway. So I think there is a little bit too much emphasis is being placed on the supply, I have not found it to be a problem from the mom-and-pops.
And then I would just add to that, with all the talk for build-to-rent and obviously we think it’s important long-term, it’s certainly a solution to add supply and we’ve got a very significant program. But with all the talk of it, it’s a tiny part of overall supply. Like if you look at total starts built to rent maybe is 3% or 4%, right? So, it’s not really having any impact on the broader market. And we are in an environment now because it’s become — obviously with really high rates and construction costs still staying fairly high. It’s very difficult to add supply, right? So, it’s not just, Kevin talked about his commentary on supply for mom-and-pops. In terms of new home supply, that’s probably down 15% year-over-year and obviously going into 2023 it’s going to be very difficult for the builders, whether it’s core sale or build-to-rent to add more supply.
Okay. Thank you.
Your next question comes from the line of Adam Kramer from Morgan Stanley. Your line is open.
Yes. Hey guys, thanks for the question. I just wanted to ask about the January new lease growth, kind of, a nice acceleration there. I’m just wondering maybe kind of what drove that outlook, I’m sure there were some kind of normal seasonal patterns that maybe help drive that. But just wondering what drove that? And then maybe kind of any disclosure you can give on February new lease? I think would be helpful as well.
Kevin, over to you.
Sure. Yes, usually what we have found or what I found is that there is a low that happens from Thanksgiving to Christmas and the year turns and as a little bit of pent-up supply that occurs. We also became more rent — have a rent bias, we felt that, so we started pushing rents harder than we have been. So, it’s a combination of the two. We went into Q4 work and we started dealing seasonality for the first time in two years. And so we really went more towards an occupancy bias.
And if you remember at the time, we used to talk about recession, how deep is the recession is going to be. Interest rates were had climbed and so we went through an occupancy bias and that’s 98% and rents stripped down a little bit. We turned the year and we felt in January that push, and people coming back into the market, so we took advantage of that. With that, our occupancy drift down a bit to get our rents and be able to harvest our loss to lease.
Going into the quarter, I would say for Q1, we’re going to be probably around 12% for the quarter in new lease rent growth and mid-7% for blended, at the beginning of the year to get this pent-up demand. 12% new lease rent, but still phenomenal in my book. So that gives you some guidance.
Yes. And I think and Adam just that compares to our guidance. The midpoint of our guidance is 6.5% on renewals and 9.5% on new leases, right? So, 7% blended rent growth with 20% turnover. So already what we’re seeing out of the gate is we’re ahead of that. It’s a slow part of the season. So that’s really good news.
That’s really helpful, guys. Thanks so much for that color. Just maybe switching gears, same-store expense growth 6% to 7.5%, I believe. Just wondering if you could kind of provide any incremental details, whether it’s kind of property tax expense specifically how much you’re kind of budgeting for that — for growth for that versus maybe kind of everything else the bucket of everything else?
Yes. So, I mean, the way we think about it is expenses are roughly divided half between what we say are non-controllable, so that would be property tax and insurance and then the other half is controllable. And so what we think is on the non-controllable property tax and insurance, that’s going to be up high-single digits. We think our property tax is going to be up roughly 8%. And the same-home insurance probably up about 10%, which is a pretty good, compared to what we’re seeing in the industry and certainly a moderation from 2022. And then on the controllables we’re thinking mid-single-digits. So that gets you to kind of that 6% to 7.5%. We feel pretty confident about that today.
Great. Thanks again for the time guys.
Your next question comes from the line of Stephen MacLeod from BMO Capital Markets. Your line is open.
Thank you. Good morning, guys.
Lots of great colors, so thank you. Just wanted to ask about one thing, with respect to the acquisition plan for 2023. You’ve talked a little bit about potentially being able to adjust the loan to value in order to accelerate on the SFR acquisition side. I guess, two questions on that. What sort of factors that you take into account as you think about adjusting the loan to value? And then secondly, are there any other levers that you can pull just outside of the spreads to drive potentially higher acquisitions?
Well, we’re govern right now by the existing joint ventures, right? Again single-family rental JV-2 and Homebuilder Direct and both of those have leveraged requirement. So, we are governed by those requirements, we’re typically around 60%. So that does put a bit of limiter, because if we got rid of that leverage we could go way faster. So again, I think, when I mean my comments about our JV partners being open or being agnostic to leverage and potentially considering a vehicle in the future that has lower leverage, that’s on future vehicles, it’s not on the existing vehicles. So those existing vehicles need to be about 60% and that’s really what’s kind of holding us back a little bit, is because at 60% the cost of leverage is in that kind of high 5% range, which is what Wissam talked about.
So that’s why it’s probably going to be a slower year. We’re planning 400 acquisitions in Q1 and we probably move that, let’s say, if we wanted to go to mid-point we could assume that 400 Q1, 1,000 Q2, 1,000 Q3, 600 — I’m just giving you an idea of what that could look like. And to the extent, obviously that we get a lower rates or lower spreads, we were able to go faster.
Great. Okay. Thanks. Really that’s helpful. That’s all I have. Thank you.
Your next question comes from the line of Jade Rahmani from KBW. Your line is open.
Thank you very much. With the spike in rate that may call into question some of the green shoots that you are seeing in the — little market. I realize spreads might be coming in, but I am concerned about spiking fixed income volatility here. But the backdrop rise is a broader question, which is with acquisition cap rates right on top of that cost. What’s really the value of leverage in your views? Is it to really just gain scale in markets where there is an opportunity? Have you rethought that, because I think it could make sense to operate with much lower leverage than historically until the debt markets become more amenable.
Yes, so I’m going to answer a little bit of that, and then I’m going to allow Jon to — we want to give Jon a chance to talk about how we think about leverage in the context of kind of longer term returns and why we use leverage. There is clearly a benefit to getting scale from an operations perspective, because it allows us essentially to go, let’s say, twice as fast, so — or more. So that — there is definitely benefit there. And then there is obviously more fee income associated with that as well. But we’ll give you some insight into how our JV partners think and how they think about kind of longer-term IRRs and I’ll turn it over to Jon.
I would just say on the — yes, I mean, look the debt markets are whipsawing and we’re seeing, like, the way they are oscillating from day-to-day, week-to-week is really crazy. And so we understand it’s an incredibly volatile environment and we know that the benchmark rates have blown out in the last couple of weeks and again into today. But we are seeing green shoots in terms of the CMBS or ABS market, right? So, we just met with 30 investors over the last couple of days. And they told us that they’re interested again and what they really want and certainly from an A tranche, bigger is better, right? They’re looking for some more call protection, they are looking for some concessions, probably compared to previous type deals.
But the bottom line is that, investors are waiting for deals and they want to see bigger deals. So that’s really good news. What it means, that a spreads will come in and we’ll have to accept the benchmark rates. And I think those benchmark rates will probably continue to oscillate all year, they’ll be up or down and maybe you’ve got to pick a window. But that’s the kind of environment we’re in.
Jon, over to you to talk about how — like why would we — I guess the question is, why would we buy with cap rates in line with debt costs. Why do that at all? Maybe you can give some insight into that.
Sure. And I think, Jade, it’s a great question and it’s extremely important to think about this over a period of time versus point in time. So your point is right, if you’re buying a cap rates right on top of leverage, you’re not getting benefit on day one. But if you think about its overall, let’s say, an eight-year investment program or vehicle life. And you’re going to see, as Gary mentioned before, let’s say, 4% to 5% NOI growth every single year. Over time you certainly get those benefits of leverage. So going in on unlevered basis you might expect a 9% or 10% IRR. But if you’re adding 50% leverage at or around 5.5% to 6%, the same as your cap rate, you’re going to see that IRR expand closer to 14% or 15%. So it’s really thinking about the longer-term because you’re getting the leverage benefit on that growth as opposed to just going in.
So on that point, is there an opportunity to scale up your acquisitions on an unlevered basis? And then accumulate a very large portfolio to securitize in a very low leverage structure, which would allow those CMBS buyers you met with the 30 you met with who want scale in the deal to buy like a really big piece of AAAs and maybe into some of the slightly lower-rated securities?
Yes. The answer to that is, yes.
Okay. Thank you very much for taking the questions and look forward to speaking with you soon.
Your next question comes from the line of Tal Woolley from National Bank Financial. Your line is open.
Hi, good morning. Just wanted to start on the fundraising side, you mentioned you’re optimistic that you should be able to re-up with your partners for another joint venture on the single-family rental side. Just wondering, longer term given that there is been such a sort of few change in credit markets over the last year. How you’re seeing — is there still much dry powder as you hoped in the private markets longer term?
There is — no, there some puts and takes to that. The biggest issue in the private capital markets is, if you have an allocation of real estate alternatives, you’re now dealing with. Where do you allocate your comp capital, given extreme uncertainty and dislocation in office, obviously in retail as well. And so, what that’s meant overtime and we think that’s going to continue to happen and that’s certainly what we’re hearing from our JV partners, it’s more and more capital has to find its way into beds and sheds.
And a lot of investors are underweighted or adversely no allocation of single-family rental. So that’s a tremendous long-term opportunity for our industry and certainly Tricon to be much, much bigger and for us to raise a lot more third-party capital. In the short term, for some pension funds where there is a denominator effect issue. So as the value of equities comes down, they have to adjust real estate allocations. So for some — there is some short-term pressure but for others they’re just underweighted to one real estate and certainly underrated to single-family rental or resi. So we think there’ll be a lot of opportunists for raise — more money at the end of this year and obviously over time.
Okay, that’s helpful. And then I guess just lastly market selection in the single-family rental business. Are there markets now where you’re kind of like at the size, you want to be? And you’re not that interested in growing unit count and are there sort of markets where you’re really looking to add homes?
Jon, I’m going to turn that over to you.
Sure. So, for the first part, I would say, from a scale perspective, we’re happy to grow in all of our markets. Even if you look at our largest market, Atlanta, we’re just a fraction of the size of where we think the opportunity is. So there is no market right now or even sub-market within those larger markets where we’ve reached any kind of concentration limit. Within the markets where we do, I’m sure there are certainly places where we’re seeing stronger performance and others where we’re seeing a bit of softening. We continue to view Atlanta, Charlotte, Dallas, Tampa and Nashville, are extremely strong. Those are places where we continue to grow.
I would say, if you look at rent growth and demand we are seeing some softening in particular in Phoenix and Vegas. And those are really markets where there was such a strong run-up in rent growth at the beginning of the pandemic. And home price appreciation, we’re really just giving a little bit back in those places. So we’re seeing a little bit lower cap rates and slower rent growth there. So, we’re biasing our acquisitions little bit elsewhere right now.
Okay. I’m glad you brought up Atlanta, I’m sure you probably saw the piece in the general constitution a few weeks ago. Just talking about what they thought the impact of single-family rental in the city. This is going to be an ongoing question I’m sure for the next few years. Are you seeing any sort of shifting signs on the politics around single-family rental and some of your major markets?
I actually think we’re starting to see some positive, I think we’re starting to see some green shoots, not just in the debt capital markets, but on the regulatory front as well. And if we’re sticking with Atlanta, we did see that piece, but the University of Georgia is going to be coming out with a landmark study — research study, which is going to show how that the real issue around high home prices and rents is a lack of supply. And they’re going to discuss how any infringement on property rights actually is detrimental and leads to lower supply and higher rent. So that type of research from reputable institutions is incredibly important.
Florida is in the process of passing a bill or an amendment to a bill, which will prevent local governments or counties from passing any kind of rent control. We see that as being really positive. Any bills that have tried to limit institutional ownership of homes has failed on the floor, so those haven’t gone anywhere. We think the White House blueprint for Tenant Bill of Rights is a step in the right direction. We’ve come out with our own Resident Bill of Rights, which we think is incredibly important. We think as this industry matures, you need a standard of conduct or care that will hold all operators to that standard. And we think that’s incredibly important as the industry matures. So those — that’s starting to happen and it’s going to protect our residents, it’s going to make our industry stronger.
And really, we have to get the message out there, Tal. There is a lot of families and to be precise, it’s about 35% in the U.S. that either can’t buy a home, because they don’t have the credit or they don’t have a down payment or they want the flexibility, but they can’t buy a home and that creates a wealth barrier. And so that’s why our industry is so important, because it allows families to move into these neighborhoods with good schools and it allows them to have better outcomes for their families and then their families and allows upward mobility. So I think when lawmakers and the media start to understand how important is for families to have options or alternatives and they realize all the good things that we and our industry are doing, that sentiment will start to change.
Got it. [Multiple Speakers]
Just to add one piece to that. And that as we have created a government relations arm or group within the company. And we’ve identified, we’ve gone through the process of identifying. We’re starting to reach out to key local, state and federal government officials. Even media, third-party allies to educate everybody about the benefits of this industry and especially how we’re running our real estate and how we think about our residents. So it’s something we’re taking a very proactive approach to do exactly what Gary was saying and educating people about our industry.
Great. Thanks very much everyone.
Your next question comes from the line of Dean Wilkinson from CIBC. Your line is open.
Thanks. Afternoon, everybody.
Hi, Dean. How are you?
I’m fantastic. I hope you are too.
I don’t know if this question is for Gary or if it’s a balance sheet question for your very own CJ Parker. Looking at the Canadian residential development side of things, the $1.5 billion, give or take remaining project costs. How much of that is at risk vis-a-vis inflationary pressures? And have you seen a material uptick in project level financing that is starting to squeeze those returns?
Andrew Joyner is here. So, he may want to chime in a little bit on the detail, but I think the short answer, Dean is, no, we’re in very, very good shape. The vast majority of our costs are locked-in. It’s not to say, we haven’t seen significant cost inflation, we have over the years, but those costs are locked-in with rents moving up fairly precipitously. So, the economics of the deals look incredibly good. There is some issues around availability of financing, but we’re very fortunate to have a venture with Canada Pension Plan, where our new projects including Queen & Ontario and Symington are being funded with all equity or all cash.
And so those projects are fully funded. So, we’re really in a great situation. This portfolio is going to add a ton of value over time. It’s going to take probably a couple of more or a few more years, but over time we should be able to harvest significant value, and then we may be able to think about monetizing some of that and using it to grow SFR, pay down debt.
Right. Makes sense. To get a sense of how much, if you were to pencil that project, those projects out today, how much of that $2.2 billion could inflate too?
Oh, in terms of what the value of the gross value of the portfolio is? The way I think about, I don’t know that off the top of my head. The way I think about it is, we’ve got around $200 million invested equity that’s Tricon’s proportionate share. So, we’ve got about $200 million invested. I think the fair value, that’s about $250 million, that sound about right. And we think that’s going to easily be worth $400 million or $500 million. So that’s pretty significant value creation over time and we’re ready seeing that on The Taylor, like The Taylor is going exceptionally well. We’re already at 50% leased. We’re above budget — significantly above budget on time and on rents. And that’s looking like it’s going to pencil in to close to a 6% yield, which is obviously very attractive even with higher baseline rates today.
Great. That’s it from me. Thanks guys.
Your next question comes from the line of Jonathan Kelcher from [TD Securities] (ph). Your line is open.
Hi. Good afternoon. Just on the — going back to the regulatory front, how much does regulatory risk factor into your buy box on where you’re looking to buy? And are there any markets where you’re maybe looking to lower exposures to?
Across the Board it really doesn’t, it’s a non-factor. There’s a lot of noise around it and we talked about before that in an environment where home prices and rents are moving up a lot. There’s going to be more noise. It’s going to ebb and flow, but obviously in an environment that’s more deflationary, some of that noise goes away. So, it’s always going to be there. It’s always going to ebb and flow. It’s not a factor for us for where we buy. There is nothing happening in virtually any market that rent is limiting our ability to run the portfolio to raise rents. I think the only place and Kevin might chime in, where I think we might want to limit our exposure would probably LA County.
Kevin, if you could talk about LA County, but it’s a difficult place to operate and that might be a mark as we think about pruning our portfolio and recycling some capital that would be the one market where we would think about doing it.
Yes. Thanks. I agree, this is a market where it’s still — there’s still ongoing moratoriums [Technical Difficulty] the residents living in the County, making it really difficult and fortunately for us, most people are responsible and they’re paying their rents. There is a small part of people who are taking advantage of it, and are going to wait it out until the more programs. And so, it makes a little bit more difficult to operate here. And so it’s [Technical Difficulty] as Gary mentioned, we’re probably going to hold-off on divesting anymore and going into the future.
Okay. So, the 400 homes you’re looking to sell this year, that’d be sprinkled basically across your portfolio?
No, they largely be Southeast Florida and LA County.
Okay. And then lastly, just on the corporate overhead, let’s say you’re looking to have that down $0.03 this year, what is the starting point for that? Does that exclude the $50 million in LTIP from 2022?
Okay. Thanks. I’ll turn it back.
Great. Thanks, Jon.
And there are no further questions at this time. Mr. Gary Berman, I turn the call back over to you for some final closing comments.
Thank you, Rob. I’d like to thank all of you on this call, for your participation. We look forward to seeing you at our upcoming Investor Day in April and speaking with you again in May to discuss our Q1 results.
This concludes today’s conference call. Thank you for your participation. You may now disconnect.