Tricon Residential Inc.
(TCN-N, TCN-T) US$8.66 | C$11.61
SFR Acquisitions Reduced Until Financing Conditions Improve
Event
Forecast update. For our initial thoughts on the quarter, click here.
Impact: NEUTRAL
Overall, we would characterize the quarter as largely in line with our/consensus expectations, and view the share price weakness (-3% yesterday) as an overreaction to a lowered acquistion forecast and slightly lower SPNOI guidance (-25bps to +6.5% at the midpoint) noting that TCN's guidance is still nicely above peers (Exhibit 5).
SFR acquisition guidance for FY2023 was lowered to ~2,000 from 2,000-4,000 previously due to an oscillating bond market that makes timing/pricing on securitizations more challenging. Management now aims to complete both the SFR JV-2 and JV-HD programs by year-end, while using lower leverage (55%-60% LTVs versus 60%-65% previously) and targeting higher cap rates (5.75%-6.0% from 5.5%-6.0%). The 800 homes are expected to be split 500/300 between the JV vehicles/Tricon's balance sheet, with homes bought on balance sheet funded by non-core home dispositions in the low-4% cap rate range (which we view as a good trade with acquisitions in the high-5s). We note Tricon also benefits from the tax savings through the 1031 exchange when disposing homes. We believe Tricon is well positioned to accelerate home acquisitions when financing conditions improve. We also expect the official announcement of its SFR JV 3 (expected in late-2023-to-early-2024) to be a positive catalyst for the share price.
Operating fundamentals within the SFR portfolio remain robust, with management pointing to strong demand (leads per home +30% q/q in Q2) and healthy new lease growth expected in the 8%-10% range (renewals at ~7%). Tricon has made solid strides in reducing controllable expenses with the cost to maintain per home (capex + opex) 5.3% lower y/y in Q2/23. Non-controllable costs, however, remain pressured and management now anticipates FY2023 property taxes to increase +10% y/y, up from 8%-9% previously, and also expects elevated HOA and insurance costs.
Forecasts. Our FFO estimates are unchanged, with our FY2023 estimate of $0.56 (consensus: $0.57) just below the mid-point of management's tightened $0.55-$0.58 range. Our NAV is -4% to $13.40.
TD Investment Conclusion
Tricon continues to benefit from favourable U.S. SFR fundamentals. We are maintaining our BUY rating and US$10.50 target price.