Tricon Residential Inc T.TCN

RBC (Correct this time)

[retiredcf]

These are USD figures and their upside scenario target is US$12.00. GLTA

August 9, 2023

Tricon Residential Inc. Rate Sensitivity Comes Back To Life

Our view: While TCN's 2Q23 results were in line, the forward guide was ultimately disappointing in the context of peers who have raised. The new guide also seems somewhat aggressive, and TCN's ability to get to the midpoint of the revised revenue growth guidance seems stretched at best. The lower acquisition expectations make sense given what has happened to rates over the past few weeks, although TCN still seems optimistic that a new JV will be raised around YE23. Our estimates are down by 2-3%.

Key points:

• 2023 core FFO/sh guidance range narrowed. TCN narrowed the high and low end of core FFO/sh guidance by $0.01 each to $0.55-$0.58, reflecting 50 bps lower revenue, opex, and NOI growth assumptions. Acquisition guidance was also lowered to ~2,000 homes (2,000-4,000 prior) at ~$700 million ($700-$1,400 million prior). The offset to the lower NOI/acquisition assumptions that kept the midpoint of overall guidance unchanged was stronger fee/residential income.

• Higher capital costs and sticky prices limit 2H23 acquisitions. TCN acquired 805 homes in 2Q23 for a total acquisition cost of $263 million, in line with prior commentary and ahead of 1Q23 at 409 homes. Despite the pickup in the quarter, TCN's revised acquisition guidance now assumes a pace of roughly 400 homes/quarter in 2H23. Management indicated the slower acquisition pace reflects an increased cost of capital, rising home prices, and a preference to complete JV programs without assuming negative leverage.

• Lower acquisitions not impacting JV completion and re-up timeline. TCN indicated that, despite the slower acquisition pace, JV-2 and JV- HD should still be completed by year-end 2023. In order to complete the JVs at a slower acquisition pace, the entities are now targeting lower leverage (55-60% LTV vs. 60-65% previously), which means incremental acquisitions will have basically no leverage. TCN also cited continued interest from partners in re-upping and creating a JV-3, with management targeting a launch in late 2023 or early 2024. Future JVs could have lower leverage targets if rates stay at current levels, which we think would be positive for TCN's leverage profile, although there could be a negative impact on fee income.

• Balance sheet transaction activity picking up to recycle capital. TCN guided 2H23 acquisitions of $125 million across 800 homes, including 300 wholly owned homes. Combined with 247 wholly owned homes acquired in 2Q23, TCN is acquiring on the balance sheet in a more significant way than it has in some time. This is part of a capital recycling plan, with TCN shifting capital out of SoCal and SE Florida and into other focus areas with newer product. Dispositions are occurring at low-to-mid 4% cap rates, with acquisitions near a 6% cap rate, while the age and capex burden of the homes is improving.

• Estimates down by $0.01-$0.02. Our 2023/2024 estimates are down by $0.01/$0.02 on a mix of slightly lower SFR estimates, lower acquisition expectations and higher benchmark rates. PT unchanged at $10/sh.