Tricon Capital Group Inc.
Accelerating single-family rental demand keeps three-year targets intact
Our view: Benefiting from accelerating demand for its single-family rental homes (70% of our NAV), we see Tricon Capital Group (“TCN”) as well- positioned against near-term headwinds for residential development (12%) and multi-family rental (17%). On balance, positive demand drivers continue to underpin an outlook for high-single digit to low-double digit annualized NAV and FFO per share growth over the next three years. We reiterate our Outperform rating and C$11 price target on TCN's shares.
Key points:
Residential transformation complete. After refining its strategy over the past two years to focus on single-family and multi-family rental, TCN has now completed its ten-year evolution into a tech-enabled rental housing company, with: 1) revised financial disclosures (details below); 2) a re- aligned corporate structure to unify and streamline operations; and, 3) the proposed re-branding to Tricon Residential Inc.
Single-family rental ("SFR") a structural winner. Benefiting from social distancing measures and self-showing technology (i.e., no leasing agents needed), all of TCN's single-family rental demand drivers are up in April, including: 1) leads up 20% YoY; 2) signed leases up 17%; 3) same-property occupancy up 90 bps to 97.4%; and, 4) rents up 5.6% on new move-ins and 4.7% on renewals. We also see multi-year demographic support (link).
A tempered outlook for multi-res and for-sale developments. While we see multi-family rental ("MFR") as comparatively well-positioned versus other property types, TCN's MFR portfolio derives 37% of NOI from Orlando (20%), Houston (12%), and Las Vegas (5%). With this backdrop, we see -4% SP-NOI growth in 2020 and 3% growth in 2021E/22E. We also see near-term headwinds in TCN's for-sale development business (8% of our NAV), but little change for MFR developments in Toronto (4%).
Increasing transparency and simplicity. In Q1/20, TCN adopted consolidated reporting and provided; 1) segmented and proportionately consolidated disclosures; 2) capex and AFFO disclosures; and, 3) enhanced detail on debt maturities and operating metrics by city. While we have not made any changes to our NAV methodology at this juncture, we believe disclosures provided a framework to better understand the significant option value the asset management business (which is not in our NAV).
Reiterate high-conviction Outperform and C$11 price target. Our NAVPS increases by $0.25 to $7.75 (i.e., C$10.85 at 1.40 USD/CAD) on the back of upward revisions to our SFR values, partially offset by largely expected write-downs in for-sale housing development. Supported by 3% SP-NOI growth and above-average financial leverage, our 1Y forward NAVPS reflects 9% growth to $8.50. Our 2020E–22E FFOPS estimates increase by $0.02–0.03 to $0.38, $0.43, and $0.50, and reflect a 3Y CAGR of 10%