July 10, 2020
Tricon Residential Inc.
$553MM securitization transaction adds term and reduces financing costs
Event:
Tricon Residential Inc.’s ("TCN") single-family rental joint venture (in which TCN has a one-third interest) priced its $553MM 2020-SFR1 securitization transaction at a 2.3% WAIR for a term of six years.
First impression:
Our view: The pricing is a record low interest rate for the single family rental (“SFR”) industry. We believe this reflects accelerating demand for the broader SFR sector, as well as TCN’s middle-market strategy (and its capabilities as an asset manager) in particular. Notably, the transaction: 1) is the Company's largest securitization financing to-date; 2) was ~5x over- subscribed, with significant interest across all tranches; and, 3) placed with 40 institutions, including 21 new investors to TCN.
Transaction priced at a 195 bps spread and a 73% LTV. The 2020-SFR1 securitization transaction includes six tranches of fixed-rate certificates, with a weighted average coupon of 2.34% and term to maturity of six- years. Pricing represents a 195 bps spread over benchmark rates. The securitization was backed by a portfolio of 3,540 homes with an IFRS value of ~$763MM ($215K/home), equating to a 72.5% loan-to-value ratio. The transaction is expected to close on or about July 21, 2020.
Set to reducing floating rate debt by 4–5pp, to ~31%. The financing will lock-in a low fixed cost of funds and will reduce TCN's floating rate debt to ~31%, from ~35%, on a proportionate basis. Gross proceeds of $553MM (100% basis) will be allocated to: 1) repayment of JV credit/subscription facility debt totalling $480–485MM at a weighted average interest rate (“WAIR”) of 3.58%; 2) ~$11MM of transaction costs; and, 3) ~$3MM of securitization reserves. Net proceeds of $55–60MM are allocated towards future acquisitions by the JV.
We see FFO accretion of ~$0.01/share or 1–2%. The ~120 bps rate reduction, partially offset by transaction costs, and the $68–73MM increased loan amounts, pencils in at net expected interest savings of $1.5MM/annually, or ~$0.01/share. This represents accretion of 1–2% relative to our 2021E TCN-defined FFO/share of $0.47, which includes $0.04 of residential development fair value gains.
Q2 results on August 5 AMC; conference call on August 6 at 10am ET. Dial 1-866-521-4909, pass. #7087334. Our Q2/20E FFO/share of $0.08 is a tad below consensus of $0.09 and compares to Q2/19A of $0.10. Post Q2 results, we will formally recast our 2020–22 FFO/share estimates