August 27, 2020
Tricon Residential Inc
US$300MM Blackstone-led investment strengthens balance sheet and validates platform
Event:
This morning, Tricon Residential Inc. ("TCN") announced a US$300MM preferred equity issuance, exchangeable into TCN shares at US$8.50 (~C$11.18)—in line with its US$8.48 pre-tax IFRS NAVPU.
First impression
Our view: The US$300MM investment supports TCN's continued growth and deleveraging, with proceeds from the offering set to repay the corporate credit facility and reduce proportionate net debt to total assets by 500 bps to 56%, excluding convertible debentures. In our view, the strong sponsorship by Blackstone Real Estate Income Trust, Inc. ("Blackstone" or "BREIT") speaks to: 1) the strength of TCN's tech-enabled platform; and 2) the abundance of structural tailwinds for TCN's business.
Exchange price represents a 13% premium to yesterday's close. Led by Blackstone, a syndicate of investors has agreed to purchase US$300MM of nearly created preferred units. The preferred units are convertible into 35.3MM common shares at an exchange price of US$8.50 (~C$11.18). The exchange price represents a 13% premium to yesterday's C$9.90 closing price and a 16% premium to the 30-day VWAP. The preferred equity carries a quarterly cash dividend of 5.75%, increasing after the seventh anniversary. Together with its US$240MM investment (of the US$300MM total), BREIT Chairman and CEO Frank Cohen will be appointed to TCN's board. Preferred equity holders will not be entitled to vote as common shareholders.
For all practical purposes, we view the prefs as equity. On an as- exchanged basis, the preferred equity will represent 14% of the pro forma diluted share count. Of this, Blackstone will represent ~12%. While the term of the preferred equity is perpetual, TCN can convert the prefs into common equity after year five with: 1) cash at 105% of the exchange price; or, 2) common stock, provided that shares are trading at a 115% of the exchange price. TCN can also convert the preferred units into equity after year four, provided that common shares are trading at a 135% of the exchange price.
Investment to reduce leverage by 500 bps to 56%. TCN expects to use the proceeds to pay down effectively all of its corporate credit facility, which carried a $330MM balance as at June 30. On a pro forma basis, TCN's proportionate net debt to total assets declines by 500 bps to 56%, excluding convertible debentures (59% including converts). Moreover, TCN remains committed to reducing leverage to 50–55%, with the planned syndication of a 2/3 interest in its multi-family portfolio in late 2020/early 2021 set to reduce reduce leverage to about 50%, excluding convertible debentures.