March 8, 2021
Tricon Residential Inc
What 70% could mean for investors
Our view: Supported by on-going de-urbanization, de-densification, and demographic trends, the fundamentals for Tricon Residential Inc.'s ("TCN") business remain among the best in our coverage universe. These positive factors are magnified by a number of company- and industry- specific tailwinds, such as: 1) further NOI margin expansion to 70%+, over time; 2) raising $1B+ of third-party capital; and 3) continued cap rate compression, to close the single/multi-family gap. In our view, this should support high-single-digit to low-double-digit NAV and FFO per share growth. We increase our price target by C$0.50 to C$14.50 and reiterate our high-conviction Outperform rating on TCN's shares.
Key points:
Our NAVPS increases $0.50 to $9.75 (C$12.34); FFOPS largely unchanged.
Post Q4, our NAVPS increases by 5% on the back of a 10 bps lower single- family rental ("SFR") cap rate to 5.1%. Our 1Y forward NAVPS reflects 10% growth to $10.75, underpinned by ~5% SP-NOI growth (vs. 5.6% in 2020). Our 2021–22E FFOPS are unchanged at $0.50 and +$0.01 to $0.55, implying growth of 3% YoY (due to a strong comp & ~11pp of deleveraging to 50%) and 10% YoY, respectively, and a 3Y CAGR of 14% (2019A–22E).
What 70% could mean for investors. With revenue growth outpacing costs, CEO Gary Berman highlighted that the SFR business could achieve an NOI margin of 70%, or better, over the next 3–5 years. Relative to 59.1% in 2012, we think 2020's 66.5% margin illustrates just how far TCN has come in terms of technology and operations. While our 2021/22E NOI is based on 66.7%/67.1% margins, a 70% margin would equate to $10MM ($0.05/sh) of additional NOI, increasing our NAVPS by $0.75 to $10.50.
"Prolific" third-party capital raising ahead in H1/21. Following the syndication of TCN's multi-family rental ("MFR") portfolio, TCN is well-on its way to raising over $1.2B of third-party capital this year. Strategically, this allows TCN to add scale, gain operating efficiencies, take development off-balance sheet, and source capital when publics markets are closed. TCN expects a Canadian build-to-core announcement soon, followed by U.S. MFR and SFR (JV-2 and Homebuilder Direct) announcements in Q2.
We see potential for continued cap rate compression. TCN's shares trade a 5.1% cap rate, compared to SFR peers at 4.6–5.1% and similar Sunbelt MFR cap rates of 4.6–4.9%. While TCN could acquire individual SFR homes at cap rates of ~5.9%, institutional portfolios could trade largely in line with—even below—comparable MFR cap rates. As such, we think the gap between TCN's implied cap rate and MFR cap rates will close over time.
What's in our numbers? Our estimates reflect steady SFR purchases of 900–1,000 homes/Q (i.e., ~$200MM of AUM beyond JV-1), nominal AUM growth for development sites (~$100MM), and no cap rate compression in our 1Y forward NAV. Given points #1–3 above, we see room for upside.