March 23, 2021
Tricon Residential Inc
Building value with C$500MM Toronto multi- family joint-venture
Impact: Positive
This morning, Tricon Residential Inc. ("TCN") announced a C$500MM build-to-core, Toronto multi-family JV with CPP Investments.
First impression
Our view: At a high level, we're pleased to see: 1) TCN more clearly define its development strategy in the GTA; 2) partner with a top-tier global investor, which provides further validation of TCN's platform, in our view; and, 3) capitalize on what we believe will be a temporary dislocation in rents and land pricing. While we expect negligible changes to our estimates at this juncture, we believe the announcement highlights continued momentum in TCN's third-party asset management business.
Overview of the 70/30 build-to-core JV. The JV includes an equity commitment of up to C$350MM from CPP Investments and C$150MM from TCN for the development of 2,000-3,000 market rate suites in the GTA with a focus on downtown and a total development cost of ~C$1.4B. TCN will serve as the developer, asset manager, and property manager. The first project is under contract on the east side with a total equity investment of C$192MM (C$58MM at TCN's share) and a budgeted cost of C$600MM. Construction is set to commence in 2022 with completion in 2025. We expect a yield toward the high end of TCN's 4.5-5.0% range.
An underappreciated part of the TCN story. TCN has been quietly incubating one of the highest quality multi-family development portfolios in Toronto. Including the JV's first project above, TCN has a pipeline of ~1,600 suites at share with a total cost of ~US$1.0B, set to come on line in 2022-26. With cap rates of 3.4% for Downtown Multifamily according to Altus and 2.75-3.75% for High Rise A according to CBRE, we think TCN's targeted development spreads of 75-125 bps are achievable. This translates into value creation of US$181-345MM (US$0.79-1.50/share), augmenting NAV growth by 2-4% annually—which is not in our forecast.
Cadence of capital deployment in line with our estimates. With our forecast incorporating the acquisition of one ~US$50MM development site (at share) in each of 2021 and 2022, we expect little change to our FFOPS estimates. Similarly, we see no change to our US$9.75 (~C$12.24) NAVPS estimate, albeit with multi-res development exposure increasing ~1pp to ~9%. For sale housing development represents a further ~7%.
TCN's shares still undervalued; reiterate Outperform. TCN's shares are trading at an implied cap rate of 4.9%, compared with its U.S. SFR peers at ~4.4-4.7%. This compares to private multi-family cap rates of ~4.7% in Sunbelt markets, with a range of 4.6-4.9%, according to RCA. Using a 4.7% single-family cap rate would increase our NAVPS US$1.50 to US$11.25.