Tricon Residential Inc.
(TCN-T) C$13.50
Resuming Coverage; SFR Portfolio Growth Set to Accelerate Event
Resuming coverage post-$166 million equity offering (C$201 million), including the full over-allotment.
Impact: NEUTRAL
Tricon completed the offering of 15.5 million shares at a price of C$13.00 for net proceeds of ~$160 million (C$193 million), which will be used to fund future growth initiatives.
While the timing of the equity offering was somewhat surprising to us given both Tricon's Q1/21 available liquidity (~$776 million) and the success of its leverage reduction initiative (-970bps q/q), we believe it reflects an acceleration of its third- party capital initiatives ($1 billion of equity commitments announced YTD), and more specifically its SFR growth strategy. The lower leverage should also allow Tricon to compare more favourably to U.S. comps in advance of a U.S. listing, which we believe could take place as early as H1/22. SFR continues to be one of the best performing real estate asset classes during the pandemic. The company has created several new vehicles to grow its SFR portfolio, most recently with the creation of its $1.5 billion home-builder direct SFR JV. The creation of this JV gives Tricon a visible path to 30,000 SFR homes. We continue to anticipate the announcement of an SFR JV-2 this summer, and believe this equity raise reflects the potential for a larger vehicle than its SFR JV-1 ($750 million equity commitment with three equal partners). On creation of its SFR JV-2, management anticipates its quarterly acquisition pace could increase to 1,500 homes, albeit this figure may ebb and flow. Fundamentals remain strong with management targeting 6% same property blended rent growth over the medium-term.
TD Investment Conclusion
While the equity raise was unexpected, we believe it positions Tricon well to fund its current and future growth initiatives. In our view, Tricon is one of the best-positioned names in our residential coverage to benefit from the change in behavior brought about by the pandemic, particularly its growing SFR business. Although Tricon's valuation has improved over recent months, we continue to see upside, particularly as it still trades well below its U.S. SFR peers. We are reiterating our BUY rating and increasing our target price to C$15.50.