Tricon Residential Inc Big Fees
Our view: TCN's 3Q21 results were well above our expectations, mainly on the realization of significant incremental fee income as SFR JV-2 started deploying capital. Renewals continue to be managed at a low level, but this is generating group-leading turnover stats and loss to lease, as well as a long runway of 8-9% blended rate growth. Our estimates are moving higher on the additional fee income.
Key points:
$0.01 3Q21 beat. TCN reported 3Q21 core FFO/sh of $0.14, $0.01 above consensus and our estimate of $0.13. On a nominal basis, core FFO was 14% above our estimate. The largest drivers of the beat versus our estimates were asset management fees, G&A/compensation and interest expense.
Managed renewal rates keeping blended rates in the single digit, but highest loss to lease and lowest turnover in the group. TCN's 3Q21 blended rate growth was 9.1%, with renewals of 5.0% and re-leases of 20.3%. October's blend was lower at 8.0%, but this was due to a higher renewal percentage as the underlying rate growth figures were similar. TCN continues to govern renewals at lower levels than peers, which is likely to moderate growth some in the near term. However, management noted that it is confident that blended rate growth can continue at 8-9% for some time (RBCCMe well into 2023). The policy continues to generate group-low turnover, while we think loss to lease is also the highest in the group at 15-20%.
Strong 3Q21 acquisition pace, Zillow could provide some upside. During the quarter, TCN acquired 2,292 homes at an average cost of $312,000 for a total acquisition cost of $657 million ($200 million attributable to TCN, above our $150 million estimate). The company expects to purchase over 1,600 homes in 4Q21, with the lower volumes explained by seasonality. However, management noted it is seeing an uptick in volumes of homes acquired from Zillow, which could drive acquisitions above company expectations. The company recently expanded its buy box to 21 markets (previously 12) and expects to acquire ~8,000 homes a year going forward at 5%-5.5% cap rates.
Same-home operating expenses up 5.3% YoY. TCN's three largest operating expense categories are property taxes, property management and R&M. In 3Q, these were up 4.5%, 4.1% and 20.6% YoY, and combined with the other expense categories, overall expenses were up 5.3%. While the R&M number screens very high, TCN noted that only 5-7% of that was due to material and labor cost pressures, with the rest due to higher work orders year-over-year.
2022 core FFO estimate up by $0.02. Our 2022 core FFO estimate is increasing by 4% to $0.61. We have actually moderated our same-store growth expectations slightly given the continued governor on renewals, but the 3Q21 upside to fee income is more than offsetting this. Our price target is unchanged at $16/sh