Tricon Residential Inc.
(TCN-N, TCN-T) US$16.38 | C$20.45
Downgrading to HOLD on Valuation; Outlook/Forecasts Unchanged
Event
Downgrading Tricon to HOLD from Buy.
Impact: NEUTRAL
Although our positive outlook for Tricon remains unchanged, its strong share- price performance since December 2020 has pushed its valuation to a premium versus its U.S. SFR peers, Invitation Homes (INVH-N), and American Homes 4 Rent (AMH-N). Since December 31, 2020, Tricon has generated a total return of 83% versus INVH/AMH at 41%/37%, respectively. It also compares favourably with the Capped REIT index and the U.S. REIT index, which have generated total returns of 36% and 39%, respectively, over the same period.
Since Tricon's shift to SFR, which accelerated with the acquisition of the Silver Bay portfolio in 2017, it has traded at a discount to its peer group. However, with the recent share-price appreciation, Tricon is now trading at a premium to its U.S. SFR peers, both on P/AFFO (3.7 multiple points) and P/NAV (five percentage points). We view the current premium versus its peers as unjustified, particularly given that the peers are pure-play SFR, have lower leverage, greater trading liquidity, and slightly better earnings growth profiles. On a P/BV basis, Tricon is now trading at 1.5x versus its long-term average of 1.2x. On P/NAV, it is currently trading in line with NAV versus the long-term average of a 22% discount.
So, although we continue to like the U.S. SFR industry and believe that TCN is well-positioned to benefit from the favourable fundamentals, the current valuation level makes it difficult to justify a Buy rating. That said, we would not hesitate to upgrade Tricon to Buy on any share-price pullback.
Forecasts. We increased our NAV/share estimate by +11% to $16.30 (the main driver is lowered cap rate to 4.2% from 4.4%). Our earnings forecasts are unchanged.
Tricon will host an investor day on April 12, 2022 (webcast link to be posted on TCN's IR page link).
TD Investment Conclusion
Tricon continues to benefit from the favourable U.S. SFR fundamentals, as well as growth in its asset base and third-party AUM. However, in consideration of its relative valuation, and with just an 11% total return to our revised $18.00 target price, we are lowering our rating to HOLD from Buy.