Tricon Residential Inc.
(TCN-N, TCN-T) US$11.90 | C$15.45
Upgrading to BUY from Hold on Valuation and Favourable Outlook Event
Upgrading Tricon to BUY from Hold and forecast update. For our initial thoughts on the quarter, click here.
Impact: NEUTRAL
We are upgrading Tricon to BUY from Hold. Since our downgrade to Hold on March 31, 2022, Tricon's share price has declined ~27%, which, we believe, is overdone and compares with declines of just ~11% each for its SFR peers Invitation Homes (INVH-N) and American Homes 4 Rent (AMH-N). This, in turn, has resulted in Tricon returning to trade at a discount to its peers on both an AFFO/unit basis (-1.1x) and NAV basis (-11%) — that is in line with historical norms. With that said, we see compelling value in Tricon's shares at these levels. Tricon is trading at a 30% discount to NAV, below its long-term average of a 22% discount and 1.0x on a P/BV basis compared with its long-term average of 1.1x (given favourable industry tailwinds, we believe Tricon should be trading above its long-term average).
Although valuations have compressed, U.S. SFR fundamentals remain robust.
Currently, there continues to be strong demand for housing in Tricon's markets despite rising mortgage rates. We expect rent growth to continue (usually lags home price appreciation) and should allow Tricon to acquire homes at higher cap rates. With an estimated loss-to-lease of ~20%, we believe that Tricon is well-positioned to continue to achieve strong rent growth, and in turn, SFR SPNOI growth going forward.
Fundraising Activities. With Tricon's build-rent JV (THPAS JV-1) now nearly fully committed, management pointed to a potential successor vehicle later this year.
Forecasts. Our 2022/2023 AFFO/share estimates are largely unchanged, with higher corporate overhead costs/interest expense mostly offset with higher NOI. Management reiterated its target to increase FFO/share by a 15% CAGR through 2024, which we view as achievable. Our $16.90 NAV/share estimate is +4%.
TD Investment Conclusion
Tricon continues to deliver strong results on the back of favourable U.S. SFR fundamentals combined with growth in its asset base and third-party AUM. We are lowering our target price to US$17.00 from US$18.00 while upgrading our recommendation to BUY from Hold.