August 10, 2020
Tricon Residential Inc
Benefiting from structural tailwinds
Our view: Tricon Residential Inc. ("TCN") remains one of the best ways to play de-urbanization and de-densification trends within our coverage universe. While still early days, TCN's single-family portfolio is benefiting from accelerating demand for both rental and for-sale housing (70% and 8% of NAV). Moreover, we came away from the quarter with increased conviction in TCN's ability to deleverage its balance sheet, as it looks to syndicate a larger portion of its multi-family portfolio (18% of NAV) sooner than we expected—and at a better price. Reiterating our Outperform rating on TCN's shares, we increase our price target by C$1.50 to C$12.50.
Key points:
Stronger-than-expected Q2 results driven by for-sale housing. FFO/share of $0.11 was $0.03 ahead of our $0.08 forecast, driven by robust for- sale housing results. While for-sale housing materially outperformed our draconian forecast, we were more impressed by the 5% SP-NOI print from single-family rental ("SFR"). This compares to TCN's Sunbelt rental housing peers, which delivered SP-NOI growth of ~1% in Q2/20, with a range of -3% to +6%. Please see Appendix I for details.
Accelerating SFR demand reflected in rent increases on new move-ins.
Supported by average rents that are $250–450 below SFR peers, TCN's affordable portfolio has seen rent growth on new move-ins accelerate each month, from 6% in April to an all-time-high of 12% in July. Buoyed by exceptional demand, we believe the SFR portfolio can comfortably sustain, if not exceed, ~5% SP-NOI growth over the next few years.
On track to syndicate the multi-family rental ("MFR") portfolio by late 2020/early 2021. TCN plans to syndicate a two-thirds non-managing interest, which compares to our prior expectations for the sale of a 50% interest (in mid-2021). Moreover, TCN is confident it can achieve a sale price on par with its $1.3B IFRS fair value—7% higher than our prior NAV carrying value. Our current NAV value sits 3% below TCN's IFRS fair value.
Sale of MFR portfolio would meaningfully reduce leverage and SP-NOI drag. The sale of the MFR portfolio in line with IFRS values would reduce TCN's net debt to total assets by about 5–7pp to 54–56%, excluding the converts. It would also reduce SP-NOI drag from Orlando/Houston, as TCN's blended Q2 print (for MFR and SFR) would have been ~170 bps higher if TCN owned a 1/3 interest in MFR instead of 100%.
Reiterate high-conviction Outperform; price target +C$1.50 to $12.50.
Our NAVPS increases by $0.75 to $8.50 (i.e., C$11.39 at 1.34 USD/CAD) on the back of stronger-than-expected SFR performance and increased confidence in MFR values. Supported by 4% blended SP-NOI growth and above-average financial leverage, our 1Y forward NAVPS reflects 12% growth to $9.50. Our 2020–22 FFOPS estimates increase by 19%, 15%, and 7% to $0.45, $0.50, and $0.53, implying a 3Y CAGR of 13%.