Our view: We're pleased to see Tricon Residential Inc. ("TCN"): 1) extending and expanding its resale single-family rental ("SFR") acquisition pipeline, with a new joint-venture ("JV-2") to acquire up to 19,000 homes valued at $5.2B—the largest JV in TCN's history; 2) growing third-party AUM faster- than-expected, with continued support from TCN's institutional partners; and, 3) a recently fortified balance sheet (link) to support continued acquisition growth. With our forecast reflecting the extension of JV-1, but not the expansion, we see upside to our $0.57 2022 FFOPS estimate of $0.02–0.04/share (4–7%) and no change to our $10.50 NAVPS (~C$13.40). Reiterate high-conviction Outperform.
First impression
Overview of SFR JV-2 (successor to SFR JV-1). The JV includes an initial equity commitment of $1.40B, which can be increased to $1.55B, comprised of: 1) $950–1,100MM from the Teacher Retirement System of Texas ("TRS"), Pacific Life Insurance Company ("Pacific Life"), and one of TCN's "existing global investors"; and, 2) $450MM from TCN, representing 29–32% of the equity. Including projected leverage of ~70%, this will enable the JV to acquire approximately 17,000 to 19,000 homes through the existing resale market, valued at $4.7–5.2B (~$275,000/home). TCN will serve as the asset and property manager for the joint-venture.
Building scale with a clear runway to ~50,000 SFR homes. TCN has three channels to grow its SFR portfolio, including: 1) resale homes acquired through its new $1.40–1.55B SFR JV-2; 2) purpose built communities developed through its $450MM build-to-rent JV; and, 3) new homes acquired through its $300–450MM homebuilder direct JV. Collectively, these JVs aim to acquire 23,000–27,000 homes (6,900–7,500 at TCN's share). Inclusive of TCN's current 24,000+ home portfolio, this would increase its total SFR portfolio to 47,000–51,000 homes (25,000–26,000 at share) over the next 3–4 years. See Exhibit 1 herein for details.
Putting TCN's acquisition targets in context. TCN anticipates acquiring over 6,000 homes between Q2/21–Q1/22, including 1,500+ in Q2/21. In 2022– 23, TCN aims to acquire 7,700–9,000 homes annually (at 100%) vs. our ~5,100 forecast. TCN's target includes ~6,000 resale homes, which equates to just ~0.5% of the 1.2MM transactions annually in its markets. Notably, the National Rental Home Council, estimates that owner-occupied housing has increased by 10% over the past 5Y, compared with just 1% for rental housing—including the loss of over 275,000 rental units in 2020 alone.
TCN's shares still have room to run; reiterate Outperform. On balance, we see these investments as well-supported by TCN's 44% levered balance sheet (i.e., no need for further equity), with net D/GBV sitting below TCN's 50–55% target. In addition, we continue to see upside in TCN's shares, which are trading at an implied cap rate of 4.8%, compared with: 1) its U.S. SFR peers at 4.0–4.1%; and, 2) private multi-family cap rates of ~4.6% in TCN's Sun Belt markets, with a range of 4.5–4.7%, according to RCA. Using a 4.5% SFR cap rate would increase our NAVPS $2.00 to $12.50 (~C$16.00).