Tricon Residential Inc. (NYSE:TCN) Q2 2023 Earnings Call Transcript

Tricon Residential Inc. (NYSE:TCN) Q2 2023 Earnings Call Transcript August 9, 2023

Operator: Good morning. My name is Sara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Residential’s Second Quarter 2023 Analyst Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] I’d now like to hand the conference over to your speaker today, Wojtek Nowak, Managing Director of Capital Markets. Thank you. Please go ahead.

Wojtek Nowak: Thank you, operator. Good morning everyone, and thank you for joining us to discuss Tricon second quarter results for the three and six months ended June 30, 2023, which were shared in the news release distributed yesterday. I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. For more information, please refer to our most recent management’s discussion and analysis and Annual Information Form, which are available on SEDAR, EDGAR and our Company website, as well as the supplementary package on our website. Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A.

I would also like to remind everyone that all figures are being quoted in U.S. dollars unless otherwise stated. Please note that this call is available by webcast on our website and a replay will be accessible there following the call. Lastly, please note that during this call, we will be referring to a slide presentation that you can follow along by joining our webcast or you can access directly through our website. You can find both the webcast registration and the presentation in the Investors section of triconresidential.com under News and Events. With that, I will turn the call over to Gary Berman, President and CEO of Tricon.

Gary Berman: Thank you, Wojtek, our very own top gun, and good morning everyone. During the second quarter, we continue to benefit from exceptional demand for our homes and solid operating performance, which in turn led to strong financial results for our company. These results would not be possible without the efforts of our dedicated employees. I want thank all of you for your commitment to excellence, integrity and teamwork in serving our residents and communities. Let’s turn to Slide 2, so I can share with you our key takeaways for today’s call. First, we delivered another great quarter of operational performance with same-home NOI growth is 6.3%, NOI margin of 68.3%, occupancy of 97.5%, turnover of 19.2%, and consistently strong blended rent growth is 7.4%.

Second, we remain focused on process improvement and cost containment and successfully reduced our cost to maintain by 5% year-over-year. Third, we continue to grow responsibly achieving our target of acquiring 805 homes during the quarter at a high 5% to 6% cap rate. We also successfully closed the securitization transaction July at a weighted average yield of 5.86%. This represents a relatively attractive cost of financing that is in line with our acquisition cap rates for SFR homes in the current market environment. The transaction also helps to reduce our floating rate exposure and term out our debt maturity profile. Looking ahead to the second half of the year, we plan to slow acquisitions to about 400 homes per quarter in order to complete the investment programs for our active joint ventures with lower overall leverage while selectively buying homes at higher cap rate.

We’ve also tightened our full-year guidance for core FFO per share to $0.55 to $0.58, and same home NOI growth is 6% to 7%. And finally, when debt financing conditions do improve, we are well positioned to grow faster with about $60 million of annualized AFFO less dividends, $462 million of liquidity and most importantly, strong inference from private institutional and capital to invest in SFR. Turning to Slide 3. Let’s step back for a minute to put our SFR business in perspective. Demand for housing is outstripping supply and with skyrocketing 30-year mortgage rates, the case for rental has never been more compelling. In fact, owning a single-family starter home today costs a $1000 more per month than renting the same home making renting with Tricon an affordable and attractive option for many American families.

We serve the need for rental housing by acquiring single-family homes, renovating them to a high standard, and providing a hassle-free lifestyle for our residents. Our acquisition program in essence, respond to the demand we see every day for accessible housing alternatives. So let’s now turn to Slide 4 to talk about the acquisition opportunity. Within our target markets, prices of homes that meet our buy box have declined by roughly 4% year-over-year, while rents have increased by about 1%. Taken together, the combination of moderated home prices and slightly higher rents has led to an expansive cap rates by about 25 basis points compared to last year. At the same time, MLS listings volume in our markets has declined by about 30% compared to last year, given homeowners reluctance to sell and forego their attractively priced in place mortgages.

As a result, the buying opportunity is smaller than it was a year ago, but it’s improving seasonally as we get into the summer months. Listings volume have increased by over 90% from December lows, which provides us with ample opportunity to achieve our acquisition targets. With that being said, we intend to slow our pace of acquisitions in the back half of the year to approximately 400 homes per quarter as shown on Slide5. We’ve made the decision with our joint venture partners to complete the investment programs of JV-2 and Home Builder Direct with overall loan to value targets of 55% to 60% rather than 60% to 65% previously. This means we will buy fewer homes, but still invest the same amount of equity. By slowing the pace of acquisitions, we can be even more selective in pursuing high cap rates without sacrificing our home quality or location.

We’ve seen that the securitization market is much more receptive to debt instruments that feature lower LTVs, which should translate to lower financing rates and better execution as demonstrated by our latest securitization transactions. Interestingly, with this shift towards the lower leverage model in our JVs, we’re seeing a convergence between private and public markets appetite for leverage, which makes our strategic capital model all the more compelling for public shareholders. Lastly, on Slide 6, I’d like to share with you an update on our Canadian multifamily built a core portfolio that continues to evolve and see new milestones. Our latest project The Taylor was recently awarded, development of the year and recognition of its resort-quality amenities, exceptional living spaces, and sustainability leadership among other features.

The building is three months ahead of its original leasing schedule, achieving 89% lease up by the end of June with average monthly rent of CAD4.63 per square foot. The Selby, our fully stabilized building, is also performing very well with blended rent growth of 7% this quarter and occupancy of 97.8%. I’m also delighted to announce that our latest project, which will [indiscernible] much needed housing supply of both market rate and affordable apartments. The City of Toronto selected Tricon and our partner Kilmer Group to develop and operate a 725-unit purpose-built rental apartment community in Toronto’s Etobicoke City Center neighborhood, which will include 30% affordable units. Tricon now has nine projects totaling 5,000 plus units in pre-construction for active construction.

As this portfolio stabilizes over the next few years, we estimated we’ll have a gross asset value close to CAD3.2 billion, creating a lot of strategic optionality for Tricon. Moreover, the book value of our stake in this portfolio is expected to double from $0.94 to a $1.90 per share upon stabilization over the next three or so years, creating meaningful value for our shareholders. With that, I’ll now turn it over to our CFO Wissam Francis to discuss our financial results.

Wissam Francis: Thank you, Gary, and good morning everyone. We delivered another solid quarter of financial results, and I want to thank a world-class team who have continued to focus on process improvements and cost containment across our business while delivering an exceptional resident experience day-in and day-out. Let’s kick things off with a review of our key financial metrics on Slide 7. Net income from continued operation was $47 million compared to $406 million last year, which includes $124 million of fair value gains on rental properties against a very strong comp of $396 million last year, as home price depreciation has moderated in recent months. Core FFO per share was $0.14 down $0.02 year-over-year. AFFO per share was $0.11, also down $0.02 from last year, but still providing us with ample cushion to support our quarterly dividend with an AFFO payout ratio of 47%.

Lastly, our IFRS book value sends up $14.09 or CAD18.64 up almost 7% year-over-year. And I will note that our book value does not factor in the value of our strategic capital fee stream. Let’s move to Slide 8 and talk about the drivers that contributed to our FFO per share variance. The year-over-year decrease of $0.02 can be attributed to strong NOI growth in the SFR portfolio being offset by higher borrowing costs, lower performance fees, and an absence of core FFO from the U.S. multi-family portfolio, which was sold in Q4 2022. Specifically, our single-family rental portfolio contributed $0.03 of incremental FFO reflecting NOI growth of 14.9%. This was driven by a 7.3% increase in average rent, 1% higher occupancy and 3.6% increase in proportionate rental home counts.

FFO from fees had a $0.04 negative impact, primarily driven by lower performance fees from legacy residential development businesses, a reduction in acquisition fee as a result of fewer SFR acquisitions, as well as a decrease in property management fees following the sale of the U.S. multifamily portfolio. Our adjacent businesses added $0.01 reflecting strong results in residential development as housing fundamentals remain robust. This was partially offset by lower FFO following the sale of the U.S. multifamily portfolio. I do want to highlight that both our U.S. residential development business and our Johnson business are a great reach through into the overall housing market, and from what we can see, housing demand is holding up exceptionally well.

Interest expense was up $0.03 as we have higher debt balance to support the growth of our single-family rental portfolio along with higher average interest rates. Meanwhile, on corporate overhead tax and other items, there was a $0.01 positive impact because of lower compensation related expenses and a favorable tax recovery offset by higher G&A. Let’s turn to Slide 9 to talk about proportional debt profile. We have been very proactive with addressing our near-term debt maturities, as we said we would. I am pleased to report that as of today we have repaid or extended all remaining 2023 maturities. This includes the SFR Joint Venture to subscription line, which was used to fund acquisition. We have fully repaid this by calling JV Capital commitment as well as a bank term loan with an extension option that we have exercised in order to extend this loan by another year.

Subsequent to quarter end we also use the proceeds of our latest securitization to repay $124 million of floating rate debt that was temporarily used to fund acquisitions within SFR JV-2, and we extended this maturity out to 2028. I’ll dive more into this transaction on Slide 10. On July 11, we closed a $416 million securitization transaction at 5.86% interest rate, which is an attractive cost of financing, and in line with our acquisition cap rates per single-family rental homes. The securitization generated strong demand from 26 investors, which included four new investors to Tricon and was 3.5 times subscribed. A key reason behind the strong demand and attractive pricing was the loan to value of 57%, which is relatively low compared to our prior offerings and underscore our fifth towards a lower leverage model with our JV partners.

Of note, the proceeds of this transaction helped to reduce the floating rate debt exposure by an additional 300 basis points from 29% in Q2 to 26% of total debt on a pro forma basis. Let’s move to Slide 11 to discuss our capital allocation plan for the rest of the year. Over the remaining two quarters, we plan to allocate capital towards the acquisition of around 800 homes. This represents $125 million investment for Tricon and will include 500 homes for the joint ventures and 300 on balance sheet homes, as part of our capital recycling program to replace older non-core homes in less attractive markets with newer and higher quality homes in our core markets that our residents can enjoy. We’re finding that we can dispose of homes at mid 4% caps and reinvest the proceeds into those homes at a high 5% cap to 6% cap, which makes for a compelling opportunity to recycle capital while maintaining a stable balance sheet portfolio.

The acquisition program will be fully funded with a total of $130 million from operating cash flows and non-core disposition. Note that we also have available liquidity of $462 million on top of all this. I’ll end here with Slide 12 to note that we have updated our 2023 guidance this quarter. This reflects a slower pace of acquisition and tightening of the expected range of our same home metrics. This leads to signing the core FFO per share and maintaining the midpoint of this FFO per share guidance. The tighter guidance per same home metrics reflects a continued trend of low resident turnover, which leads to slightly lower rent growth as well as lower ancillary revenue such as early lease termination fees. On the flip side, we benefit from lower turnover expenses and are finding success in reducing our controllable expenses.

This is partly offset by continued pressure on non-controllable expenses such as property taxes, insurance, and HOA. In terms of our core FFO per share guidance, the midpoint remains unchanged. Bringing up the lower end of the guidance is driven by strong SFR and for-sale housing fundamentals underpinning both U.S. residential developments and our Johnson land development business. The tightening on the upper end of the range reflects the lower acquisition and expectations by reducing our acquisition pace down to 2,000 homes versus the prior midpoint of 3,000 homes. As we head into the second half of the year, we remain laser focused on cost control, balance sheet flexibility, and prudent capital allocation while keeping an emphasis on creating the best resident experience possible.

And now to give you more insights into our same home metrics, I’ll turn the call over to the man who had me at Hello, our Chief Operating Officer, Kevin Baldridge.

Kevin Baldridge: Thank you, Wissam and good morning everyone. I want to start today by recognizing the incredible efforts of our operations and customer service teams who delivered another exceptional quarter. I continue to be blown away by our team’s unwavering commitment to resident service and operational excellence and how they keep raising the bar. Let’s move to Slide 13 to talk about the drivers of our same home NOI growth of 6.3% for the quarter. The top-line revenue growth was driven by a 6.7% increase in average monthly rent that was partially offset by a 50 basis point decrease in occupancy as we shifted slightly towards a rent growth bias into the spring. Our rent growth remains healthy with blended rents increasing 7.4% during the quarter, underpinned by 9.8% growth on new move-ins and 6.6% on renewals.

Our renewals reflect our policy of self-governing, which typically maintains rent growth below market level for existing residents, helping them stay in their homes longer and as a byproduct keeps our turnover low. As we moved into July, we saw sustained levels of demand and rent growth coming in at a healthy 8.2% on new leases, 6.8% on renewals, and 7.2% on a blended basis. Our bad debt expense, which is embedded in the revenue numbers, has continued to inch down due to successful collection efforts and is now near a pre-pandemic levels at 0.9% versus 1.8% in Q2 of last year. Finally, other revenue decreased by 7.8% from last year. This was driven by lower late fees as our collection efforts have improved coupled with more conservative provisioning for resident recoveries to reflect actual collections rather than build amounts.

This was partially offset by revenues earned from services that enhance our resident experience like smart home and renters insurance, which saw increased adoption year-over-year. Over time, we do see a path to increasing other revenue as we continue to focus on rolling out additional services that add value to our resident experience. Let’s now turn to Slide 14 to discuss the same home expense growth of 7.2%. The rise in expenses was driven by property taxes, which were up 9.9% from last year, reflecting meaningful home price appreciation in our markets. We expect property taxes to be up around 10% for the full year and possibly higher, which is above our original forecast of 8% to 9%. This forecast is based on assessments that have come in for key markets, including Texas and Atlanta, which together represent 50% of our same home tax bill.

In Texas, we feel good about the prospect of capturing from relief on millage rates, but Atlanta is unknown at this time. If we do achieve relief on millage rates, we could end up at the low end of our expense guidance for the year. Moving to other expenses, repair and maintenance expenses down this quarter by 3.9%. In addition to experiencing a lower volume of work orders than in the comparable period, we drove cost savings by managing scope, undertaking more work orders in-house, and achieving price reductions on numerous materials in our price book. Turnover expenses also down due to cost containment initiatives such as focusing on repairs versus replacements, compressing the delegation of authority to put more eyes on scope, including increasing centralized reviews of larger jobs.

Next homeowners’ association costs increased by 36%, reflecting inflation and HOA dues, as well as a heightened level of violations imposed by HOAs coming out of the pandemic, which drove higher penalties. And finally, other direct expenses increased primarily from our monthly costs of providing same home technology to more residents and increase in utility costs. With this, I wanted to walk through our proactive approach to managing cost to maintain on Slide 15. I’m pleased to report that we achieved a 5% reduction in cost to maintain year-over-year while continuing to deliver an outstanding resident experience with an industry-leading Google score of 4.6 stars. We really think of three main areas of savings. First, our national procurement program where we focus on negotiating price reductions on materials to help offset inflationary pressures.

Next, our scope management where we actively refine and manage work scopes. We aim to repair versus replace wherever possible, and we focus on the 80/20 rule, driving down the cost of the top 20% of turns that account for about 80% of the total cost. And finally, our internalization efforts whereby we use our in-house team to undertake a higher number of work orders versus using outside vendors. We have about 75% of our work orders completed in-house and are on track towards our goal of 80% by the end of the year. Our in-house technicians cost per work order is about $400 or 45% cheaper than using a vendor for similar kinds of work. Not only are we reducing the cost maintained, but we are also seeing a stabilization in the mix between capitalized and expensed items.

Recall that over the past few quarters, we have seen a higher mix of CapEx compared to the prior year, given the more extensive work required to turn and maintain homes. This was driven by longer average resident tenure and people spending 24-hours a day in their homes during the pandemic, which created more wear and tear. We are now lapping those comps, and so the mix of CapEx versus OpEx should be less of a driver of expense variance going forward. Turning to Slide 16, I’m thrilled to give an update today on Tricon Vantage and the amazing progress we’ve made controlling out this novel industry-leading program. We are really walking the walk on this one. Tricon Vantage is our cornerstone program aimed at providing our U.S. residents with a suite of tools to set financial goals and enhance their long-term economic stability.

Since launching just over a year ago, we have made some exciting progress in every aspect of the program. A few highlights include our financial literacy program, where we offer free access to workshops, coaching, and other resources to help residents achieve their financial goals. Since launching, we have provided over 263 one-on-one coaching sessions. Our credit builder program, which has already helped over 2,100 residents improve their credit score by an average of 53 points. And finally, our down payment assistance program, which is awarded 11 residents a cash grant of up to $5,000 towards the purchase of their very owned home. All in all these programs are meaningful and impactful to our residents. At Tricon, we are a housing provider that puts our residents first and their wellbeing is at the core of how we operate.

Now I’ll turn the call back to Gary for closing remarks.

Gary Berman: Thank you, Kevin. In closing, it was a solid quarter, and I want to acknowledge all of the outstanding efforts of our world-class operations team who continue to deliver unmatched resident experience while containing costs. As we head into the second half of the year, we’re excited for what’s ahead as demand remains extremely strong for professionally managed homes. I’ll now pass the call back to the operator to take questions with Wissam, Kevin and I will also be joined by Jon Ellenzweig, Andy Carmody and Andrew Joyner to answer questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Eric Wolfe with Citi. Your line is open.

Eric Wolfe: Hey, thanks for taking my questions. It looks like you’re expecting 7.3%, same-store revenue growth in the back half, and I’m just trying to understand why same-store revenue would accelerate from the 6.6% you did in the second quarter. So can you just help us bridge that?

Wissam Francis: So the question is from what, 6.6% you’re saying in the first half to 7.3%?

Eric Wolfe: Well, I think you had 5.7% in the first half, so just the math would say you’re, to get to 6.5% midpoint, you need 7.3% in the back half, and you put up 6.6% in the second quarter, and you show your drivers here a lower occupancy and lower other revenue. So I’m just, I’m trying to understand what changes in the back half of the year to kind of see that acceleration from a 6.6% and a second quarter to 7.3% on average?

Wissam Francis: Yes. Okay. I understand. Hi, Eric. So I think one key thing is clearly bad debt, right? The bad debt is stabilizing. And I think we see that as, as really being a tailwind as we get into the second half of the year our collections through 30 days now are very close to where they were pre-pandemic. It’s 60 days I would say they’re at, or even better than pre-pandemic. So we’ve made significant progress on bad debt, and that will act as a tailwind as we get into the second half of the year. If you look at kind of where we were in 2022, bad debt was as high as 2%. This quarter it was 1%. We’re expecting it to be in the low ones. But again, that provides some of the difference. And I think the tailwind in the second half.

Eric Wolfe: Okay. And then I know you’ve been asked this question in the past, but the 8% new lease you saw in July, I get why that would be lower than your 15% mark-to-market if it’s, mainly driven by units that were mark-to-market last year. So you’re not getting to some of those longer stained residents, but I guess I would also think that, if you look at those longer duration tenants that the mark-to-market would have to be continuing to grow there. So maybe you can just tell us for that, call it 80% of tenants, that aren’t turning over. How long are they staying on average? How that changed and whether the mark-to-market is just continuing to build there?

Gary Berman: Well, the loss to lease on the portfolio is 15%. So it’s staying pretty constant. At the same time we’re renewing, close to 7%. So, I think we think that’s really positive. But I think, you should never look at one month and think that makes a trend, right, because it really comes down to what the mix of the residents that are turning. And in July we had a majority of those residents turning with tenors less than 24 months. And we don’t have the same loss to lease on, let’s say tenors under 24 months. So that’s why you’re really seeing a new lease growth only at about 8%. And it’s going to vary really from month-to-month, but what hasn’t changed is the loss to lease. And so we continue to feel confident about new lease growth in that kind of 8% to 10% range. But it might be closer to 8% again, depending on the mix.

Operator: Your next question comes from the line of Handel St. Juste with Mizuho. Your line is open.

Handel St. Juste: Hey good morning to you.

Gary Berman: Hey, Handel.

Handel St. Juste: Yes. Hey there. So maybe more on the decision to slow the home buying here, in the past, I know you’ve talked about the cap rates, your cost of capital, even with the tight spread being good enough to hit the target IRRs for your JV partners. Today’s call, you’re clearly changing the messaging a bit here, slowing the pace, wanting higher cap rates. So can you talk a bit more about the shift, why the shift now and where cap rates and IRS would need to be for you to be a bit more active? Thanks.

Gary Berman: Yes, yes, for sure. I mean, look, we’re just trying to be cautious. I mean, we’re operating in a very volatile environment where interest rates and the benchmark rates are really oscillating pretty significantly from kind of week-to-week or quarter-to-quarter, right? So what we really don’t like is negative leverage. We’re allergic to negative leverage. We want to make sure that we can buy it at cap rates that are at or above where we can finance. And obviously, what we’ve seen in the last few weeks is those benchmark rates have moved up since we did the last securitization, which was extremely successful. So to the extent that changes then we we’re in a position again to go faster. And I think the other decision that we’ve really made with our joint venture partners is let’s complete the investment programs for both JV-2 and Home Builder Direct, but let’s do it with lower leverage lower, lower leverage parameters.

We put the same amount of equity out. We obviously buy less homes, but we do it with less leverage. We think that makes sense because you really don’t get paid to take on leverage above 60% today. We’re seeing, one of our private peers does securitization at 72% and the cost of that incremental debt from 60% to 72% is closer to 10%. We just don’t think that makes sense, right? So really at the end of the day, we want to keep the leverage, from what we can see today at or below 60%. And then, in doing so, it makes sense to go slower. But I think the good news Handel, is that we’re on track to complete the investment program for both funds by the end of the year. We think we’re going to have still very solid returns in those funds. Our investment partners are very happy with the progress we’re making.

They’re very supportive of a new fund and re-upping. And so as soon as it makes sense to go faster, I can assure you we’ll be – we will be going faster.

Handel St. Juste: Appreciate the color there. And on securitization, since you mentioned it had a follow up on that front, can you talk a bit more about the decision to do a five-year term here versus maybe longer term and potential appetite for more and what you’re seeing in the market? Obviously looking at that piece of securitization debt, I’m maturing next year and wondering what’s the plan? I’m assuming another securitization, but maybe some comments around the market, what you’re seeing in a decision to do a shorter securitization here versus a longer one? Thank you.

Gary Berman: Yes, no problem. Thanks for the question. The reason why we did that specific securitization is it was related to JV-2 and we have the time to securitization to the maturity of the joint venture. So the five-year is the most we could have done in that specific case, because just timing maturity. For our own securitization potential transactions, I know we have 2017-2 [ph] maturing early next year. We would look to do longer than that, obviously, because that is all balance sheet homes and therefore we would potentially be looking at longer term maturities. The idea is also spreading our maturity schedule and really moving stuff subsequent to 2028 and moving stuff over to there. We don’t want any maturity in a single year, so obviously we’re going to be focused on that. But for the joint ventures, you have to couple it with the timing of the joint venture.

Operator: Your next question comes from the line of Brad Heffern with RBC Capital Markets. Your line is open.

Brad Heffern: Hey, thank you. Good morning everybody. Another question on the guidance. This quarter, both the acquisition and the NOI guides moved lower. It didn’t look like any of the guidance items that you provided would’ve provided a tailwind. So, I’m curious what the offset was to those two items that kept the midpoint of the guidance from decreasing.

Gary Berman: So you’re asking, where the tailwinds in the, well, I mean, I think, I mean on the expense side, we’re doing a great job controlling costs, right? So, we really expect at this point for controllable expenses to be roughly flat year-over-year, which is a really pretty incredible year, I think given the environment we’re in. So we feel really, really good about that focusing on what we can control. The lower turnover’s been persistently lower, and that might sound negative. It’s actually a real positive because if we can keep our residents and our homes for longer, that’s really what we want to do. But that lower turnover obviously means lower expenses. It means lower revenue too, but it does mean lower expenses.

And I think those are the tailwinds. I think the question really at the end of the day, and I think the major factor, which will determine how we do on the same home NOI is property tax, right? That’s obviously 50% of our expense. In Q2, we accrued 10% to really hit the lower end of the expense range. We needed to be at about 10% for the year. If it’s going to be 11% or 11.5%, which is possible then we’re going to be at the higher end of the expense range, right? So that’s really the question. We’re trying to be conservative there. That’s another reason kind of why I think we’ve tightened the guidance because we have some concern based on the assessments we’ve seen to date that the property taxes could be higher than 10%. We know we’re going to get relief in taxes on millage rates.

We’re hoping we get relief in some of the other markets, but until we get that relief, we don’t know, right? So it’s just rather we’d be a little bit more conservative.

Wissam Francis: Yes. And Brad, if I can add a little bit, I think, what you’re asking is why do we bring up the low end of FFO guidance and what might be helping us? Another thing to note is the, is the for-sale housing business is doing tremendously well. We went into this year thinking we were going to have a housing recession caused by high interest rates that hasn’t happened. So for-sale housing’s doing well, Johnson’s doing well. You could see that in the numbers. And we expect that to continue to be a tailwind.

Brad Heffern: Okay. Got it. Thanks for that. And then on the next JVs, can you just talk about how those conversations have been going and should we also read this lower leverage strategy into what’s likely to happen with those?

Gary Berman: Yes, I mean, conversations have been really positive. All our existing partners are excited about their investments. They’re under allocated, I think the single-family rental. They see it as a kind of core part of their portfolio going forward. So, I think we feel great about our partners re-upping and creating a new fund. We expect to be able to launch that by the end of this year, maybe early into next year. And I think on leverage, I think that remains to be seen, but I think if we’re in the current environment, yes, we’re more likely to have, leverage parameters at 60% or lower as opposed to 60% or 65%. And we’re fine with that. I mean, we’ve always said we’re agnostic to leverage. If it makes sense to use lower leverage in the funds, we’ll do that. And obviously, we like it from a public market perspective because it creates more conversions with the leverage metrics.

Operator: Your next question comes from the line of Adam Kramer with Morgan Stanley. Your line is open.

Adam Kramer: Hey, yes, thanks for the, the time guys. Just wanted to ask about insurance expense. And I guess more specifically around kind of your insurance renewal for 2023, I just remind us kind of when that was, how much your premium went up and then, also if you adjusted to kind of your coverage levels deductible as well.

Gary Berman: Adam, I’m going to pass it on to Kevin.

Kevin Baldridge: Sure. Thank you, Adam. Yes, we bind our insurance at the end of the year. December 1 is when we did it for 2023. We think that it gives us a little bit more visibility by that time. The hurricane season is behind us. There’s a lot more things that are, that are known. I think it helps us a little bit with our costs compared to others. And we did in fact, we did adjust our deductible a bit which helped. And then we brought down a little bit of the self-insurance was brought down to compensate for that. I think that one of the reasons; we’ve done well so far is, we are very proactive in our communications with our insurance companies, especially during weather events, we were on the phone early and often. We also brought them into our offices, we toured them around, we let them see how we engage technology, how we go through all of our processes.

We’re also – we’re buying newer homes for our own portfolio and have put water sensors in. So all of those things are really helping I think with our pricing. So, we found that like half of the increase was due to home values going up and the other half due to rate increases.

Adam Kramer: Got it. That’s really helpful. And then just, I guess it ties a little bit back to Eric’s kind of initial question, but just thinking about thinking about some of the same-store revenue drivers and I guess specifically double clicking on bad debt. Wondering kind of what – because it looked like it kind of moved a lot year-over-year. I think it moved quarter-to-quarter as well. And I think part of that may be driven from the kind of rental assistance that you received a year ago. So in 1Q 2022, and 2Q 2022, maybe just remind us if you have those numbers handy. The rental assistance in 1Q 2022 and 2Q 2022. Just maybe we can kind of get a better sense for kind of the year-over-year comp on bad debt.

Gary Berman: Yes, so Adam, first of all, I think on bad debt, I mean, we only got about $500,000 rental assistance this quarter, and I think we got about $3 million in the previous period. So that, that’s a big difference. And that’s the thing I just caution you on looking at some of the comps, not just for us, but the peers. It’s really noisy when you go back and look at the pandemic, because the amount of rental assistance that was received, and it could really differ from quarter-to-quarter. And then there might’ve been different approaches to collection processes during that time too. So, I think we’re now getting to a point where we’re starting to see a stabilization, and I talked about that earlier in terms of kind of looking at delinquency after 30 days or 60 days or how much rent we collect.

So, I think we’re in a really – I think we’re in a really good spot. But that’s explaining I think some of the noise in bad debt. And again, I think the overall message is, is collections are going back to normal residents are able to pay and rental assistance is burning off, which is again, creating the noise on the comp, but overall we’re in really good shape. One other thing I’d just tell you on insurance. So insurance is up 12% in our same home, but it’s only up about 10% on the total portfolio. And the difference just in the same home is we’ve got a little more exposure to Texas and California. So that, just to complete the answer to your last question,

Operator: [Operator Instructions] Your next question comes from the line of Keegan Carl with Wolfe Research. Your line is open.

Keegan Carl: Yes, thanks for the time, guys. So first one here, just what were the blended rate increase you sent out for August, and how should we think about your trajectory of blended spreads throughout the balance of the year?

Gary Berman: Hey, Kevin, you want to take that?

Kevin Baldridge: Sure, yes, we’re looking, much like July, it’s, we’re keeping in the same level that we’re in July, we’re really looking at kind of high single digits for new leases. And we’re trending towards like a 6.9% to 7% on renewals going forward. That’ll probably fall up a little bit as we get into the winter, but for the next couple of months, we’re going to be in the same range.

Keegan Carl: Got it. That’s very helpful.

Gary Berman: And I’ll just add to that, I think turnover, on turnover, we’re looking at probably about 20% for the year. It’s obviously ticked up a little bit in July. But that 20% is kind of lower than where we thought it would be. We thought it’d probably be between 20% and 25%, but that’s really driving the blended rent spreads to be closer to 7% or in the low-7s.

Kevin Baldridge: Yes. And also, and assurance on rates, our demand is still really strong. Our leads per available home or per marketed home we’re up over what we were pre-pandemic a quarter-to-quarter we’re up over 30% in leads per available home. And that remained in the July. And we’re seeing the same strength into August. So demand is super strong. It’s going to uphold our occupancies and rent growth.

Keegan Carl: Got it. And then on the speaking of demand, I’m just kind of curious, what sort of level of financial health are you seeing in new applicant – in your two new applicants, and how does that compare to a year ago?

Kevin Baldridge: I’m sorry….

Gary Berman: Kevin over to you.

Kevin Baldridge: Are you talking about the demographics? Like the financial health of our residents?

Keegan Carl: Yes, yes. No, your new applicants. So specifically the people that are applying now, sort of where does the rent coverage ratio sit at and how does that compare to a year ago?

Kevin Baldridge: Yes, interestingly, the rent coverage has remained static. It’s a 23% rent to income. The – but the household income has grown as rents have grown, in order to keep the same ratio. So we’re – we are like at 95,000, 96,000 on average in the portfolio in the last couple of months. We’ve really seen applicants at a 100,000 per household. So they’re – and has increased FICO scores have also increased, or the average is around 650, 654, we’re in the 670, 672 for the current applicants. So we see a strength, a continuing strengthening in the applicant pool.

Operator: Your next question comes from the line of Jade Romani with KBW. Your line is open.

Jason Sabshon: Hi, this is Jason Sabshon, on for Jade. With respect to third-party equity under management in your view, what areas will drive growth over the – how many years?

Gary Berman: Well, we’ll drive the growth in third-party capital or strategic capital?

Jason Sabshon: Yes. Over the next year?

Gary Berman: Yes, I mean, it’s going to come from the launch of JV-3, right? So we feel, really good about that. As I talked about in previous Q&A, we’ve started having conversations with our existing investors. They’ve all given us positive signs or indicators that they’d like to re-up. And so we’re really anticipating a launch of that fund at the end of this year, early next year. And obviously that will drive hopefully a fairly meaningful increase in the third-party AUM.

Jason Sabshon: Got it. Thank you. And with regard to the ancillary businesses are you seeing any acceleration and what could drive a decision to potentially monetize earlier?

Gary Berman: Well, the for-sale housing business is being monetized naturally, as we sell lots in homes, and that business is going exceptionally well. I mean, we talked about how we were worried about that coming into the year. But the business is doing better than we thought, and is certainly providing a tailwind to our core FFO earnings. So we feel great about that. We had a really strong contribution from this quarter. And that’s just going to naturally wind down over the next few years as we just liquidate the remaining portfolio. But we only have, if you look at the for-sale housing business, we probably only have about $90 million or a $100 million left on balance sheet. So that, that is just winding down. The other business being our Canadian multifamily is also doing exceptionally well.

We talked about some of the operating parameters at The Selby and The Taylor, we’re hitting all the development milestones in the construction project. So we think within the next few years we’re going to have a significant portfolio that’s going to be unique, very valuable, and stabilized. And I think there’s an opportunity at that point to consider different options. I don’t know what those are going to be, but I will tell you that, if we wanted to lift it or do or monetize it, we would have that opportunity. We just remain confident that we know we’re going to create a real, a lot of value in harnessing that portfolio one way or the other.

Operator: Your next question comes from the line of Jonathan Kelcher with TD Securities. Your line is open.

Jonathan Kelcher: Thanks, good morning. First question you guys seem to be more active in terms of buying homes on your own balance sheet, both this quarter and in your guidance for the rest of the year. Can you maybe give us a little bit of color on that?

Gary Berman: Yes, hi John. Yes, for sure. I mean, look, we’ve gotten a little more leeway from our partners to buy homes on the balance sheet. Because we’re disposing homes that are wholly owned, right? And we think it’s just a great use of capital right now to sell homes, wholly owned homes where we can sell those at low-4%, mid-4% cap rates and then take that capital and replace it and recycle it into homes that are closer to a 6% cap. So that’s essentially what we’re doing. We’re also hydrating the portfolio as we do that, because we’re exiting Southern California and Southeast Florida where we have an older portfolio, those homes have a higher CapEx burden, and we’re able to rotate that capital back into other areas in the country that are with newer homes and lower CapEx. So we think it makes a ton of sense.

We’re going to continue that in the second half a year. That’s why we’re seeing, of the 800 homes, roughly 300 homes of those acquisitions are going to be wholly owned and they’re going to largely be funded by dispositions.

Kevin Baldridge: Yes, if I could just add to that, Jonathan, as well as part of the disposition proceeds. Also, we benefit from the 1031 Exchange where we could use the we could save on the taxes on the wholly owned portfolio of homes that we sold. So we could take that and put it in new homes as well.

Jonathan Kelcher: Okay, that’s helpful. And then just secondly, on The Taylor, I guess you’re leasing it up at around C$4.63 a square foot. Is that market rent or are you going a little bit under just to get the building full and you’ll get good bumps on renewals next year?

Gary Berman: I would say that slightly under market. Because obviously when you’re doing a lease up, we are using some concessions. We’re using up to four weeks. But I would say, market’s probably closer to $4.75 or $5 in that, in that location. So it’s a little bit low. So we’re building a little bit of loss to lease in there, but I think over time we’ll capture that.

Operator: There are no further questions at this time. I’ll turn the call back over to Gary Berman, President and CEO of Tricon Residential. Thank

Gary Berman: You operator. I would now like to thank all of you on the call for your participation. We look forward to speaking with you again in November to discuss our Q3 results.

Operator: This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.