CA - Tricon Residential Offers A Lot Of Value At Current Prices

2023-07-05 11:10:07 ET

Summary

• The continued supply-demand imbalance in the housing market is expected to drive healthy rent growth for the next few quarters.
• Tricon has managed to keep a check on its debt with considerably lower maturities in the coming years.
• The vast market opportunity has been recognized by Tricon and its differentiated strategy of catering to middle-market households has helped immensely.
• Risks remain with rent growth expected to decelerate over the long term.
• On the whole, Tricon is doing well operationally in addition to its strong liquidity position.

Coming on the back of a record Core FFO per share , Tricon Residential (TCN) has private investors excited given the rising supply-demand imbalance in housing. There was record growth in same home NOI as well, up 10.4% YOY.

Recent business update

The sale of the U.S. multi-family business in October generated $315 million which was then used to pay down the company's revolving credit facility. We welcome this move given the issues Tricon has had with its debt. The stock price had markedly improved after this because some of the proceeds went towards stock buybacks and the SFR acquisition program.

Focus is something that we have repeatedly touted and Tricon's strategy may pay off big time as we close out 2023. The firm is looking for financial markets to stabilize prior to putting almost $3 billion of equity capital to work.

Tricon has a clear value appeal for investors

Tricon's value proposition is clear. The new entry-level housing supply is at a five-decade low. There is a dearth of housing supply in North America and home ownership is increasingly out of reach. Tricon is well-capitalized to take advantage of the opportunities that America's decades-long housing shortage presents. It is a socially responsible business that looks to fill the void for hardworking families. A little over one-third of U.S. households are renting their home, meaning that there is a pent-up demand for Tricon's offering.

As part of the Tricon Vantage program, rents are set typically below market rates. This has had the effect of lowering turnover as there is reduced financial anxiety among tenants. These factors have positive impact on home NOI growth. The average monthly rent is $1,688 for an average home size of 1,688 SF. Consequently, Tricon is delivering on its promise of a high-quality home at a reasonable cost for families.

The future of this space appears exciting with the increasing use of 3D printing looking to bring down production costs. Additionally, there are savings to be realized in energy consumption. Leading-edge technologies which Tricon is looking to embrace will make housing that much more affordable, thereby propping up Tricon's already great value proposition.

The housing supply crisis is not going to go away anytime soon. This pressing problem that has been around for decades appears to have given a moat for the firm. Also, the tailwinds in the form of tremendous population growth in excess of 10% in the U.S. Sun Belt areas makes a strong bull case for Tricon. The friendly business environment, lower taxes and good job growth seen in the past and expected in the future make the U.S. Sun Belt even more attractive.

The middle-market demographic are known to be long-term renters, providing a steady cash flow. This is part of Tricon's differentiated strategy which has succeeded as seen by the financial metrics. The middle-market demographic consists of over seven million U.S. renter households (source: U.S. Census Bureau). The household income for this cohort is between $75,000 to $125,000 per year, making the monthly rental payments of $1,400 to $2,300 quite affordable. It is very apparent that Tricon has made the right choice in targeting this particular demographic and should continue to reap the rewards for some time via stable cash flows.

For a real estate firm, Tricon has ticked all the boxes and aggressively expanded single-family rental portfolio by adding 7,227 homes, a surge of 23% YOY from 2021 to 2022.

Even though this is a property rental company, the American dream of home ownership is very well supported with the chance for long-term residents to buy the home they are renting in certain cases. Tricon has sold 34 homes to residents this pilot program was launched in 2021. Also, there is some financial backing if a qualifying resident decides to purchase a non-Tricon home. The criteria for this include being a Tricon renter for at least five years and to have good financial standing with the company.

Liquidity - Management confident in ability to refinance near-term debt

We were curious to see how the company was faring on the liquidity front. The chart above paints an encouraging picture of what to expect going forward in this aspect of the fundamental side of the business.

A fairly obvious point we wish to make is that Tricon owns its homes portfolio. These types of assets have the tendency more often than not to appreciate and may beat inflation. Additionally, it is fairly easy to gain access to capital by disposing of non-performing home stocks (something the company does regularly) or taking out bank loans at favorable rates. This aspect of Tricon's business means that liquidity should not be much of an issue.

A quick glance at the current and quick ratios suggests the company can do better. But with the improving debt maturity levels, we wouldn't be surprised if these liquidity metrics were to improve. The gearing ratios are also on the high side, so the risk exists. On the other hand, these metrics are not exactly alarming.

Operating performance

Favorable demographic shifts in the U.S. Sun Belt markets, as explored earlier, have driven positive operating results. Add to this the inflationary cost pressures and higher mortgage rates, which make Tricon's affordable single-family rental homes very appealing.

The strong operating performance has been reflected in the low resident turnover of 16.8%, high home occupancy of 97.3% and the rent growth which came in at 7.2% last quarter.

Revenue expansion outpaced expense growth in the latest quarterly update. To put it in sheer numbers, total portfolio NOI increased by $11.3 million or 17.9% to $74.6 million in the first quarter of 2023 compared to $63.3 million in the first quarter of 2022. Moreover, rental revenue has ticked upwards 5.7% YOY.

Risks

There is an increased supply of rental homes in Tricon's markets. This has smothered the rent growth on new move-ins.

Since our investment thesis is based on stock price appreciation in the coming months, there is the real possibility that all this may be priced into the stock already. Investors are savvy and may have by now identified the prospect we are excited about currently.

Technically speaking, there has been recent upticks in the stock price and so investors need to be wary of possible declines.

Conclusion - Renewed financial strength and substantial liquidity generation make Tricon Residential a buy for the next few quarters

The company has succeeded in keeping its cost of debt low which helps to maintain its financial strength. We like the measures it has taken to keep interest rate fluctuations minimized over the long term. This is particularly important in the space that Tricon operates in. The SFR business looks very healthy and should continue to provide the firm with stable cash flow. Therefore, the dividend is safe for the coming quarters. In conclusion, we feel everything we've seen and evaluated about the company presents a low risk buying opportunity.

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