Tricon Residential Inc (TCN) 2011 Q4 法說會逐字稿

Good morning and welcome to Tricon's fourth-quarter results conference call. At this time, note that all lines are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, note that the conference is being recorded today, March 15, 2012. I now would like to turn the conference over to your host, Mr. David Berman. Please go ahead.

Thank you, operator. Good morning, everyone and thank you for joining us to discuss Tricon's results for the fourth quarter and full-year ending December 31, 2011, which results were set out in the news release we distributed earlier this morning.

With me today are June Alikhan, our Chief Financial Officer; Gary Berman, President and Co-Chief Operating Officer; and Glenn Watchorn, Co-Chief Operating Officer.

Please note that this call is also available by webcast at triconcapital.com and a replay will be accessible by telephone until March 22.

Before we get started, a reminder that our remarks and answers to your questions may contain forward-looking information about future events and the performance of our limited partnership funds. This information by its nature is subject to risks and uncertainties that may cause actual events or results to differ materially. A detailed review of such risk factors is included in our most recent annual information form, which is available on SEDAR.

I will start with a summary of our fourth-quarter and full-year achievements. June will then briefly review key financial results, after which I will comment on our outlook and business prospects and Gary and Glenn will provide some commentary on what we are seeing in the Canadian and US markets in which we operate. We will then be pleased to take your questions.

Assets under management, one of the key metrics of our business, have grown throughout the year, primarily as a result of our fundraising success in Canada. Our AUM amounted to CAD944 million at year-end 2011, an increase of nearly CAD100 million from the 2010 year-end. We have raised [CAD140] million to date for our current Canadian fund Tricon XII and are finalizing documentation for additional commitments of approximately CAD45 million, which should be in place for a final close later this month. Our new investors are major Canadian institutions and represent a mix of existing and new limited partners.

As is customary, these investors will pay a one-time catch-up management fee, which will have a meaningful impact on our Q1 2012 results. As an anticipated capitalization of CAD185 million, this will be our largest Canadian fund ever and will provide a significant stable fee base for Tricon for many years to come.

Last quarter, we noted that we had received an expression of interest for a lead order of CAD100 million from a large US institutional investor for Tricon XI, our new US distressed fund. We are targeting a first close in Q2 2012. We recognize this closing has slipped somewhat; however, the delay has had minimal impact on our day-to-day operations and we believe that having lead order onboard will help facilitate the remainder of the fund raise, which will start in earnest after the first close of Tricon XI.

Before I pass the call over to June, I am very pleased to announce that, on March 14, our Board of Directors declared a quarterly dividend payment in the amount of CAD0.06 per share to shareholders of record on March 31. The dividend, which is unchanged from that of the previous quarter, will be payable on April 13. With that, I will now turn our presentation over to June for a summary of how we've performed in relation to our key financial metrics.

Thanks, David. Tricon's financial results released earlier today are prepared in accordance with the international financial reporting standards, or IFRS, and are presented in Canadian dollars unless noted otherwise. Management's discussion and analysis of these results and the full financial statements are available on our website and SEDAR.

Tricon's net and comprehensive income for the year was CAD544,000 or CAD0.03 per share as compared to a loss of CAD8.469 million or CAD0.61 per share for 2010. For the quarter, net income declined by approximately CAD255,000 when compared to the corresponding quarter in 2010.

Even though we are very pleased with the large year-over-year improvement in net income, it remains management's opinion that adjusted base EBITDA, adjusted EBITDA and adjusted net income are more useful metrics for assessing the performance of the Company since these exclude nonrecurring and non-cash items, including the significant potential LTIP-related expense.

Adjusted base EBITDA for 2011 and for the quarter were essentially flat after adjusting for upfront formation and operating costs incurred on the co-investment in Tricon XII. These expenses are characterized as investment losses in the financial statements and are always incurred in the early years of a fund's life. These losses should be reversed as our co-investment capital is deployed in higher-yielding projects over the next couple of years.

This process has already started with the investment by Tricon XII in two prime high-profile projects, one in Toronto, the other in Vancouver and should accelerate after the first close of Tricon XI. Adjusted EBITDA was also essentially flat after adjusting for the aforementioned investment losses and for performance fees.

Performance fees are a volatile revenue stream for which we had expected to decline in 2011. Given that our performance fees are tied directly to the performance of our underlying investments, we have some clarity on their timing. As such, we continue to expect minimal performance fees in 2012 with a ramp-up in future years.

Finally, adjusted net income was also impacted by investment losses and lower performance fees and declined by approximately CAD499,000 from 2010 to 2011 and by approximately CAD302,000 when comparing Q4 2011 to Q4 2010.

In summary, due to the aforementioned frontloaded formation costs associated with the new fund and lower performance fees, which we previously anticipated, our performance has declined from 2010 to 2011. Ignoring both these transitory factors, our results are substantially in line with our internal projections and expectations. I will now turn the presentation back to David.

Thank you, June. In order to provide our investors with additional insight on the residential real estate development markets in Canada and the United States, as well as the real estate capital markets, I have invited Gary Berman and Glenn Watchorn to provide some additional commentary. Gary?

Thanks, David. We have been surprised by the strength of the Canadian housing market, especially in the face of what seems like continuous and relentless negative press on the housing market in general and the [countermarket] specifically. It seems that the media and the prognosticators who they interview are either out of touch, premature in their doomsday predictions or generationally low mortgage rates and robust immigration are creating what seems like a tidal wave of demand, especially in Toronto and Vancouver, that is effectively pushing aside the party crashers and embarrassing them in the process.

In reality, the truth probably lies somewhere in the middle, but is being distorted by push and pull forces led by none other than the banks themselves who can only be described as being engaged in erratic behavior consisting of simultaneous easing of [M] loans, a.k.a. mortgage wars, and tightening of acquisition, development and construction financing.

We have a project in Toronto that is 100% sold out, is probably as good of a site as you can get in terms of construction, its access on three separate sides, it is about a 70,000 square-foot site that we have been struggling for months to get construction financing for. We just now have it in place. It should normally have taken us about two or three months, it is going to take us more than six months and it is going to require approximately five banks for a roughly CAD120 million loan. That gets you an indication of how difficult it is today in order to get construction financing.

Notwithstanding this delay suffered at this particular project, we do welcome some tightening in the [AD&C] market because we believe it will put the brakes on what seems like unlimited demand for pre-sales and keeps supply in check. We have often said before that we could probably sell units all day long, perhaps 50,000 or 100,000 or 200,000 units in Toronto. The real question is how much can we build. We certainly have bottlenecks in the entitlement process. Developers often complain about this, but in reality it is probably a good thing for the industry. There is also a limited amount of skilled trades [and] cranes to even build these projects and obviously, we have talked about the banks, which themselves are tightening.

The Canadian housing market is not homogenous and we are experiencing much more sober conditions in Alberta where the market is still recovering from the recent housing correction and hangover and is less influenced by investor capital flows. With that being said, macro housing fundamentals in Alberta are strong and we expect the market to improve, but for building activity to remain at levels meaningfully below the previous cycle.

A quick word on our first project in Tricon XII, the Massey Tower. Our development partner formally launched sales last week and although still preliminary, the interest in the project has been overwhelming with people literally tripping over themselves to buy units. We expect to hit our presale ahead of schedule and we will be turning our efforts to get the project built. I will now turn it over to Glenn to talk about the US market.

Thank you, Gary. Well, by the end of 2011, the US housing market was beginning to show signs of improvement with significant positive changes in key housing indicators. The inventory of new and resale homes reduced slightly to slightly over six months, which would normally be considered a balance of supply and demand were it not for the shadow inventory, which is simply the pending foreclosures in the system. As such, there may be variability over the next 12 months. However, the foreclosure activity has declined dramatically over the year with default notices falling 26% at the lowest monthly level since December 2006.

The US posted healthy annual job growth at 1.1% and the unemployment rate declined to 8.9%, which was the lowest since 2008. With the shadow -- also the consumer confidence not only improved over the quarter, but improved dramatically over the year. With the shadow inventory continuing to be absorbed, we expect that the housing market will strengthen over 2012, leading into 2013 and by the end of 2013, we will have reached a more normalized and healthy state.

With the recent improvements in employment, reduced inventory levels and less distress in the market, consumers are beginning to feel more confident in the market and see this as a great time to buy a house. However, one of the few remaining hurdles to a market recovery remains the availability of mortgage financing. The good news is that this problem has begun to fix itself. Banks and homebuyers are beginning to heal their respective balance sheets and both improving their ability to lend and borrow respectively.

As mentioned last quarter, the US national housing market has returned to a market characterized by regional disparities as in the not-too-distant past. As such, Tricon continues to focus on those markets with the greatest potential for high growth such as the San Francisco Bay area and Texas. These markets are not only leading the US economic recovery with their underpinning in high-tech and energy sectors, they are also leading the US in the recovery of their respective housing markets.

As an example, at the end of 2011, Houston had more than recovered all the jobs lost since the credit crisis. On a percentage basis, it has grown at more than twice the national average in the last year in both population and jobs with an increase of 91,000 new jobs and 128,000 in population, which is quite staggering. With the rest of the country experiencing -- with the rest -- while the rest of the country experienced a reduction in price on average over the last year, Houston experienced a slight increase.

Further, the resale inventory level is now below six months, which is considered a balance between supply and demand. Consequently, Houston is now the largest new housing market in the country based on starts and is poised for significant improvement in the near term.

A very similar dynamic exists for another of our targeted markets in Texas, that being Dallas. Tricon is now working in some very attractive transactions in both Dallas and Houston and expect to close on at least one of them by the end of the first quarter or the beginning of the second quarter of 2012.

In summary, we continue to believe that a significant portion of the US housing market and more specifically our targeted markets are undervalued largely due to lack of available financing to both homebuyers and the residential developments themselves. And this will continue to produce opportunities at extremely attractive risk-adjusted returns. Now I will pass it back to David Berman.

Thank you, Glenn. Thank you, Gary. Overall, I am very pleased with the progress that Tricon has made over the course of 2011. We have raised our largest Canadian fund ever and as mentioned, expect additional institutional investors to participate in its final closing in the upcoming weeks. We have laid the groundwork for our new US distressed fund and we with a lead order onboard and our sizable corporate co-investment, we have built a strong platform for raising the remainder of the fund.

Also, as Gary and Glenn have noted, we continue to see a strong deal pipeline in both Canada and the United States, which should (inaudible) our fund investments throughout the course of 2012 and beyond.

We have also begun to selectively explore new ways in which to grow our business. Over the past five years, our US investment focus has been on the southern and western parts of the country. As Glenn mentioned, we have been growing our network of relationships in Texas, in particular Houston and Dallas. We have also been attempting to broaden our limited partner base by reaching out to investors who prefer to invest directly in specified assets rather than participating in co-mingled funds. As we continue to meet with these LPs and understand the investment parameters, we expect that new opportunities will emerge.

Finally, we are looking at a variety of other new initiatives in which to participate in the distressed US housing market, either through our fund products or by creating new products or direct investments. While these new initiatives are still in conceptual stages, we expect that 2012 will see some of them come to fruition.

Stepping back, I would like to thank our shareholders for their patience in 2011. It has been a year of transition as we made our final investments in Tricon IX and Tricon X and have begun raising new and hopefully larger funds. We recognize the strength and uniqueness of our business platform and hope to leverage our position as one of North America's leading residential real estate investment companies in order to profitably grow and expand our business. We will now be pleased to respond to any questions you may have. Thank you.

(Operator Instructions). Mark Rothschild. Please state your affiliation and proceed.

Hi, I am from Canaccord. Good morning. Maybe in regard to the new initiatives that you mentioned, if you can just give a little more detail on -- are these all US-focused initiatives and how material would this be to the size of the Company? And you said this would be potentially in 2012, so is it something that could impact cash flow this year or in 2013?

The new strategies, if they should come into being, are primarily US-focused, yes. We do expect that if they do materialize they will happen this year and they will -- again, if they do happen -- will significantly impact both the size and hopefully the earnings of the Company.

That being said, as with our new funds, that there are formation costs associated with it, so it takes a little bit of time for the cash flow and for the earnings to materialize. But we think there are great opportunities in the US and we are looking at ways of taking advantage of them.

Okay. Moving onto something else, you bought back a few shares in the quarter. Really wasn't that significant, but it wasn't at a price very different from the current share price. So what is the strategy there and to what extent should we -- if the share price stays where it is, should we see greater share buybacks?

The strategy really is to send a message out to the shareholders and potential shareholders that we think the shares at the price that they are today are undervalued. So it is more of a psychological message; it is a message of potential support. Money that we raised in terms of the IPO was given to us to invest in projects and funds, not to buy back our shares. So there is no intention to use this as a means of reducing the outside shareholding. It is just really, as I've said, our message to everybody to think that our shares are undervalued.

Okay, great. Thanks a lot.

(Operator Instructions). Currently, Mr. Berman, we have no other questions.

Thank you, operator. So in conclusion, I would like to thank all of you on the call for your participation. We look forward to speaking to you in May when we discuss our results for the first quarter of 2012. Thanks very much.

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, we do thank you for attending and at this time, we ask that you please disconnect your lines. Enjoy the rest of your day.