Tricon Residential Inc (TCN) 2012 Q1 法說會逐字稿

Welcome to the Tricon Q1 investor conference call. At this time, all lines are in a listen-only mode. Later we'll conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded on May 11, 2012.

I would now like to turn the conference over to your host, David Berman. Please go ahead.

Thank you, Operator. Good morning everyone and thank you for joining us to discuss Tricon's results for the quarter ending March 31st, 2012, which results were set out in a news release we distributed earlier this morning.

With me today in our offices are June Alikhan, our Chief Financial Officer; Gary Berman, President and co-Chief Operating Officer; and Jonathan Ellenzweig, Vice President.

Glenn Watchorn, our other co-Chief Operating Officer, is on the line from Florida, where he's currently on business.

Please note that this call is also available via webcast at triconcapital.com, and a replay will be accessible by telephone until May 18.

Before we get started, I'll remind you 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 first-quarter highlights. June will then very 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.

The first quarter of 2012 has been the most financially successful quarter in our brief history as a public company, as we have strong year-over-year improvements in all of our key metrics. Assets under management have grown by nearly CAD100 million over the past 12 months to CAD992 million as of March 31, 2012, when, including events that took place subsequent to quarter end, our AUM has actually increased to over CAD1.1 billion.

Fundraising for our new Canadian fund, Tricon XII, continued during the quarter, with an increase in commitments received of approximately CAD46 million. In total, commitments to the fund have now increased to CAD186 million, far in excess of our expectations. The new commitments generated a one-time catch-up in general partnership distributions, since new investors are required to make GP distributions as if they had invested in the fund on the first closing.

As we have noted in the past, Tricon XII is our largest Canadian fund ever, and will provide a significant, stable, fee base for Tricon for many years to come.

We also continue to move forward toward the first closing for our new US distress fund, Tricon XI, and are now in formal legal documentation for CAD100 million investment from a large US institutional investor. We continue to target a first close in Q2 2012, after which we will start the broader fund raising process in earnest.

Subsequent to quarter end, we now have two new strategic initiatives in the United States -- a separate account for a large trophy assets in Houston, Texas; and the acquisition, renovation, and rental of distressed single-family homes in certain select markets. We also successfully completed a bought deal financing for approximately CAD50 million, primarily to finance a single-family rental strategy. These are all transformative events for Tricon, which I will discuss further in my closing remarks.

Before I pass the call over to June, I'm very pleased to announce that on May 8, our Board of Directors declared an unchanged quarterly dividend payment in the amount of CAD0.06 per share to shareholders of record on June 30. The dividend will be payable on July 13, 2012.

With that, I will now turn our presentation over to June, for summary of how we have performed in relation to our key financial metrics.

Thanks, David. Tricon's financial results, released earlier today, are prepared in accordance with 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 quarter was CAD243,000 or CAD0.01 per share, as compared to a loss of CAD195,000 or a loss of CAD0.01 per share for the corresponding quarter in 2011. Although we are very pleased with this meaningful 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.

We are, therefore, even more pleased to report that adjusted base EBITDA for the quarter increased by nearly 60%, to CAD1,709,000 when compared to Q1 2011, largely as a result of the aforementioned general partner distribution catch-up. Adjusted EBITDA had a meaningful increase for the same reason. Similarly, adjusted net income increased by nearly 70% from CAD658,000 in Q1 20 to CAD1,109,000 in Q1 2012.

In summary, we are very loose with the strong improvement in our key financial metrics, and are excited by our financial prospects for 2012 and beyond, as we begin closing for Tricon XI and continue to roll out our new strategic initiatives.

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 markets in Canada and the United States, as well as the real estate capital markets, I have invited Glenn and Gary to provide some additional commentary. Glenn?

Thank you, David. Overall, in the first quarter of 2012, it's been a very positive quarter, not only for the US housing market, but also for Tricon's activities in the US. For the second straight quarter, key indicators for the US housing market continue to demonstrate evidence of improvement. Inventory levels of both new and resale homes remain stable at what would be considered healthy levels, approximately 6 months each.

New home sales increased over the quarter, and new home inventory on an absolute basis now stands at its lowest level in decades. Existing home inventory is now decreased by more than 40% since reaching its peak in July 2007. Public homebuilders are reporting strong traffic and double-digit year-over-year increases in orders.

Starts are up this quarter, and we expect that they will increase 20% this year over 2011, albeit this will be coming off of a historically low base. In many of our actively selling communities, where we were able to buy land at today's depressed market prices, we have been recently generating three to four sales per month, which is indicative of a normal demand in a stabilized market.

With jobs and consumer confidence still on the rise, there remains only two major impediments to a full recovery -- the availability of credit, and shadow inventory. Shadow inventory, really, being those mortgages currently delinquent or in the foreclosure process, which will ultimately add to the overall housing inventory.

As I mentioned in our previous conference call, the problem associated with the availability of credit should fix itself over time, as the populace improves their balance sheets, and their credit history improves within the system in the natural course of time. What will aid in the solving the issue of shadow inventory is affordability. The significant reduction in home prices since the peak, and generationally low mortgage rates, have restored affordability to levels that have not been seen in decades, to the point now that the median earning income -- median earning household can now afford nearly two median-price homes.

Prices have now gotten to a level of affordability where, in many cases, the cost of renting is higher than the cost of owning, which would generally be considered abnormal; and, in my opinion, is a strong indication that the market has over-corrected. This has actually given rise to a new industry, where many investors are purchasing homes and renting them for very attractive yields, which Gary will discuss after this.

Traditional buyer demand is also improving, with supply tightening, and jobs and confidence improving. As a result, we believe that the increase in demand from both investors and the traditional buyer will, over the next couple of years, offset both existing foreclosure inventory and the shadow inventory that will ultimately become the real inventory. We are of the opinion that the shadow inventory will decline meaningfully over this timeframe, and will be at a healthy, manageable level by the end of 2013, which is when we believe the overall housing market will be back to a normalized state.

Even while the market appears to be improving, Tricon continues to see significant flow of distressed opportunistic transactions that underwrite to extremely attractive risk-adjusted returns. And this is largely due to the lack of competition, with very few capital providers focused on this sector; and the lack of conventional debt available to provide leverage for the acquisition and development of land. As such, Tricon has been financing its transactions on a unlevered, or all-cash basis, which -- while still underwriting high-equity returns, essentially, in the whole capital structure.

It's really rare to see such security capital -- security of capital, and while still being able to project high-equity returns. This is largely, again, due to the lack of leverage, and the significant high margins that are necessary to provide the equity returns on the whole capital structure.

Since the beginning of the year, Tricon has closed on three major transactions in the US, with really the same underwriting characteristics -- one in the Bay Area of San Francisco, which was the final investment for our Tricon IX fund; one in Dallas, which will be the seed investment in our new Tricon XI fund; and one in Houston, which David mentioned, which is a very large, separate account transaction with a new institutional partner. The Houston Cross Creek transaction is probably the largest single residential land deal completed in the US in the last five years. And Tricon's very excited about its entry into what is the top housing market in the country.

In summary, we believe that we will continue to see a significant pipeline of opportunistic transactions, with extremely attractive risk adjusted returns in the US.

Now, I'll pass it back to David.

Gary, will you take over?

Yes, yes. Thanks, Glenn. I'd like to talk a little bit about our US single-family rental strategy, and just continue along the lines of the US update. Our implementation of our US single-family rental strategy is progressing on track with schedule. We expect to enter into definitive documentation with our Sacramento partner early next week, and our Phoenix and San Francisco Bay Area partners by late next week. We've also just entered into a term sheet with a potential new partner in Southeast Florida to pursue Section 8 housing, and that's something we're also excited about.

Due diligence on specified assets to be rolled into the various partnerships is going well, and we anticipate being able to close on our first few assets for approximately CAD7 million next week. Our overall plan, as was disclosing in our recent offering, used to buy homes predominantly at the courthouse steps at a blended 8% cap rate, with -- and, obviously, there will be some variations across markets, depending on the type of assets we acquire.

We expect to allocate a majority of the net proceeds of the bought deal within the next two months, and then to employ 50% to 60% leverage once the assets are stabilized. In total, we anticipate being able to acquire roughly 1000 homes.

Our longer-term goal would be to acquire roughly 5000 homes, and to fund the purchases through both public and private capital markets. We really view this as a historic, once-in-a-lifetime opportunity, and we are working closely with our partners to move as quickly as possible, within what is likely a two-, maybe three-year window, before the discounted buying opportunities disappear.

As Glenn was saying, as we and other like-minded investors buy distressed single-family homes, it will become a self-fulfilling prophecy as we move -- remove the distressed inventory and the ultimate shadow inventory off the market, and ensure that home prices go back up to normalized levels.

For Canadian housing market update, we like to say that the market seems to continue to chug along and perform well in the face of what seems like relentless negative media reports and doom and gloom headlines. Our first two investments in Fund XII, the Massey Tower and the Silver Tower in the Metrotown Portfolio, have exceeded our launch expectations, and are now largely sold.

With that being said, we are sensing that the market is changing, and that we are moving into an environment of winners and losers, as buyers are being much more selective and taking longer to make purchase decisions. Over the last couple of years, most launches routinely fared well, but this can no longer be taken for granted in the face of bank tightening and negative headline news. As such, we will continue to be very cautious as we pursue new investment opportunities in Tricon XII, and we'll remain vigilant in the monitoring of its existing assets.

I should point out that our current Toronto condo portfolio consists of approximately 3100 units, and only 300 units remain unsold; the vast majority of those being in the recently-launched Massey Tower. So we are very well-positioned to weather any expected market correction.

David, I'll hand it back to you.

Thank you, Gary. Thank you, Glenn. As discussed earlier, I am very pleased with Tricon's financial success this quarter. And furthermore, I'm excited for our prospects for the balance of the year and beyond. Our new separate account strategy of partnering with major institutional investors on large, one-off investments and trophy assets has already had a very successful launch, with the CAD150 million investment in Cross Creek Ranch, the large, master-planned development in Houston.

This investment will generate an additional management fee revenue stream for Tricon for quite a few years to come. It will also produce investment income on our co-investment from the get-go, as well as back-ended performance fees if the project performs as expected.

Although we cannot reasonably project the timing of additional separate account investments going forward, we continue to look for similar investment opportunities, and will strive to make this a meaningful part of our business.

Our other new strategic initiative, which was launched subsequent to quarter end, is the acquisition, renovation, and rental of distressed single-family homes in the United States, as Gary has mentioned, in partnership with local operating partners. We believe that there is a 18- to 24-month window to acquire these homes via foreclosure and short sales, generally at sizable discounts to market pricing. Given a limited timeframe to buy these homes, and the extent of time it takes to raise new institutional funds in the United States, we have decided to enter this strategy by using Tricon's balance sheet, as opposed to raising a new, dedicated fund.

Our bought deal offering of approximately CAD50 million will facilitate our entry into this market; and with a prudent amount of leverage, should allow us to acquire approximately 100,000,000 -- sorry, 100,000 homes -- sorry, 1000 homes, as Gary has mentioned. Our foray into this strategy is being closely watched by the institutional investor community, and could lead to a dedicated single-family rental fund down the road.

2012 is poised to be an exciting year for Tricon as we execute in our core, private fund strategy as well as our new strategic initiatives. We appreciate the continued support of our shareholders -- those that have been with us since the IPO, and those who became shareholders as a result of our bought deal financing. We hope to reward each and all by continuing to report further financial success in the quarters and years to come.

We will now be pleased to respond to any questions that you may have. Thank you.

(Operator Instructions). Stephen Boland.

Several questions -- I guess I will start with the US single-family rental strategy. You see the press reports coming out about how different institutions are trying to do the same strategy. Is there a risk of competition down there? Or are we just not aware of the scale of the amount of foreclosures that are coming to the courthouse steps every day? I wonder if you could just talk about that.

Yes. Hi Steve, it's Gary. There's certainly a lot of people talking about this strategy. There is actually not a lot of people doing it. That's the conclusion. I mean, we were recently at a conference the last couple of days -- and also with Jefferies, who is just kind of leading the effort in the US, in terms of the capital markets -- and they also echoed that, that there's been a lot of press. There has really been, I think, a lot of hyperbole in terms of what people are planning to do, but they're not actually doing.

We're actually one of the very few groups that are currently doing this institutionally. I'd say our competition right now would be Oaktree Carrington; GI Partners, in partnership with Waypoint; Och-Ziff, maybe Colony; Beazer recently announced something. But Beazer is really just trying to get rid of their existing homes. So it's, I think, maybe a bit of a different strategy.

You have to keep in mind that if we were to acquire 5000 homes over time, as I mentioned, I think that would be a big accomplishment or Tricon. That would require probably about CAD500 million of capital between equity and debt. 5000 homes is a drop in the bucket in comparison to the overall market. The current excess shadow inventory, compared to a normalized market right now is 4 million units. And some people talk about 6 million or 7 million units, when all is said and done.

So, again, if we were to acquire 5000 minutes -- selectively, one at a time -- through our hub and spoke strategy with different partners, it would be an incredibly small amount, compared to the overall market. So there's room for lots and lots of competitors.

But I think, at the end of the day, Wall Street will be disappointed with this strategy, because it is a difficult one to implement and operate. And it may be -- may prove to be too painful for them from an operational perspective. They may find that it's a lot easier for them to finance the strategy in the debt capital markets, or do securitization rather than actually going out there and buy homes.

So we'll see how it unfolds. But we are conscious of the fact that this is a limited window. And as both David and I said, we really think there is probably maybe two years of buying opportunities before that big discount between wholesale at the steps and retail in the secondary market disappear. We do need to move quickly.

Great. I guess, Gary, since you were talking about -- you gave the update on the Canadian housing, as well. I read this news on the overheated condo market. You talked about a winner-loser strategy, and possibly an expected correction. Maybe you could just talk about -- how do you find a winner or loser? What makes -- what criteria do you find to pick the winning condos or developments going forward? And then, I just have a subsequent question.

Yes, sure. When I talk about a winner -- a winner and loser market, I'm really referring to launches, new condo launches. I guess, let's talk about Toronto. What we've seen over the last couple of years, especially with all the stimulus coming into the housing market, is that virtually all launches were successful. And what I mean by that is they were routinely selling 30% to -- in some cases 70% of the building off the launch, which would be in the first couple of months. That was not, by any means, normal if you go back over time.

What we're seeing today -- and this is really kind of a very recent phenomenon -- is that some projects are achieving very strong sales off the launch, such as Massey Tower, which has probably been the top-performing, or one of the top-performing projects in the city; and others have not done well at all. In fact, they failed. And the reason for that is that the market, and certainly investor buyers, are becoming a lot more skeptical. They are being more careful. I think, in many cases, they are full. They don't really have capacity to make much more in the way of investment. And because of that, we're moving into a winner and loser market.

I think what differentiates the projects is -- you really need to have an incredible location. Let's take Massey Tower, for example. The reason Massey Tower has been so successful is largely because of its location. It is beside the celebrated Massey Hall that everybody knows, and beside the Winter-Elgin Theater, so it's part of the theater block. It's across the street from the Eaton Centre. It's adjacent to the Queen Street subway. You can ingress and egress from that subway; it's at your doorsteps. It's walking distance to the CBD. It's a tall project with good height that investors like, because of the view premiums. It was everything that investors want. And so this is a market that's been very well-received in the launch market. Others that may be further off the beaten path, in terms of transit-oriented development, are not doing as well.

Okay. If you can remind me, where is the capital -- your capital, or the fund capital, most at risk during the process? Is it when you've committed to a project? And how do you protect that capital, that it doesn't become a loser in that sort of scenario that you just talked about?

Right. So again, we're making these investments within our funds. So I think that's something important to distinguish, although we are co-investing through the public company. When we talk about the Massey Tower, that is a Tricon XII investment. It is not on Tricon Capital or TCN investment. Where I would say we're most at risk is really at the beginning. Because when we come into a project, a developer will come to us with a business plan. They will let us know that they tied up a site. We'll vet it. We then come in to help them buy the land and to fund all of the predevelopment costs. That would include approvals or entitlements. It would include design. It would include marketing, building the sales center.

That's where we are really at risk, Steve. Because if the launch is not successful, or the market turns down, obviously that's going to have a negative effect on your investment. Where we try to protect ourselves is, obviously, in the underwriting. But two, to ensure that if we use any land debt -- and a lot of developers do use land debt, acquisition development financing -- we make sure that we have enough capital within our fund to take out that debt. So if there was a correction, there's no chance of the bank taking that away from us or foreclosing. We can hold that. And we've found that if you can hold, generally you're okay.

We're also trying to buy properties that have some level of income on them, because we're acquiring properties that are typically transit-oriented, very good locations that would probably do as substitute uses; and, therefore, we are protected with a little bit of income.

So again, it's making sure that we can hold if there is a correction. It's making sure we're well-capitalized, and also allowing us to have a little bit of income to hold it, that protects if things aren't going according to plan.

Once you get under construction, as long as there's no execution errors, the risk is largely mitigated. Because, typically, you don't get a construction loan until you have enough presales to take out that loan. We really feel that once we do get under construction, as long as there's no operational mistakes, it's just a matter of waiting for the building to complete and for the units to close.

I think just one comment, if I could add. I think history has shown us over the years that if you can have enough cash to withstand the downturn, and you can hold the property through the downturn, you will recover your investment over time as the market recovers. And that's the strategy that we've taken. And we've certainly learned a lot from this latest US downturn.

Okay. Great. I'll re-cue. I don't want to hog the puck here. Thanks.

(Operator Instructions). Jeffrey Olin, Vision Capital.

I apologize, I joined the call late. So if you addressed this in your comments, I will listen to the replay of the call. But my question is -- in our shop up here in Toronto, we are seeing, literally, at least one transaction a week in the US rental housing with capital appreciation of single-family homes. And so, my question is -- do you still have the same outlook, that you are going to be able to get any scale in that business?

There's so much competition from guys that are just -- published headlines that aren't in the business, to guys that are actually doing it. As you're probably aware, [FBR] did a CAD200 million pre-IPO deal a week ago. There was a Canadian one-off deal in Florida. All kinds of stuff chasing this. Is the product there? And the pricing -- is the pricing going to be able to be attained, to achieve the kind of returns that you anticipated?

Hi, Jeff, it's Gary. We just answered that question, but I'll elaborate and you can play back afterwards. First of all, there's certainly a lot of headline. It's a strategy du jour, for sure. Everyone's considering it. Jefferies is going to be having a conference in the latter part of May, in DC. I can tell you that every major real estate private equity player will be there to listen in on what people are doing. But at this point in time, there's a lot more people looking and thinking and talking about the strategy than actually doing it, in an institutional way.

We're one of the very few groups that is actually doing it today. I mentioned the competition in my earlier remarks; it's limited. You have to keep in mind that this is an enormous market. We are planning with this bought offering -- bought deal; and any leverage we use, we're planning to buy 1000 homes.

Our ultimate goal would probably be to acquire 5000 homes, which would require about CAD500 million of capital, both equity and debt. That would be a big accomplishment, 5000 homes. It is a drop in the bucket compared to the size of the market. The size of the market today is 4 million units. That is the excess amount of -- or shadow inventory represents the excess amount of distressed inventory, what we would typically considered to be normal. There are other people that think that that shadow inventory will ultimately be about 7 million or 8 million units.

So it goes to show that our activities, while maybe large and meaningful for Tricon, are really a pittance compared to the entire market. And the same holds for any other player on Wall Street who wanted to try and implement the strategy. We believe that we will have our capital largely invested within the next two months. So, as I mentioned in my earlier remarks, I think that speaks to the fact that we don't see any issues with be in being able to allocate the capital.

The real question is, when does this other inventory come to the market? That's really the big question mark that nobody knows. Right now, the banks and the GSEs are holding that inventory, and it's really a question of how they release it. Part of the reason the inventories dried up is because of the robo-signing fiasco. And that's now being worked out through the Attorney General settlement. So we're going to start to see more inventory come back on the market. It's just a question of when.

Obviously, the banks and the GSEs are smart. They know that they flood the market at one time, they're going to get lower pricing, so they're going to release it over time. And we're going to see that the opportunities on a month-to-month basis, in terms of buying foreclosure assets, is going to ebb and flow. Some months, we are going to see more listings than normal, others we're going to see less. We'll see how the strategy evolves, but we don't see any issue with being able to place our capital and get the returns we mentioned. (Multiple speakers).

Sorry, just one question to answer to your point. The fact that prices might be increasing in certain markets, and certainly in Phoenix, we are seeing pricing increase. We have the flexibility to move from market to market from that point of view. So, again, to Gary's point, it's such a large market that if some market starts running ahead of us, we can easily exit that market.

(multiple speakers). In Phoenix, things are -- in Phoenix, it's becoming much tougher to get the desired yields in Phoenix, because inventory is depressed, has come down extremely significantly over last year or so. But there are other markets. For example, in Riverside, or Southeast Florida, where there's more inventory; and it's much easier to get the yields. We may have to be flexible as we pursue this. But the market's enormous.

Well, you touched on my follow-on question, which was, what are the -- my understanding is, you're not doing this, per se, absolutely directly. You're working with local partners with experience, and some profile and capabilities in a local or regional market. So where are you guys targeting right now, by market?

Okay, so we're targeting the greater Sacramento region. We are targeting the greater San Francisco Bay region. We are targeting the Inland Empire, predominantly closer in -- Riverside, San Bernardino. Also, ultimately, we may look at San Diego and parts of East LA County. We are looking at Phoenix. We are looking -- which, as I'd mentioned on the call earlier -- we've just signed a term sheet with a partner to cover Southeast Florida for us. That would be Miami-Dade, Broward, and Palm Beach counties. And we may also look to partner with someone in Atlanta.

These are all markets that we are currently operating in, in our private fund business. They are markets we know well. The reason we've chosen these markets is because they've obviously been hard-hit by the housing downturn and great recession. But we also think that they are markets are going to come back, as the economy recovers. And so we'll see home price appreciation.

So, our strategy is to really provide a blend of good rental yields, from obviously -- from the rental operations, but also position ourselves for price appreciation. So we want to do both. That's why we're not looking to do this in Detroit. We could go in Detroit and probably get very attractive rental yields. But we might not get the home price appreciation, so we're trying to really look for total return.

How about Texas?

We may look at Texas, because we're also in that -- we're also in Dallas and Houston. But as you know, Texas was not as hard-hit. We didn't see the same price declines. In the markets I previously mentioned, we saw home prices come down roughly 50%. They didn't come down anywhere near that in Texas. So there's better opportunities when you look at some of the metrics in the other markets. But it's not to say we wouldn't look at Texas, but we'd probably look at it more selectively, and down the road.

Thank you very much.

Okay. So, we currently have no more questions at this time. Please proceed.

Thanks, operator. In concluding, I would like to thank all of you on the call for your participation. We look forward to speaking to you in August, when we discuss our results for the second quarter of 2012. Thank you all.

Ladies and gentlemen, this does conclude the conference call for today. Please disconnect your lines, and thank you for attending.