Tricon Residential Inc (TCN) 2012 Q2 法說會逐字稿

Welcome to the Tricon second-quarter investor conference call.

At this time all lines are in the listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded on August 13, 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 June 30, 2012, which results we set out in a news release we distributed earlier this morning.

With me today and our offices are June Alikhan, our Chief Financial Officer; Gary Berman, President and Co-Chief Operating Officer; Glenn Watchorn, Co-Chief Operating Officer; and Jonathan Ellenzweig, Vice President. Please note that this call is also available by webcast at triconcapital.com and a replay will be accessible via telephone until August 20.

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 fund. 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 second-quarter highlights. June will then very briefly review key financial metrics, after which I will comment on our outlook and business prospects and Gary, Glenn, and Jon will provide some commentary on what we are seeing in the markets in which we operate. We will then be pleased to take your questions.

As you may be aware, Tricon announced record financial results this morning with year-over-year increases of over 100% in our key earnings metrics. Assets under management grew by over CAD200 million during the quarter to almost CAD1.2 billion. We closed a major separate accounts investment in Houston and had a very successful launch of our single-family for rent platform. Overall, a banner quarter for Tricon.

In our asset management business fund raising was finalized for our new Canadian fund, Tricon XII, during the quarter with a large commitment of CAD10 million coming from a Canadian corporate foundation. This is investment brings our total fund size to CAD196 million, which is by far a record for Tricon's Canadian fund business.

We are also nearing the end of documentation, finally I might say, for our new US distressed fund, Tricon XI, and now I expect the first close in the next few weeks after which we will go out to the broader market. In addition, during the quarter we closed on the previously announced $150 million Cross Creek separate accounts in partnership with a large Canadian institutional investor to support the acquisition and development of the award winning 3,200 acre Cross Creek master planned community in Houston. The Company has committed approximately 10% of the required capital to the transaction with the balance being committed by Tricon's institutional partner and the project's developer.

In our principal investing business we formally launched our US single-family for rent platform during the quarter, which is being funded by the proceeds from an approximately CAD50 million equity offering completed during the quarter and a similarly sized convertible debenture offering completed subsequent to quarter end. We are now actively buying, renovating, and leasing homes in five markets across the United States with four operating partners and, as of this call, over 400 homes. Given that it generally takes 60 to 90 days until these homes are cash flowing, we don't expect this strategy to produce meaningful financial results until Q4 2012, which makes the second-quarter record results even more significant.

Finally, I am pleased to announce that August 9 our Board of Directors declared an unchanged quarterly dividend payment in the amount of $0.06 per share to shareholders of record on September 30. The dividend will be payable on October 15, 2012.

With that I will now turn our presentation over to June for a summary of how we 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 CAD2.159 million, or CAD 0.08 per share, as compared to a loss of CAD509,000, or CAD0.03 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 non-recurring 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 approximately 145% to CAD2.912 million when compared to Q2 2011, largely as a result of the contractual management fees and interest earned from the co-investment in and the management of the Cross Creek Ranch separate investment account, as well as general partner distribution catch-up from Tricon XII on the additional commitment of CAD10 million. Adjusted EBITDA also had a meaningful increase for the same reason. Similarly, adjusted net income increased by nearly 200%.

In summary, we are extremely pleased, but not surprised, with the strong improvements in our key financial metrics as we continue to advance both our asset management and principal investing businesses.

I will now turn the presentation back to David.

Thank you, June. In order to provide shareholders with additional insight on the residential real estate markets in Canada and the United States, including our new single-family for rent platform, I have invited Glenn, Gary, and John to provide some additional commentary. Glenn?

Thank you, David. The recovery in the US housing market continues to gain momentum through the second quarter of 2012, a result of the confluence of many factors including reduced levels of new and resale inventory, strong investor activity in the resale sector, historically high affordability, and perhaps most importantly, a shift to a more positive tone towards housing in the media.

Our expectation and that of many industry observers is that 2012 will be the first year since 2006 in which the US housing -- the US will experience home price inflation. In fact, prices in many of the markets in which we have been investing have already begun to rise. Many of our actively selling communities have seen a significant increase in both sales and pricing over the last quarter.

For instance, one of our Phoenix projects, Paseo Lindo, sold at almost twice the rate per month over the second quarter than it did during the previous 12 months even while increasing prices. Similarly, our Williams Island project in Miami, which launched in June this year, achieved sales in the first two months equal to our projections for the first 12 months at prices higher than recently budgeted and being increased during the sales process.

This recent improvement in pricing is a significant step towards the ultimate recovery of the housing market. There has been a strong correlation in previous housing recoveries between home price inflation and home sales as buyers had to make purchases when they have confidence that values are not declining.

Further evidence of this correlation can be seen in the latest improvements in the new home sales statistics with an increase in sales closing of 18% quarter over quarter and an increase of 20% for the first two quarters of 2012 versus the same period of 2011. With builders reporting sales orders increasing at an even higher pace, it is not surprising to find that housing starts are up significantly with an increase of 30% quarter over quarter and 27% for the first two quarters of 2012 versus the same period in 2011.

The importance of the substantial increase in housing sales and starts to the health of the US economy and job growth cannot be underestimated. The US housing downturn and related economic recession has resulted in a significant reduction in overall investment in residential real estate and for the last four to five years this has been a large drag on the nation's GDP. A return to historic levels would not only significantly boost GDP but also create more jobs.

If housing starts continue to grow at the expected rate of 20% per annum for the next two years, it is estimated that 750,000 to 1 million new construction jobs could be created by 2014. Notwithstanding the aforegoing, as we mentioned in last quarter's report, the constrained availability of credit and the large shadow inventory of homes remain as an impediment to the full housing recovery.

Moreover, the strength of the housing recovery is dependent on a continued improvement of economic conditions in the US which could be challenged by macro shocks stemming from the upcoming presidential election and the European debt crisis. Such macro concerns have already affected consumer sentiment with the Consumer Confidence Index declining in the second quarter.

While shadow inventory is decreasing sharply and credit availability continues to improve, the pace of improvement will be tempered by these macro factors and the manager still expects the market will take until the end of 2013 to reach a normalized, balanced state. That said, we remain very bullish on the US housing market and we continue to see a healthy pipeline of opportunistic transactions with extremely attractive risk-adjusted returns. This should bode well for the beginning of our newest fund, Tricon XI, and as Jonathan will mention, our new single-family rental strategy.

I will now pass it over to Gary to talk about our Canadian markets.

Thanks, Glenn. Notwithstanding the barrage of negative headline news about the Canadian housing market, all reported statistics point to a stable market. National housing starts are robust at 220,000 units and certainly higher what we or CMHC would have predicted at the beginning of the year. New home prices were up slightly year over year, existing home prices have stabilized, and resale inventory is balanced at 52% sales-to-listing ratio.

While the national housing market appears healthy and should continue to perform well in a historically low interest rate environment, housing is a local business and there are certain submarkets that have gotten ahead of fundamentals are in the process of correcting. The Vancouver single-family housing market is one such market.

Chinese buying, particularly on the west side, has tempered and the market in many ways is reflecting the cool local summer weather. On the other hand, new condo sales remain strong in certain affordable submarkets, such as Burnaby, that appeal to Chinese end-users.

We launched a project in the second quarter called the Silver Tower, which is part of our Metrotown portfolio in Tricon XII, and we have now at the launch sold 50%. A couple of months later we have now sold 72% of the 284 units in the project, so this is indicative of the fact that if you have a well-priced and well-designed project it can still do well in the Vancouver marketplace.

The Toronto condo market is another notable sector that is undergoing a significant slowdown. In what feels like Chinese-style housing policy, the Bank of Canada and federal government have orchestrated a correction in the condo market through bank tightening, and that is both for construction loans and consumer end loans, integration controls, and continuous warnings channeled through the media. Although this is (technical difficulty) in mainstream media (technical difficulty) we suspect new condo prices are down upwards of 10% as developers are offering a number of incentives to lure in increasingly skeptical investors and end-users.

Summer is seeing a slow launch market and price reductions are related to the summer doldrums. Given that the last few summers have been strong, we believe that this is something more and that we are in the midst of a correction that could easily last into 2013.

In some ways this is welcome news for Tricon as we are not overexposed to the Toronto condo market and a correction could lead to better investment opportunities in the future, especially for Tricon XII. At the current time and assuming interest rates stay low, we believe that a Toronto condo correction will be moderate as completed buildings are fully occupied and new projects will be delayed thereby keeping supply in check. Also, investor demand should return quickly when rental economics improve.

Sales in 2011 were clearly not sustainable, so a pullback should be considered healthy and in the industry's best interests over the longer term.

I am now going to hand it over to John to talk about our single-family rental business.

Thank you, Gary. Tricon is currently actively buying homes with four operating partners in five markets, namely the Greater Sacramento region, the Greater Bay Area, Southern California's Inland Empire, which is Riverside and San Bernardino counties, Phoenix, and Southeast Florida, which we consider Miami-Dade, Broward, and Palm Beach counties.

We are also evaluating potential operating partners and select new markets, including greater Los Angeles, Atlanta, Tampa, and Orlando. Our portfolio currently consists of over 420 homes, of which approximately 50 are designated as flip homes, those which are targeted for renovation and immediate sale at a profit of roughly 8% to 10% on all-in costs with the remainder designated as a rental homes, which are renovated and then leased to end-users.

At the blended portfolio level the homes that we have acquired are performing as expected. However, it is important to recognize that our approach to this business, as well as the nature of the distressed inventory, varies from market to market.

For example, in Phoenix we are buying newer homes -- our average home was built in 2003 -- which we expect to have high near-term appreciation and are targeting gross rental yields of 10% to 11%. This is in contrast to the Southeast Florida where our typical home was built in the 1960s or 1970s but is generating a gross rental yield of more than 15%. Our other markets fall somewhere in between these two extremes.

We will provide [shareholders] with additional market color and in-depth data (technical difficulty) in the quarters and years to come.

As expected, we are seeing some strong competitors in this burgeoning industry. However, we have managed to carve a niche for ourselves through our hub and spoke operating platform and ones and twos approach to home buying. In general, we have elected not to bid for the large portfolios that the GSEs are starting to (technical difficulty). For example, the 2,500 home portfolio recently sold by Fannie Mae.

Instead, we are looking for slow and measured growth through careful evaluation of each home being acquired. While we may look at portfolio acquisitions in the future, they will typically be smaller regional portfolios where our local operating partner can perform extensive due diligence on the asset.

As a whole, we are very pleased with our performance thus far and are confident in our ability to successfully deploy the CAD100 million raised by Tricon through our recent public equity and debt offerings, as well as the debt that we are starting to raise at the partnership level. We continue to see the single-family rental strategy as a growth business for Tricon and are currently working on a variety of capital raising strategies which will allow us to grow this platform even further.

I would now like to pass this back to David Berman for his closing remarks.

Thanks, gentlemen. As noted earlier, this has been a record financial quarter for Tricon, driven largely by management fees and investment income from the Cross Creek Ranch separate account. Given that our asset management business is underpinned by sticky management fees, Cross Creek and the impending closing of Tricon XI will provide the Company with a stable stream of cash flows for many years to come.

In addition, as John discussed, our principal investing business, and in particular our US single-family for rent platform, is in growth mode and we are well positioned to become one of the leaders in this burgeoning industry. We believe that we are aligned with best-in-class operating partners in housing markets that offer the best long-term investment opportunities and expect to reap the rewards from this strategy over the upcoming years.

For a long time now Tricon's share price has not, in my opinion, reflected the Company's prospects and potential. Although not yet back to original issued price, the 30% increase in share price over the past four months validates, I believe, our investment thesis.

Accordingly, it is incumbent upon me to thank those shareholders who have stuck by the Company as we have rolled out our new funds an expansion strategies, sometimes a little slower than we all would have liked but successfully nonetheless. And, as the saying goes, good things do come to people who wait and we believe that all our shareholders are now starting to be rewarded for their patience.

Operator, we are not ready to take questions.

(Operator Instructions) Stephen Boland, GMP Securities.

Good morning. I guess first question on the single-family business in the US, 10% of the homes that you have purchased now you have designated as flip, meaning -- is that more than you thought would occur? I guess we always thought that the strategy would be kind of a buy, hold, wait for the capital appreciation. But is the capital appreciation coming faster than expected?

No, Steve. This is Jonathan; I wouldn't say that is the case. In some of our partnerships, in particular in Sacramento and Phoenix, we always thought that there would be opportunities to buy homes, typically slightly higher priced homes that it didn't necessarily pencil for the for-rent strategy but where you could add some improvements in the near term and then resell them at a profit.

Actually, the single-family for rent business really began for a lot of these guys as a flip business where you would buy homes to renovate them and resell them, and we didn't want our operating partners to have to depart from that strategy to shift solely to for rent. So although the main focus is and is going to continue to be single-family for rent, if we can also buy homes and make a near-term 8% to 10% profit and turn our money three times in a year therefore generating a return on investment of 20% to 25% annually, we don't want to walk away from that. And we are opportunistic in our investments and think that that is a good way for us to play in the market as well, but to a much lesser extent.

Okay. And I guess you are not using -- just remind me when the leverage is going to start coming in here more meaningfully? What is the plan there?

Actually we are getting very close to a first draw on a loan that we have with our Sacramento partnership with 29th Street Capital. That loan is as a 5% -- 60% loan to cost and all of our other partners and us are in the process speaking with banks.

We have actually had some very interesting and productive recent conversations with money center banks and Wall Street investment bank types who are all coming into the market. Gary and I were actually in Washington a couple weeks ago meeting with government agencies regarding their interest in providing financing to this strategy. So this loan is at 5% and we believe that over time that that will come into the space of lower rates as low as 4%.

Okay. And your plan, I guess is it still to be 60/40 in terms of leverage or has that changed your outlook there?

No, that is still the same.

Okay. I guess second question. When I look at some concerns you have in the Canadian market and you have just done a big raise, is there enough product for you to get this fund up and fully invested over the next 12 months? Because you do seem more concerned about the Canadian market than in the past couple of years.

Let's just say we have been cautious, particularly in Toronto, over the last several years. I mean since 2008 we have only invested in three or four condo projects in Toronto and prior to that we were probably the largest financier for the condo business, particularly in downtown.

So we have been cautious for quite some time. I think the difference right now is we are noticing what I would say is a tangible correction. You can feel that the market is slow. We know that developers are really dropping prices or using incentives to drop the effective price. So in that kind of environment it is important to be, I think, that much more cautious.

But in terms of being able to put the capital out in Tricon XII, we are not concerned about that at all. We have ready-made two investments that between the two of them are probably going to be CAD50 million or CAD60 million; that being the Massey Tower and the Metrotown portfolio. And both of those investments look like they are doing very well.

And we still have roughly another couple of years in our investment period to put that money out. We are looking at a new opportunity in Vancouver, which is along the lines of affordable, I would describe more suburban condo product, which we believe there is a market today. We also are looking to increase our weighting in Alberta.

Alberta has gone through, I think, a pretty substantial housing recovery up to 2007 or since 2007. That market is now really stabilizing and we are starting to see home prices go up. We are starting to see inventories come down. So Alberta is a place -- if you believe that commodities are going to stay stable and China is going to stay intact, we think Alberta is a good place to be.

So I think we will see more of a weighting in Tricon XII to Western Canada and we will continue to be cautious in Toronto. But, again, and we will see how this goes, but at this point in time I personally don't believe that the Toronto condo correction will be a long correction. And so we may see opportunities, let's say, within a year that we want to take advantage of.

Okay, that is great. Just one final question on the new US fund. The size is -- I know it is pretty fluid, are you still confident to get to 350 to 450? Is that still a valid range?

Yes, that is still our expectation. As we mentioned, we are inching closer to the finishing line but we will get there probably should say by the end of the quarter for sure. Once the first closing takes place then we can start the broader marketing.

Okay. Thanks, guys.

Thank you.

[Jeffrey Erline], Vision Capital Corporation.

Good morning and thanks for the good results. Just have a strategic question, a little different than the sort of fix up and flip on the short-term basis at some of your single-family housing.

You mentioned with the recovery of the US home market that some of the original strategy is unfolding as anticipated. I guess my question is at what point do you consider -- if you see both success in buying and renting and you are getting a nice rental stream and you are seeing substantial capital appreciation, what is your decision metrics of holding for the rental stream or selling at a profit? This isn't the short-term kind of fix up and flip homes, but the more core rental ones.

This is Gary. I think at this point in time our expectation in the single-family for rent platform is to hold. Notwithstanding Jon's comments that a small percentage of our portfolio is really designated to flip, we are really looking for a longer-term hold and I would say today that hold period is going to be probably roughly three years.

That might change. It could be two years, it could be five years, but we really believe we are just at the very beginning of the US housing recovery. There has been lots of positive news. There is lots of things to get excited about, but we still have a long way to go in terms of all the metrics. In terms of housing starts, sales, home prices, we still have a long way to go.

So we think this year we could see home prices appreciate, let's say, 5%. They might be even higher in some of our markets. We think, and a lot of the analysts believe, that we could see home prices continue to appreciate by about 5% for the next several years. If that is the case, we are going to be in a better -- we should hold.

We continue to get good rental income. We might even see some rent inflation, but we should hold and take advantage of that home price appreciation. And when we get to a point where the home price appreciation stabilizes I think that might be a more opportune time to start talking about an exit, but I think it is far too premature to discuss that.

No, I appreciate it is premature but I was just trying to get a sense, for example, if you saw 25% appreciation in your home prices over the next six to 12 months would you sell versus continue to clip coupons?

We would be tempted at that stage. But, again, as to what Gary has been saying, we would really evaluate the market and see where we think it is going, because if at that stage we still believe it is completely undervalued then it wouldn't make -- yes, you would be (multiple speakers), but it would make more sense to hold and benefit for the longer term.

Thanks very much.

We currently have no questions coming through. (Operator Instructions)

We have no further questions. I will now hand you back to your host to conclude today's conference.

In concluding I would like to thank all of you on the call for your participation. We look forward to speaking to you in November when we discuss our results for Q3 2012. Thank you.

Thank you for joining today's conference. You may now replace your handsets. Thank you.