Tricon Residential Inc (TCN) 2014 Q1 法說會逐字稿

Hello, my name is Tonya, and I'll be your conference operator today. At this time I would like to welcome everyone to the Tricon first-quarter investor call. (Operator Instructions). After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Stephanie Chow, Investor Relations, you may begin your conference.

Thank you, operator. Good morning, everyone, and thank you for joining us to discuss Tricon's results for the quarter ending March 31, 2014, which were shared in the news release we distributed yesterday afternoon. Our financial statements and MD&A are also available on both the Tricon website and SEDAR.

Please note that this call is also available by webcast at triconcapital.com, and a replay will be accessible by telephone until May 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 private funds and principal investment vehicles.

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 both our most recent short-form prospectus and annual information form, which are available on SEDAR.

With that, I would now like to hand the call over to David Berman, Chairman and CEO.

Thanks, Stephanie, and good morning, everyone. I will start with a summary of this quarter's highlights. Margaret Whelan, our CFO, will then review our key financial results; followed by Gary Berman, Tricon's President and COO, who will provide an overview of our single-family rental, our land and homebuilding, and private fund and advisory businesses -- and, in particular, some exciting growth initiatives we are working on this year.

Other members of our investment team will then join us as we take your questions. This morning we announced a strong start to 2014 by reporting adjusted base revenue of CAD22.3 million and adjusted EBITDA of CAD26.3 million for the first quarter, representing a 320% and a 75% increase, respectively, year over year.

This growth was the result of two primary drivers. First, continued momentum in our single-family rental platform, Tricon American Homes, which added 604 homes in the quarter, contributing to a total of 3,858 homes owned by the end of March. By the end of April we owned over 4,000 homes, putting us on track to meet or exceed our goal of owning 5,000 homes by early next year.

This growth has been funded primarily by a dedicated CAD250 million credit facility for the platform, along with select equity investment in our new markets. Our acquisition program continues to focus on markets with strong, long-term housing fundamentals where we can achieve our target deal parameters, including several newer markets which we entered in the second half of 2013, namely Atlanta, Tampa, San Antonio, and Las Vegas.

While the growth in volume contributed to a 170% increase in rental revenue, we also had another meaningful uplift in fair market value of CAD8.6 million this past quarter, representing a nearly 4% quarterly increase in home prices across our key markets, even after absorbing CAD13.2 million of capital expenditures. Since inception, the cumulative fair value adjustment has totaled $42.9 million, or 9.1% of the total cost basis, which we believe is conservative relative to the investments we have made and home price appreciation in the local markets.

The second growth driver in our adjusted EBITDA came from our land and homebuilding business, and specifically the acquisition last year of the 68.4% interest in our US fund, Tricon IX. Since the closing of that transaction last August, Tricon has received $23.4 million in cash distribution through March 31, which is ahead of our original business plan. And furthermore, in April of this year we received an additional $10.3 million from the fund.

We continue to enjoy stability in the results of our private funds and advisory business. With respect to our co-mingled funds, we recently completed the Tricon XII investment program with a closing of a CAD60 million investment in Mahogany, an active master-planned community in Calgary. This project was the recipient of the 2013 Community of the Year Award from the Calgary Region Home Builders Association, and the investment provides Tricon and its fund with exposure to arguably the strongest housing market in Canada.

With Tricon XI, our active fund, we are more than halfway through the investment phase, with a current pipeline of CAD700 million and only CAD146 million left to deploy.

From a Companywide perspective, Q2 got off to an exciting start with the announcement in April of two new initiatives. First, we were very pleased to pursue a unique opportunity as we acquired a 50.1% ownership interest in the Johnson Companies LP, the development and management division of one of the most active development managers in the US, for $18.5 million.

Since 2012 we have enjoyed an excellent working relationship with Larry Johnson and his team, resulting in three separate accounts being formed in the Houston area. We look forward to potential expansion opportunities into new markets through this investment. Moreover, the transaction will be immediately accretive to our earnings effective Q2.

Second, we announced our entry into the US manufactured housing industry, which is an investment opportunity we have been exploring for quite some time. We view this initiative as the next step for Tricon in establishing our housing brand, as we expect that our investment focus will continue to expand to include other opportunistic and related residential business lines. And as with any investment, we intend to offer a co-investment opportunity in this exciting strategy to our institutional partners once critical mass is achieved, thereby further enhancing our third-party asset management business.

Finally, I am also pleased to announce that on May 12, 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 15, 2014.

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

Thank you, David, and good morning, everyone. For the first quarter we reported adjusted base revenue of CAD22.3 million, an increase of 320% year over year. The significant growth was driven by growth across each of our business segments, including the increase in our share of the investment income post the acquisition of 68.4% of Tricon IX in the third quarter of 2013; continued growth in rental revenue earned by Tricon American Homes in volumes increased and occupancy rates improved; contractual fees generated post the final close of Tricon XI late last year; and the closing of new separate accounts with Tricon investments in the back half of 2013.

As a result, our adjusted base revenue increased almost 500% year over year to CAD19.2 million, benefiting from the revenue growth, but also from contractual fee income, the investment income from land and homebuilding, increasing year over year by 45% and almost 2,000% respectively. The growth in our profitability was further augmented by the positive fair value adjustments of Tricon American Homes, which David mentioned.

Our adjusted net income increased 50% year over year to CAD12.4 million, driven by the overall increase in adjusted EBITDA; while our adjusted basic EPS and adjusted diluted EPS decreased by 30% and 45% year over year to $0.14 and $0.11, respectively, primarily as a result of this higher share count. By the end of the first quarter, our assets under management had exceeded CAD2 billion, having increased 75% year over year.

Over the last four years, our asset base has increased more than tenfold to CAD690 million at the end of the first quarter. On this base we expect to generate meaningful cash flow this year and in the future.

As Gary will discuss, we are pursuing and realizing many exciting growth opportunities in 2014. We anticipate that these initiatives will be supported by our internally generated cash flow, along with the increased liquidity provided by the recent increase in our corporate credit facility from CAD45 million CAD105 million. Our leverage ratio remains conservative at almost 20%.

In August 2013 we announced a normal course issuer bid, allowing us to buy up to 5% of our fully diluted share count, or 4.5 million shares. Given our enhanced liquidity and the recent pullback in our share price, we have been opportunistically buying in some shares of late. So far in the second quarter, we have repurchased 90,000 shares at an average price of CAD$7.63. Our goal primarily is to offset the creep in our share count resulting from the new compensation plan announced late last year, which increased the ratio of equity to cash compensation for our senior executives to better align our goals with those of our shareholders.

I will now turn the call over to Gary, who will provide additional insight on our fund management and principal investing businesses.

Thank you, Margaret. While 2013 was one of our most productive periods in Tricon's 26-year history, 2014 is off to an equally strong and exciting start. Each of our core businesses delivered meaningful revenue growth, contributing a record quarterly adjusted net income, while our cash flow generation remains robust.

Previously I have referred to 2013 as a transformational year for our Company, but as we look at the new strategic initiatives that we've announced of late, it is clear that the metamorphosis continues. With our investment in a controlling interest in the Johnson Companies, along with our announced entry into the US manufactured housing industry, we are well on our way to becoming a diversified housing brand. Our goal is to control related business lines in the residential real estate industry that offers shareholders and limited partners added diversification across the full spectrum of housing, from affordable housing to affordable luxury.

Let me recap some highlights of our first-quarter results and these recently announced transactions. Starting off with our single-family rental platform, Tricon American Homes: for the quarter we earned approximately CAD6 million of NOI and CAD3.6 million of realized investment income -- that is after corporate overhead and asset management fees paid to our operators -- representing a nearly 170% and a 126% increase year over year, as the growth in the number of homes with we owned accelerated and occupancy remained steady.

Given that our single-family rental business was essentially in startup mode at this time last year, perhaps it's more pertinent to look at the sequential growth; and we are pleased to report that NOI for Q1 increased 37% compared to Q4 2013. We credit our success of, one, our hub-and-spoke model, where we have partnered with seasoned, on-the-ground operators who have made meaningful co-investments alongside of us; and two, our emphasis on quality over quantity in our acquisition process so we can generate higher yields and manage throughput.

We have successfully and seamlessly shifted our acquisition program from the West Coast to the East Coast as we follow readily available shadow inventory and continue to target blended net yields of 7%-plus. With over 4,000 homes owned currently, we continue to anticipate being able to reach 5,000 homes in early 2015. And we'll continue to finance the acquisitions through our Deutsche Bank credit facility of $250 million. We are encouraged by the recent activity of our single-family rental peers in the securitization market and continue to expect to refinance our credit facility with more permanent debt once we reach critical mass.

In the first quarter we acquired 604 rental homes, bringing the total rental portfolio to 3,858 units. The pace of acquisitions accelerated as a result of entering four new markets late last year -- San Antonio, Las Vegas, Atlanta, and Tampa -- where strong buying opportunities persist. We are currently pursuing new acquisitions in 8 of our 12 markets and are evaluating several new markets, including Houston, Raleigh-Durham, and Orlando.

Gross yields have generally come under pressure as a result of underlying home price appreciation, but through our selective onesies and twosies approach, we continue to be able to target and buy homes with blended gross yields of 12% to 13%, which was our initial targeted range.

Total portfolio occupancy has remained fairly steady at 77%, as new leasing has generally been able to keep up with new acquisitions. Again, if we were to stop acquiring or renovating existing homes, we believe we would ultimately achieve 95% occupancy; and we are already at this level in several of our earlier-stage acquisition markets.

We should add that our six-month occupancy rebounded meaningfully in the quarter, increasing by 500 basis points to 92% as a result of our continued efforts to stabilize homes in the portfolio. Blended NOI margins improved to 64%, 110 basis points year over year and 260 basis points sequentially, although the vast majority of this increase is attributable to moving items that are typically capitalized, such as CapEx and leasing commissions, below the NOI line, so that our margin analysis is standardized with other single-family rental REITs. The industry is obviously evolving rapidly, and we want to make sure that we report our numbers on an apples-to-apples basis with our peers.

Although we still have limited experience with moveouts, we are seeing turnover rates of roughly 30% to 35% and net turn costs of about CAD1,500 per unit, which is in line with our budget. In terms of fair market value adjustments, we recorded a lift of CAD42.9 million as of Q1 2014, which essentially represents the cumulative increase since launching our single-family rental strategy in early 2012 and an approximately 9% increase on Tricon's gross acquisition basis, which is conservative, given that, one, the AVM valuation methodology is a lagging indicator; and, two, we have made significant capital improvements that are not yet reflected in the adjustment.

So all in all, our single-family rental strategy remains right on track from an acquisition and operational point of view. And we remain optimistic that we will hit our longer-term volume, NOI, and total return targets. Let's move on to land and homebuilding.

Our land and homebuilding business line refers to co-investments we have made in various residential development funds in separate accounts, including our 68.4% interest in Tricon IX. In Q1 2014 we generated CAD14.8 million of net operating income. That excludes performance fees, foreign exchange, and tax. And it represents a significant 19 times increase over the prior year, primarily as a result of our majority interest in Tricon IX.

Tricon's investment in Tricon IX has already produced CAD23.4 million of cash flow since their acquisition in August 2013, and we expect it to produce roughly CAD100 million of net free cash to Tricon in each of 2014, 2015, and 2016 as we harvest the underlying investments. In April 2014 alone, we received an additional CAD10.3 million from Tricon IX, thereby increasing total cash received since the acquisition to $33.7 million.

In Q1 2014 the fund XI equity position in the new home company was converted from a private company state into publicly traded shares following the completion of The New Home's IPO on January 31, 2014, on the New York Stock Exchange. The fund now owns 11.6% of the company, which, based on the March 31, 2014, share price of $14.24, carries a value of $27.3 million compared to Tricon XI's basis of approximately [$15] million.

The success of this IPO reinforces our decision to make a meaningful level investment in a company with a seasoned and very experienced management team. We hope to pursue more investment opportunities with this team in the future.

In Q1 2014 we successfully completed the anticipated syndication of 90% of our stake in Shea Homes, Vistancia West's active adult community in Phoenix, Arizona, which lowered Tricon's co-investment in this project from $55 million to $4.95 million and created a new sidecar investment vehicle in the process. Shea Homes is one of the largest private homebuilders in the US and a leader in the active adult segment through their Trilogy brand, and we look forward to growing our investment platform with them in the years to come.

Product sales at the Cross Creek Ranch separate account investment in Houston were slower than expected in Q1 as a result of poor weather, which limited the ability to complete residential lots. Delivery of these lots has been pushed back to Q2, and the project is still expected to meet budgeted goals for 2014. The finished-lot market in high quality master-planned communities in Houston remains very strong, with finished-lot pricing up 3% in 2014 following a 22% annual increase in 2013. To date we've received $8 million in distributions already from this approximately $14 million investment.

The Tricon XI investment program remains active, with a number of additional investments in the advanced due diligence stage and a potential transaction pipeline of over CAD700 million as of May 1, 2014. We expect Tricon XI to be fully invested by this time next year.

While the US housing market is recovering slowly, we continue to believe that we are in the early innings of what could be an extra-inning game as we target longer-term land investments across the Sun Belt. Every time that there is a statistical hiccup or marginal negative news, we view this as an opportunity to accumulate and increase our position in US land and homebuilding assets.

Moving on to private funds and advisory. In our private funds and advisory business, where we provide advisory services and manage capital on behalf of private third-party investors, we had a solid quarter, with approximately CAD3.9 million of GP distribution income and contractual management fees, representing year-over-year growth of 45%. This growth was driven by the final closing of Tricon XI and continuing momentum in our separate account for joint venture business.

As we stated earlier, we believe our ability to perform these investments with large institutions and create sidecars for larger fund investments will allow us to smooth out and bolster our AUM growth. With the syndication of Vistancia West and a sidecar from Mahogany in Q1, we have now established a total of five separate accounts and sidecars for land and homebuilding projects since 2012, with aggregate third-party capital commitments of nearly CAD350 million.

Last month we announced an $18.5 million strategic investment to acquire a 50.1% position in the Johnson Companies LP, the development management division of the Johnson Development Corp., and in the process created what we call our advisory business. Johnson is one of the most active development managers of master-planned communities in the US, and the only development manager in the country to have four communities ranked in the top 20 in 2013. The company earns fee and commission income from in-place development management contracts at 14 active communities it manages. Management fees and sales commissions are earned as loss and lands are sold, but are not contingent on underlying project-level returns, as Tricon is not acquiring an interest in Johnson's project-level equity positions.

With development projects in place representing a pipeline of over 20,000 residential lots and 1,250 acres of commercial land, this transaction will be immediately accretive to Tricon, delivering income growth as a result of in-place contractual management fees, thereby bolstering our private funds and advisory business.

In addition, we believe that the proprietary investment pipeline from this transaction will generate significantly more upside as we continue to grow our platform with fee-generating assets. Already we've committed $27.5 million of our own capital and raised $247.3 million in third-party institutional capital commitments to support Johnson management investments since 2012.

Company revenue is expected to grow as new communities are brought online and as the national housing market continues to recover. Johnson may look to strategically expand to other major US markets to take advantage of large acquisition and recapitalization opportunities. As David mentioned earlier, we are very excited at the opportunity to work more closely with Larry Johnson and his team.

In terms of our active co-mingled funds, we completed the Tricon XII investment program in March, with the closing of a CAD60 million commitment to the Mahogany master-planned community in Calgary; and in the US we have approximately 45% of fund capital left in Tricon XI and continue to see attractive land and investment opportunities, as reflected in our CAD700 million pipeline as of May 1. While we do not have immediate plans to raise a successor Canadian fund for Tricon XII, we do intend to launch a successor US investment vehicle for Tricon XI later in 2014.

US projected fund returns have been stable to positive year over year, while Canadian fund yields have compressed slightly as a result of projects being delayed from the difficult financing environment, permit issues, and weather conditions. That being said, overall profits are more or less intact.

Let's talk about some new verticals. As we discussed earlier this year, over the last 12 months, we have spent a significant amount of time analyzing potential investments and related business lines or verticals. In late April we announced a new strategic initiative focused on acquiring and managing existing manufactured housing communities across the United States.

We are attracted to this industry for several reasons. First, this is a large, fragmented industry with less than 2% institutional ownership. Second, it is a supply-constrained market. It is very difficult to achieve entitlements to build new parks or communities.

Third, investment yields are very stable relative to other asset classes, and NOI margins are high as a result of low turnover. The reason for this is that it is prohibitively expensive for tenants to move their homes, and therefore they tend to stay in place.

And finally, this is an established industry with attractively priced debt capital that is widely available. We've entered into a definitive partnership agreement with Cobblestone Real Estate LLC, a vertically integrated asset and property manager whose principals have a successful 15-year track record acquiring and managing over 16,000 residential pads across the US.

Our partnership will pursue an acquisition strategy that targets both age-restricted and all-age MHCs in the US Sun Belt, where we can leverage our development and operational experience. We plan to target well located MHCs that are initially deemed to be at least three- to four-star quality and potentially suffering from below-market rents, low occupancy, and general market perception.

Initially we will capitalize the strategy on our balance sheet, which provides will provide Tricon with stable rental income and potential upside by, one, driving rental income through aggressive asset management and a programmatic CapEx plan; and, two, taking advantage of the significant positive spread to current financing rates, targeting cash-on-cash yields of 10%-plus.

The partnership's business plan will provide downside protection by focusing on free cash flow and upside in the terminal value by actively repositioning existing assets to a higher-star classification. With time, we anticipate the opportunity to assemble a high-yielding, institutional-quality portfolio in a highly fragmented market that is largely dominated by private investors.

Our goal is to build a diverse portfolio of quality assets that will garner the interest of public markets and strategic investors once critical mass is achieved. Similar to land and homebuilding, we intend to offer a co-investment in this exciting strategy to our institutional partners once critical mass is achieved, thereby further enhancing our third-party asset management business.

I will now turn it over to David for his closing remarks.

Thanks, Gary. In conclusion, as I discussed last quarter, Tricon continues to pursue opportunistic residential real estate investments across the United States and Canada. I believe that our current platforms of financing single-family homes and residential development are just a start, and with time we will enter into related and complementary business lines, without forgoing our underlying operating strategy: that of being an asset manager for our investors and for ourselves.

We look forward to adding value for our shareholders in the quarters and years to come and appreciate your faith in the Company and our management team. We now welcome questions.

(Operator Instructions) Geoff Kwan, RBC Capital Markets.

The first question I had was: with Tricon IX, you guys have stated that you expect, or you hope to get, about CAD100 million in free cash flow this year. And when you think about the runway in terms of how you can deploy this capital, do you feel that you have enough investment opportunities with the various platforms that you have? Or do you think there may be some excess cash as we get towards the end of the year? And if so, how do you think about how you'd use those cash proceeds?

Hi, Geoff, it's Gary. Good morning. No, we're confident that we have sufficient opportunities, really in all our active businesses -- land and homebuilding. Again, we still think we are in the early stages of the recovery, and so we continue to see more opportunity there.

And certainly in manufactured housing, that's a new vertical for us that obviously will require capital. So we think that there is enough opportunity in those two business lines alone.

So I would say at this point, we can actively redeploy that capital. Obviously, if we ever found ourselves in a situation where we didn't see good opportunities, we could obviously consider alternatives, including repurchasing our shares. But at this point in time, we are seeing ample opportunity in the market.

Would part of that come from taking slightly higher co-investment stakes in projects? Or is your expectation on how you would really deploy it based on how you have typically co-invested in recent deals?

In land and homebuilding at this point in time, we would not anticipate higher co-investments. We just don't think it's necessary. But obviously, we're flexible if the market environment changes.

And manufactured housing at this point in time -- as I stated, we are contemplating investing in that on our own, building up some critical mass, and only at that time offering an opportunity to institutional investors. So we would do that directly off of our balance sheet, as we have done with single-family rental to start.

And that leads into my next question in terms of the cash that you may get coming through the door this year. Can you clarify -- when you made the comment around the single-family rental kind of reaching critical mass, in terms of when you might do some sort of securitization?

And then if you guys go down that route, based on -- there's been a few deals in the market already, how much that might potentially lower the funding cost for you? And also, how much of your invested equity you might be able to pull out?

Well, at this point, as you know, we have a credit facility with Deutsche Bank for $250 million. We have currently drawn nearly $200 million. We are doing roughly about $20 million of acquisitions per month, so we anticipate upsizing that credit facility to roughly $350 million sometime over the summer to give us more buying power.

And we think at that point in time, once that's basically fully deployed, we are at a level or critical mass that is going to be more attractive to the rating agencies and the debt capital markets in terms of pricing. So I would say at this point in time, securitization for Tricon is a late year-end 2014 event.

In terms of our cost of capital, right now we are boring at LIBOR plus 3.60%. If you look at the recent securitizations that were done for Blackstone and Colony -- Blackstone, I believe, borrowed at LIBOR plus 1.66%; Colony at a similar range. So they are almost 150 to 200 basis points lower than we are. So it's a significant reduction in borrowing costs.

But I would say, even more importantly than that is also the advance rate. So right now we are borrowing at 65% loan to cost. Blackstone and Colony have been -- through the securitization are borrowing at 70% to 75% loan to value. And because, obviously, there is a bit -- a fair amount of home price appreciation, they have been able to essentially borrow at 90% loan to cost.

So that's a big change. And that has significant ramifications for us -- positive ramifications in terms of our ability to either repatriate equity and then, again, redeploy that into manufactured housing or other opportunities that we see, or continue to buy homes. And that is a decision we will make later in the year.

We continue to see great buying opportunities. That distressed buying window has not closed in the eastern markets. And so it is very likely we will be continuing to buy at this time next year.

So you could potentially, also, at the end of the year -- in addition to what Tricon IX could do in 2015, you could also be getting even more cash flow from the securitization transaction? Is that a fair way to think about it?

I think from a securitization perspective, yes, we will get more cash flow. The question is really: how do we deploy it? Do we continue to put it back into the single-family strategy, or do we move into other verticals as well? So we have a lot of optionality on that side.

Yes. I mean there's no question, Geoff, that if you were to model out -- if you were to say Tricon could more or less replicate what Blackstone and Colony have done, you will see when you model that out that we could buy significantly more than 5,000 homes. But it really comes down to our own business judgment as to whether it makes sense for us to continue to buy, or whether we should redeploy that capital into other verticals.

I would tell you at this point that even if our underlying yields come down a little bit -- again, we are currently targeting 7% to 8% -- even if they come down, they can afford to come down if we are able to borrow at a lower rate. So that is something that will play out later this year.

Okay. And, sorry, just one last question I had is: when you take a look at your capital in place -- roughly, call it, 70% homebuilding/land development, 30% SFR. When you take a look at how the US peers trade, it's often such that where the US guys have gone up, that Tricon share price hasn't increased kind of commensurate with the asset mix.

How much do you guys think about that? Are there ways that you can look at maybe narrowing that gap, whether or not it's even potentially US listing or some other methods?

Yes, I mean, that's obviously frustrating for us, that -- you know, obviously our share price has moved up in the last couple of weeks, but it really, we believe, should be quite a bit higher. Certainly that's reflected in the in the NAV of all the different analysts on the Street.

You know, look, we're not focused on monitoring our stock price day to day; we're focused on our business. And we believe that long-term, as we continue to produce good quarterly results, that will ultimately -- that the share price will ultimately reflect that. So from management's perspective, it's frustrating, but I guess we just need to be patient and just focus on our business. And we think if we do that, we will ultimately be rewarded.

Okay. Thank you.

(Operator Instructions) Jimmy Shan, GMP Securities.

A number of US homebuilders have talked about a slowing pace in their new home sales -- in particular, the first-time homebuyer market. I wonder what you're seeing across your managed portfolio, and particularly Fund IX; and whether you had to sort of re-look at your budgets or your cash flow trends, and how that has impacted that at all, if any?

Hi, Jimmy, it's Gary. So there's no question that the US housing market is going sideways right now, and we view that as really part of the recovery. We know this is not going to be a V-shaped recovery; it's going to essentially ebb and flow.

There is a number of reasons, probably, why it is going sideways, but I would say certainly weather has been a factor. We've seen that in Houston. It was difficult to deliver lots, and so we've been delayed in some cases there.

But another major factor is just that home prices have gone up too quickly, and that has essentially given some consumers sticker shock and has made it harder to drive volumes. So if you look at markets like Phoenix, where prices have gone up 30% year over year -- even markets like Houston, where we talked about 20% -- I mean, that is just not a sustainable pace.

And so I think there's a little bit of cash-out that's involved here. So I think that's a major reason that the market is moving sideways.

In the case of first-time homebuyer markets, the first-time homebuyers definitely are not participating in this recovery. And that's a major reason why the starts -- you know, total starts are far off from long-term averages; the first-time homebuyers are not there. Again, there's probably many reasons for that, and it is not necessarily a science to determine why that is.

But I would say many of the traditional first-time homebuyer markets -- places like outer Phoenix, the Inland Empire -- if you look at resale home prices, they are not high enough in many cases to justify new homebuilding. And so in other words, a first-time homebuyer can either buy an existing home or they can rent a single-family rental home more economically than buying a new home. And that could be one of the reasons that they are staying out of the new homebuilding market.

In terms of the impact on Tricon in general, it's had, I would say, a de minimis impact. Our Phoenix portfolio in Tricon IX has been impacted. We have some finished lots in outer parts of the southeast Valley where we had to move our cash flows back from, I would say, the first half of this year to the later half of the year.

But overall, if you look at our total returns for Tricon IX, they are actually going up. And that's because we really have major concentration in Tricon IX in Northern California, which is a very, very strong or healthy market. So I would say on the whole that we have been impacted a little bit. It's not going to have any material impact on our returns.

I just want to make one addition to Gary's comments. When we underwrote our Phoenix transactions, they actually assumed -- because we bought them, obviously, in 2009, thereabouts -- we assumed that we would not be able to sell any lots until 2014, 2015, 2016. So we effectively took a lot of this into account in the underwriting. So that's why you are not seeing much in the way of change.

Got it. And speaking on Northern California -- so just on Faria Preserve, I wondered if you could give us an update on the entitlement process there and what you are thinking about in terms of proceeding with this asset? How much of the CAD100 million cash flow expected this year would be to arrive from Faria?

Right. Well, we received preliminary planning approval a couple of weeks ago -- five to zero. We are now going into our appeal period, and then we would also need resource agency approval. So at this point in time we are anticipating having all our entitlements in place sometime over the summer.

And at that point in time we would also engage a broker to determine whether we should sell it or build it out -- build it out ourselves. That's a decision we will make in the next two or three months. At this point in time we are anticipating to sell it, and I would say of the CAD100 million of cash flow this year, roughly half of that will come from Faria Preserve.

That's under the assumption that it will be sold?

Correct.

On that basis, I get my first phone call this morning from a public homebuilder asking if they could speak to us about potentially getting involved. So there will be a lot of demand for this product.

Okay. Okay. That's it for me, for now. I will turn it back. Thanks.

Thank you.

Geoff Kwan, RBC Capital Markets.

I just wanted to follow-up on Jimmy's question in terms of what's going on with the US housing market. With the prices having gone up -- you know, it seems to be one of the key reasons that you are citing for what's been going on in the market, but then when you guys went through each of these kind of projects, or four maybe just talking -- generally speaking was -- are you able to get those returns? Because now the sales may get delayed a little bit longer than what you might have seen over the past year. But the returns can also still be good, because the prices you are getting realized might have been meaningfully higher than what you expected originally, when you were underwriting the project?

Yes. I mean, that's the case. And that's why, if you look at our returns, which we disclose in our MD&A, you'll notice that the Tricon IX returns have actually moved up. The gross returns have moved up from 2014 to 2015. That's at the fund level. They have moved up from 2014 to 2015, and part of that is a result of just higher home prices than what we expected.

So that is something that you certainly -- and we report it -- you can monitor it quarter to quarter. But again, I mean, at this point in time we are being impacted in part of our Phoenix lot portfolio. But we've got other assets in Phoenix that are doing quite well, including Santa Rita Ranch in Tricon XI is performing on budget. And the active adult market in Phoenix, where we have exposure through our Vistancia West project, is also performing very well.

So again, you can't -- you know, when the commentary is broad across the United States, you have to look at it market by market. And we feel, on the whole, pretty confident with our exposure to markets that are performing better than average.

Okay. Thank you.

Jimmy Shan, GMP Securities.

Just a small follow-up. A few more small follow-ups. On the MHC can you give us a sense of your pipeline as you see it today? And then, just turning to the SFR business, when you talk about 7% to 8% cap, I just want to clarify again that that is before the operator fees and all the G&A?

Yes. So your last question -- that's correct. That is a property-level NOI. Again, apples-to-apples with the way real estate would view NOI, SG&A is below the line, including our operator asset management fees. That's really essentially corporate overhead. That's below the line.

In terms of manufactured housing, we are actively looking at opportunities right now. Jimmy, there's nothing specific I can tell you today, but we are actively looking at opportunities. And we anticipate being able to acquire some parks later this year.

Okay. And on Johnson Development, anything you could share with us to help us model this acquisition?

I can't get into the specifics of the income -- the contractual fees -- today. Again, we were able to report this quarter that we do have a majority or controlling interest of 50.1%. I can tell you that in terms of reporting income, we have structured this investment. So we are able to receive the income as of January 1.

But in terms of what we are hearing today, the way that will be reported in Q2 is income from January 1 to April 12, when we made the acquisition, will be netted off against the acquisition price of $18.5 million. So you should expect that in Q2.

And, obviously, in Q2 we will be able to report the full income for the first six months. I'm sorry; I can't tell you more than that.

Okay. Fair enough. Thanks.

Just to clarify, the income from Q2 will be from April 12 to June 30, with the income before that showing as a reduction in our cost.

I can tell you, obviously, that this is -- and we reported this before -- this is immediately accretive. We feel very good about this transaction and the earnings potential, but we can't comment on it specifically.

Okay. Thank you.

There are no further questions at this time. I turn the call back over to the presenters.

Thank you, Tonya. So 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 2014. And we also look forward to seeing you at our AGM, to be held next Wednesday. Thank you.

This concludes today's conference call. You may now disconnect.