Tricon Residential Inc (TCN) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Tricon Capital second-quarter 2014 investors conference call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) Please note that this call is being recorded today, Thursday, August the 14th, 2014 at 10 a.m. Eastern Time.

I would now like to turn the meeting over to the host for today's call, Stephanie Chow. 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, 2014, which was 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 the replay will be accessible by telephone until August the 21st.

Before we get started, a reminder that our remarks and answers to your questions may contain forward-looking information about future events and its 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. Good morning, everyone. I will start by reviewing a summary of the second quarter's highlights. Margaret Whelan, our CFO, will then review our key financial results, followed by Gary Berman, Tricon's President, COO, and recently appointed Director, who will provide an overview of our single-family rental, land, and homebuilding, and private funds and advisory businesses, and in particular, provide a mid-year update on the goals and growth initiatives we are working on this year. Other members of our investment team will then join us as we take your questions.

Following a strong and exciting first quarter, we continued to deliver meaningful growth across the board, reflected in a 185% year-over-year increase in quarterly adjusted base revenue to CAD17.1 million, and a 215% year-over-year increase in adjusted base EBITDA to CAD12.7 million. This growth was the result of two primary drivers.

First, continued momentum in our single-family rental platform, Tricon American Homes, which added 416 homes in the quarter, contributing to a total of 4274 homes owned by the end of June. This growth, which represents a 68% year-over-year increase, continues to be funded primarily by a dedicated and recently outsized credit facility for the platform, along with select equity investments as we enter new markets.

Our acquisition program focuses on markets with robust long-term housing fundamentals where we can achieve our target yield parameters, including several newer markets, which we successfully entered in the second half of 2013, namely Atlanta, Tampa, San Antonio, and Las Vegas. We entered Houston in the second quarter, where we already have a strong presence through our development business. And we're on track to meet or exceed our goal of owning 5000 homes by early next year.

This quarter's growth in volume, along with improved occupancy rates, to a portfolio-wide record 85%, contributed to 133% year-over-year increase in rental revenue. More importantly, we delivered record NOI margin of [66%] and net operating income of CAD7.6 million. As of June 30, we reported a nearly 5% sequential increase in home prices on properties owned since last quarter.

While we consider this quarterly fair value increase to be high and unsustainable, we are happy to report that we have overall meaningful uplift in fair -- uplift in fair market value of $3.4 million this past quarter, even after absorbing $20 million of capital expenditures. Since inception, accumulative fair value adjustment has totaled $45.5 million or 8.6% 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 a year ago of the 68.4% interest in our US fund, Tricon Loan. Since closing this transaction last August, Tricon has received $42.4 million in cash distributions to June 30, which is ahead of our original business plan. Furthermore, since the end of June, we have received an additional [$7.7 million] from the fund.

We continue to enjoy stability and the results of our private funds and advisory business. And as previously discussed, we completed the Tricon XII investment program earlier this year, but do not have plans to raise a successor fund in the near-term. With Tricon XI, our active US fund, we are approximately 70% committed, with a current pipeline of over [CAD600 million] and only $91 million left to deploy.

At present, we have three additional investments in the advanced due diligence stage that are expected to close in the second half of 2014. And as such, we expect to be fully committed and fund-lined before the year-end. As a result, marketing activities for the Company's successful US investment fund are expected to commence this fall.

In Q2, we successfully assimilated our acquisition earlier this year of a 50.1% ownership interest in the Johnson Company's LP, the Development Management division of one of the most active market plan developers in the United States. The Johnson acquisition was immediately accretive to our earnings, and we expect Johnson's contractual fee to be even stronger in the second half of the year.

With respect to our announcement that we plan to enter the US manufacturing housing industry -- a sector we have been exploring for quite some time -- we have been actively pursuing several attractive investment opportunities, and expect to announce our inaugural investment in the near future. Once we have established critical mass in this attractive sector, we intend to offer coinvestment opportunity to our institutional partners, thereby further enhancing our third-party asset management business.

From a companywide perspective, the third quarter got off to an exciting start, with the recent announcement of two strategic land deals in Charlotte, North Carolina and Corona, California with our existing partner Shea Homes and The New Home Company. Together, these two transactions have increased our assets under management by over CAD150 million through the formation of two sidecar investment vehicles.

Finally, I am also pleased to announce that on August 13, our Board of Directors declared an unchanged quarterly dividend payment in the amount of [CAD0.06] per share to shareholders of record on September 30. The dividend will be payable on October 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. In the second quarter, our adjusted base revenue rose 185% year-over-year to CAD17.1 million. This significant gain was driven by growth across our major business segments, including the increase in our share of investment income post the Tricon IX acquisition in the third quarter last year, and continued growth in rental revenue earned by Tricon American Homes, as volumes increased and occupancy rates improved to a record high.

In our private funds and advisory business, contractual fees also reached a record high following the final close of Tricon XI late last year, the closing of a new separate account in sidecar investments in the second half of 2013, and our acquisition of a 50.1% interest in Johnson's, which closed in April. Our adjusted base EBITDA rose 215% year-over-year to CAD12.7 million, benefiting from our robust revenue growth. In particular, contractual fee income, investment income from SFR, and investment income from the Land and Homebuilding business, increased year-over-year by 149%, 115%, and 766%, respectively.

Our adjusted EBITDA increased 84% year-over-year to CAD14.5 million, driven in part by further fair value adjustments at Tricon American Homes, which David mentioned. This contributed to a 243% year-over-year increase in our adjusted net income to CAD9.8 million. Finally, adjusted basic earnings per share and adjusted diluted earnings per share increased by 57% and 88% year-over-year to CAD0.11 and CAD0.09, respectively, this quarter despite the significant increase in our share count.

As of June 30, our assets under management was CAD2 billion, representing a 52% year-over-year increase. Since the end of the quarter, we have closed on two additional sidecar investment vehicles with combined new capital of CAD150.8 million, which underscores the confidence our institutional partners have in our investment strategies and working with us. Since 2010, our asset base has increased more than ten-fold to over CAD700 million currently. This foundation and our conservative leverage ratio of 23% has allowed us to improve our liquidity meaningfully this year.

In April, we increased our corporate credit facility to CAD105 million from CAD45 million; while earlier this month, we increased the dedicated credit facility at Tricon American Homes to [$400 million] from $250 million. As of today, [$31 million] and [$246 million] have been drawn on the corporate and MGH credit facilities respectively. In addition, we continue to expect to generate meaningful cash flow as we harvest our existing land investments, which we will deploy to pursue new growth initiatives.

During the quarter, we repurchased 120,000 shares at an average price of CAD7.68 under our normal course issuer bid. Our primary goal with these buybacks is to offset the creep in our share count resulting from our compensation plan. But we also believe that our stock price is undervalued and, as such, it is a prudent use of capital.

In terms of the foreign exchange fluctuations, we reported a large gain in the first quarter, which was subsequently reversed in the second quarter when the US dollar deepened against the loonie. Given the recent strength in the US dollar, we expect this new reversal again this quarter. At this time, we have decided not to hedge our foreign currency exposure because we have natural hedges in place for our business. Mainly, we file in US dollars for both our single-family rental and corporate credit facilities, and reinvest any cash earned into our US budget. Going forward, we will continue to monitor and analyze different hedging alternatives.

I'll now turn the call over to Gary, who will provide additional insight on our fund management key principle investment (technical difficulty) [deficits].

Thank you, Margaret. Good morning, everyone. I'm excited to update you on the progress we're making across our businesses and towards our goal of establishing Tricon as 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 a full spectrum of housing from affordable housing to affordable luxury.

Let me recap some highlights of our second-quarter results and our recently announced transactions, starting with single-family rental or what we call Tricon American Homes. For the quarter, we earned CAD7.6 million of net operating income and CAD4.7 million of realized investment income -- that's after corporate overhead and operator asset management fees -- representing 153% and 113% increase year-over-year, respectively, as the growth in the number of homes we owned accelerated, and our occupancy rates improved to record highs.

We've 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 acquire homes at blended gross yields of 12%-plus and average cap rates of 7%-plus, in line with the targeted yields we established upon the launch of our single-family rental platform in early 2012. Our target of reaching 5000 homes by early 2015 remains on track, and we will continue to finance the acquisitions for a credit facility, which we recently increased.

We are encouraged by the recent activity of our single-family rental peers in the securitization market and are actively preparing to refinance a credit facility with more permanent debt once we reach critical mass. In Q2, we acquired 416 rental homes. The pace of acquisitions was consistent with previous quarters, with much of the buying activity taking place in newer markets San Antonio, Tampa and Atlanta, where strong buying opportunities persist. We're currently pursuing new acquisitions in nine of our 13 markets, including Houston, which we formally entered in the quarter.

In Houston, where resale prices are back at peak and then some, we are able to buy high quality workforce housing in neighborhoods located near the Energy Corridor at cap rates of 7%-plus. This bodes well for our ability to continue our acquisition program in other select markets, once the distressed inventory is largely absorbed, and speaks to the long-term opportunities in single-family rental sector and to the prevailing view of many in the industry that this is an active business rather than simply a trade.

Total portfolio occupancy ramped up meaningfully this quarter to 85% as new homes were quickly leased up. As we said before, if we were to stop acquiring or renovating existing homes, we believe we would ultimately achieve 95% occupancy, as we are already at this level in several of our earlier stage acquisition markets. We should add that our six-month occupancy improved sequentially again this quarter by 200 basis points to 94%, as a result of our continued efforts to stabilize homes in the portfolio.

Net operating income rose by 25% sequentially to CAD7.6 million as a result of accelerated growth and continuing improvement in our occupancy rate across the portfolio. Blended NOI margins improved to 65.6%, 160 basis points sequential improvement. Although we still have limited experience with move-outs, we are seeing turnover rates of roughly 30% to 35%, and net turn costs of about $1400 per unit, which is in line with our budget.

In terms of fair market value adjustments, as of the end of Q2, we recorded an aggregate lift of $45.5 million, which is the cumulative increase since launching our single-family rental strategy in Q1 2012, and approximately a 9% increase on Tricon's gross acquisition basis, which I believe is probably conservative, given that, one, the ABN valuation methodology is a lagging indicator; and two, we made significant capital improvements that are not yet reflected in the adjustment.

We've invested CAD84.3 million in CapEx to date, including CAD20 million spent in Q2, largely the result of an outsized acquisition program in the first quarter of this year. Now let's step back and think about what that means.

In our AVM model, it compares like-for-like homes by zip code, by home type, but it does not look into the homes. It's simply an algorithm. If we pretended or imagined that our AVM was essentially a drone, and could sweep into our various homes, and were to give us some credit for the CapEx, let's say that it gave us 50% credit for the CapEx we've spent of CAD84 million. That's CAD42 million of value that is not reflected in our earnings. So, it's something that we wanted to point out.

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. We are well-positioned to pursue a securitization in early 2015.

As we close in on our targeted acquisition volume and achieve critical mass, we have started to integrate or combine our local operators into one entity in an effort to establish an internalized operating company that will perform asset and property management functions nationally, and be controlled by Tricon. While Tricon American Homes are currently managed through an established network of property management affiliates, with common policies and procedures across markets, over time, we will benefit from integrating our local property management affiliates in order to create a consolidated property management platform.

We anticipate having centralized back office services, including maintenance and leasing call centers, accounting and technology infrastructure, based on the industry-leading Yardi software package. As Tricon American Homes growth continues to 5000 homes and beyond, having an internalized and integrated property management company will provide the Company with enhanced governance of its operations, and enable it to provide superior customer service to both existing and potential tenants.

Moving on to our Land and Homebuilding business. In Q2, we generated CAD6.9 million of net operating income. That excludes performance fees, foreign exchange, and tax, which represents a significant 766% increase over the primary year, primarily as a result of a maturity investment in Tricon IX. This amount was slightly behind management expectations, as closings were pushed out approximately one year in the Phoenix lot portfolio, which is a Tricon IX investment.

As of today's date, our share of the Tricon IX investment income has generated approximately $50.1 million in less than one year since the acquisition. We expect it to produce roughly [$300 million] of net free cash flow to Tricon from 2014 to 2016, as we harvest these investments.

Sales of finished lofts at the Cross Creek Ranch master-planned community in Houston rebounded in Q2 as a result of the completion of a number of programs that were delayed by poor weather in Q1. Finished lofts at the project remain in high demand from area builders, with the project still expected to achieve its original 2014 sales targets. Given the tight supply of finished lofts across Houston, loft prices also continue to increase, with average loft prices at Cross Creek Ranch increasing 14% year-over-year for the first half of 2014. To date, we received $9 million in distributions already from this approximately $14 million investment.

In Q2, Fund XI continued its investment program with two new infill investments in Northern California alongside the Sares Regis Group, representing CAD17.1 million in new capital commitments for the Fund. The Fund XI investment program remains active with three additional investments in the advanced due diligence stage, including multifamily development projects in Dallas and Austin, and a home-building project in Atlanta, all of which are expected to close in the second half of 2014. As David has mentioned, we expect Tricon XI to be fully committed by year-end. As a result, marketing activities for its successor US investment fund will commence this fall.

Subsequent to the end of the quarter, we closed two strategic land deals with existing development partners, which allowed us to form two significant coinvestment vehicles, also known as sidecars. The first is in Charlotte, North Carolina with Shea Communities, while the second is in Corona, California with The New Home Company. The total capital commitment for these transactions was $201.5 million, of which $50.7 million was provided by Fund IX -- Fund XI, I should say; $15.1 million by the Company; and $135.7 million by one of our institutional partners by way of a sidecar investment.

The first of these transactions known as Trilogy Lake Norman closed on July 23, and was a $59 million investment to support the acquisition, development and sale of almost 1200 homes on a 606-acre site in northwest Charlotte, North Carolina. I should add that sites of this size are extremely rare in Charlotte, because the landmark is very fragmented.

This investment provided us with an excellent opportunity to expand our relationship with Shea Homes, one of the premier homebuilders in the US, and a leader under the Trilogy brand in the development of highly amenitized communities targeted at the baby boomer market. It also allows us to diversify our portfolio by increasing our exposure to the fast-growing Charlotte area, and to the active adult market segment, which continues to perform extremely well.

We closed the second of these transactions on August 5, when we announced $142.5 million investment to support the acquisition of Arantine Hills, a fully entitled large-scale infield residential master-planned community located in Corona, California, and a subsequent development and sale of approximately 1300 partially-finished lofts there on to public homebuilders. This investment allows us to deepen our relationship with The New Home Company in the development of what we believe to be one of the best available major development sites in Southern California.

While the US housing market recovery has had its fits and starts, we continue to believe that we are in the early innings of what can be an extra inning game, as we target longer-term land investments across the Sun Belt. Every time there is a statistical hiccough or marginal negative news, we view this as an opportunity to accumulate and increase our position in US Land and Homebuilding assets.

On to private funds and advisory. 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 CAD3.1 million of GP distribution income and contractual management fees, representing year-over-year growth of 76%. This growth was driven by the final closing of Tricon XI and continued momentum in our separate account or joint venture business.

As we've stated earlier, we believe our ability to form these investment vehicles with large institutions and create sidecars for larger fund investments will allow us to smooth that and bolster our AUM growth. With the closing of two more sidecar investment vehicles in the last few weeks, we have now established a total of seven separate accounts and sidecars for Land and Homebuilding projects since 2012, with aggregate third-party capital commitments of over CAD450 million.

In April 2014, we closed off $18.5 million strategic investment to acquire 50.1% ownership interest in the Johnson Company's LP. Johnson earns development management fees and sales commissions from the sale of residential lots and commercial land within the master-planned communities that it manages. The aggregate fees and commissions are typically 3% to 4% of land sales, and are generally paid to Johnson on a closing to a third-party homebuilder or commercial developer.

Land sales can be lumpy and difficult to forecast quarter-to-quarter, although annual projections are more predictable. From an annual -- from an earnings perspective, Tricon's investment in Johnson was immediately accretive, with approximately $500,000 of adjusted EBITDA that is net of a minority interest, being generated for the period April 15 to June 30. We expect EBITDA from Johnson to increase meaningfully over the remainder of 2014 as a result of a large backlog of sales from both residential lots and commercial land.

Over the long-term, recurring contractual fee income will be generated by the development and sale of over 20,000 residential lots and 1250 acres of commercial land managed by Johnson in the Houston area. US projected fund returns have been stable to positive year-over-year, while our 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 fund profits are more or less intact.

With that, I would now like to turn it back to the operator and we will welcome any questions.

(Operator Instructions) Jonathan Kelcher, TD Securities.

First, on the -- on your SFR business, that was a pretty good quarter-to-quarter jump in occupancy. Could you maybe give us some -- a little bit more color on what drove that? Was there an increase in marketing? Were you offering any incentives?

No. I mean, I think if you look back to Q1, we acquired a lot of homes in Q1 -- over 600 -- and about 400 in Q2. And so, because the acquisitions in relation were lower, it give us more opportunity to pick up our leasing. And as we said, if we were to put our pencils down and stop, we would ultimately get to 95%. The reason the occupancy rate remained lower than that is because, essentially, for every home we lease, we acquire a new home. And so it's really -- that is the interplay, I think, between the two quarters.

And just the other part to your question is, there were no real incentives.

Yes. Yes, the rental market is incredibly strong. You know, the days listing for leasing in all of our markets is very tight. There is no issue at all in renting homes. It's more just a question of how quickly we can get them to a point where the CapEx is performed and we can get them to market.

Okay. And would you be on track to buy roughly 400 homes this quarter?

Yes, that's about right.

So, we should see occupancy then would stay -- we could expect it in and around that 85% (multiple speakers) level for Q3?

Yes, it should stay around -- it should be about stable. It might be up or down a point or two, but yes, it should be relatively stable.

Okay. And then, secondly, just see just a little bit on the Johnson Company's -- I guess you recorded CAD2 million of revenues, so that's going to increase meaningfully over the rest of the year. Could you maybe quantify that a little bit? Are you talking CAD3 million a quarter, CAD5 million a quarter?

Yes. Well, I'm not going to quantify for the remainder of the year. Maybe give you a little more details of the transaction to help you. The CAD500,000 -- that's our share of the EBITDA -- is really from the period of April 15 to June 30. So, that is not even a full quarter. But if you assume it is a full quarter, that works out to about an 11% unlevered return on the investment, roughly CAD2 million on an CAD18.5 million investment. We think that's light.

Given the backlog they have, we think it will increase meaningfully over the rest of the year. I can tell you from an acquisition perspective, we underwrote the transaction based on a five times EBITDA multiple for 2015 earnings. So, 2015 should increase further, but that's how we underwrote it. So you should see some meaningful growth over the next few quarters. But it is a very lumpy business. And that is something that we should remind everyone. We certainly saw that in Q1, that lot sales were delayed meaningfully because of the poor weather in the US. And certainly those type of factors can affect us again.

Okay. And just in terms of the cost on that side, I guess it's just -- you've put it generally into your G&A. Is that mostly a fixed cost? Or is there any portion that's variable based on the amount of revenue that that would bring in?

The vast majority of it is fixed, and basically their salaries and benefits are very stable. We do have a performance bonus where we do pay the Johnson management team 10% of EBITDA. But I think to guide you, you probably should expect from us about CAD3 million in salaries and benefits per quarter going forward. And of that, roughly CAD1 million would be from Johnson.

Okay, thanks. I'll turn it back for now.

Stephen MacLeod, BMO Capital Markets.

Just wanted to follow-up on the Tricon American Homes. You also had a very strong NOI margin in the quarter. And is that also reflective of kind of the timing of sales and the size of sales on a quarter-to-quarter basis?

The NOI margin has improved. Part of the reason it's improved over the last two or three quarters is because -- and I think we stated this before -- is because we move leasing commissions below the line, so it's consistent with other -- with our peers in the industry. And so that's one of the reasons we've seen an increase over the last June quarters from probably around 60% to roughly 65% today.

But that's essentially where we expect it to be. And that's -- and we see that remaining. There's nothing else that really happened, I would say. There's no catalyst apart from that, for that increase.

Right. Okay. Okay, that's great. And then just, David and Gary, you both had commentary surrounding Tricon IX. And I think the why I understood it was that Tricon IX, you expect to be fully invested by the end of this year. And the Tricon XI successor fund, do you have any idea of kind of what the size of that would be out of the gates?

Yes, so just to clarify, it's Tricon XI. We expect Tricon XI to be fully committed by the end of the year. And we expect to start marketing a successor fund to Tricon XI. We're going to be rebranding the names of all our active funds, so that successor fund is going to be called Tricon Housing Partners III. You'll see more of that in Q3 in terms of the rebranding effort. But that new fund we expect to be roughly the same size as Tricon XI, which is about CAD330 million.

Okay. And you cited sort of a CAD600 million pipeline of investment. Is that -- do you have the capital committed to pursue that pipeline? Or do you need to launch successor funds beyond Tricon Housing Partners III and beyond? I mean, does that CAD600 million include the longer-term view?

Yes. So, no, not specifically. We don't have the capital committed. But as you've seen, I think we've been very effective at raising separate accounts or sidecar investments. And so, at this point in time, we don't seem to have any issue finding the capital, third-party capital for these opportunities.

And, so, I would say if there is a lag in terms of closing our next fund, there's a very good chance we'll be able to form more separate accounts. And then once the new fund is launched and is essentially open, we have to allocate opportunities that fit that fund to the fund. But if there's larger investments, we would go ahead and look for sidecars. So, the pipeline's indicative of the overall opportunities we are seeing, and then we figure out what the right capital bucket is to allocate to that pipeline.

Just one point. On the pipeline itself, these are deals that have basically met the sort of criteria of our development partners. We then perform our own due diligence. Some of those we might actually make across the finishing line from that perspective as well.

Okay. That's great. Okay, that's very helpful. Thank you very much. I'll turn it back to the line.

Geoff Kwan, RBC Capital Markets.

The first question I had was just in the US, we've seen kind of mixed housing data on the housing side, but the employment data generally has been getting better. With the markets that you guys are in, are you guys seeing anything that's any different that kind of comes out from the people that analyze housing in the US?

Well, there's no question, I mean, nationally that the housing market is moving sideways. And that's why there's been some consternation in the market with respect to the homebuilders. But we believe it's moving sideways on its way to a higher plateau.

And some of the reason for that is just that the homebuilding market has been a victim of its own success, where prices, in a sense, have risen too quickly. And that's led to some sticker shock and it's led to some slowing in consumer demand. Give you an example in Phoenix -- in Tricon IX, we had to push out our Phoenix lot portfolio of sales or closings there by about a year, because we are seeing a softer market.

If you look at the average payment that a consumer would have to make on a new home over the last 18 months, it's up 30%. That's a combination of home price increases and higher mortgage rates over that period of time. That's a major increase. And so that's when I talk about the market being a victim of its own success. That is what's happening.

So we really feel we are in a catch-up mode. But then -- again, that's nationally. You have to go market-by-market. As we've talked about, our experience in Houston continues to be very, very strong. That market is cooling a bit, but clearly, the pace it's been going at is not sustainable. The market in Northern California continues to be very, very strong.

So overall, we are essentially right on track, I think, in terms of Land and Homebuilding. I mean, we had a slight miss in Land and Homebuilding this quarter because we probably had a reduction in fair market value in the Phoenix lot portfolio of about CAD1.5 million. But we didn't -- we missed our own internal estimates by only about CAD1 million. So we are pretty much on track, and we feel very confident about our prospects in the business.

And so with the price appreciation that has been going on with a lot of your markets, would it be fair then to say is, okay, well, sales may be a bit more tepid. But relative to when you guys would've made some of your housing investments in the underwriting expectations, that business being offset because you're -- or maybe even more than offset because you're getting higher prices?

Yes. And I think -- yes. I mean, I think you can see that in the underlying returns of the funds. I mean, if you look at Tricon IX, for example, the IRR has moved out there from 14% to 15%. That doesn't sound like a lot, but that's a major jump on a fund that's basically in an all-cash position that's been in place for a long, long time. So that's an indication of higher prices.

And the same thing I would say if you look at Tricon XI. I mean, they were projecting gross IRRs of 27%. That is partly because of higher pricing.

Okay. On the SFR side, I had two questions around that. With the -- it sounds like, I guess, internalization of the local operating partners, what are kind of the upfront costs that you may need to deal with? And how does that kind of change the profitability as to what you are reporting now in terms of other -- you know, on the expense side?

And then also, if you're able to get off the securitization in early 2015, as you suggest, with having bought a bunch of houses kind of earlier and seeing the price appreciating over time, like how -- like what are you able to do with the cash you would be able to kind of effectively get out of kind of repatriate? Is it just buying more homes? How many more can you buy? Any color on that would be appreciated.

Sure. Let me start with your first question. On the integration, it's going well. It's obviously a complicated process, but it's moving forward well. There will be some upfront costs related to things like severance, some payments to some of our operators to compensate them from integrating their existing operation into a larger one.

But on the whole, without getting into the kind of gory details, I would say on the whole, it should be economically neutral to positive. The reason for that is we are essentially -- all the asset management fees that we are currently paying third-party operators and property management fees are now going to get thrown into a new pot. And we will have probably a 50% share of those economics.

So, that longer-term is definitely positive for Tricon, but there will be some upfront costs associated with the integration. So I would assume at this point, from an economic perspective, Geoff, that it's really neutral, maybe long-term positive. But clearly, from a governance perspective, from a branding perspective, from ability to provide better service to our tenants, it's much -- there is a big advantage to it.

Your second question related to securitization -- yes, we are on track for early 2015. The key thing there is just getting the critical mass. We currently board about CAD250 million off the Deutsche Bank line. We think we need to be at around CAD350 million to make it more interesting for the debt capital markets, so that's our goal.

It's going to be -- if it happens, it's going to be a major liquidity event for Tricon. We certainly don't think the markets appreciate that. And what we plan to do with that capital, and I think also the capital that's coming off of Tricon IX, is to reinvest it into our different verticals on a first-come/first-served basis, based on where we think the best opportunities are.

We continue to see great opportunities in single-family rentals, as we talked about in Houston. So I suspect that a lot of that money will be redeployed back into single-family rental.

Okay. And do you have any kind of -- your portfolio is at 4300-ish today or as of the end of the quarter. If you are to redeploy all the -- or what you can out of the securitization, like how much more could you increase the size of your portfolio?

Well, I mean, you could run the math yourself. I mean, if you looked at the comps and saw what the advance rates are, and essentially what the values are in relation to the cost, you could probably work it out. But I would say if everything would go according to Hoyle, and we were to take all those proceeds and reinvest it, and then with the additional homes, continue to borrow, there's no reason to think that the portfolio couldn't double over the long-term.

Okay. Last question I had -- sorry -- was just -- with these separate accounts you've been doing over the past little bit, are these with different third-party investors? Or have they been with the same one?

They're -- well, I can't get into the specifics as to who they are, but there's more than one.

Okay. Great. Thank you.

Jimmy Shan, GMP Securities.

I wanted to turn to the SFR business again. The margin was pretty strong. Occupancy is strong. Wondering what you're seeing on the rent side in terms of renewal activity? Hearing that rent growth has been pretty good so far. So, kind of wanting to know what your experience has been.

Yes. I mean, the rent growth is strong. It's just -- it's getting better. I think in the past, we've kind of told you that rent increases are about 2% to 3%. I would say it is now at the top of that range, if not even a bit higher.

For example, in Phoenix, anecdotally, what we are seeing in the market, over the last year days listing, in terms of leases, has dropped from about 55 days to 35 days; and average rent increases in that market are about 7%, which is pretty significant. It is an interesting counterpoint against the new homebuilding market. But I would say that -- I wouldn't say -- we're not getting -- there are situations where we get 7% or 10% increase. But on average, it's probably -- in that market, would be about 3% to 5%.

Okay. Okay. And then just in terms of the valuation, we saw the VISA Homes transaction and what looks like a pretty low cap rate. I guess a couple of questions there. One, does it makes sense at this point to potentially carve out maybe a piece of the portfolio, and see if you could monetize on some of that, given the low cap?

And from a valuation -- IFRS valuation perspective, instead of introducing drones into your valuation, I wondered if you -- does it makes sense to look at sort of cap rate methodology as opposed to the conservative AVM model?

Yes. I mean, that's an interesting second comment there. I think we are going to take another look at the AVM model to see if we can find a way to better reflect what's happening in the portfolio, but I can't really comment further than that.

We have no intention at this point to sell any part of our portfolio at this point in time. Everything is going really well, is tracking well. Everything from the number of homes required to the margins and the rent increases. We feel great about it as a kind of a longer-term business, and we're going to continue that way.

That's not to say ultimately there wouldn't be an exit. But for the time being, we think there's lots and lots of upside in our existing portfolio, particularly if we securitize.

Okay. Then just turning to the DMAC business. Sort of any further update you could provide us on the pipeline that you have and the pricing that you're seeing in that regard?

Yes. I mean we are actively looking for opportunities. We have one part that is under contract. So, you should expect something fairly soon in that regard.

We did take a run at the Greencore portfolio. We were in the mix, potentially even a second runner-up on that portfolio, which was a major manufactured housing community sold for about CAD1.3 billion. And we were going to do that with other institutional partners. So that was something that was very exciting for us. We came up a little bit short.

So, I would say the guidance I would give is, for the time being, we're going to be like single-family rental. We're going to be looking for onesies and twosies. And we'd be happy if we could buy two parts per quarter. And an average park is probably, call it CAD10 million to CAD15 million investment. So, that is kind of what we would be happy with. But we will continue to look for portfolios. And if something major comes up, we'll obviously take a run at it.

In terms of pricing, you know, again, pricing is coming. It's certainly aggressive, which I think is consistent with all the different real estate food groups, given that debt financing is so cheap, especially in this sector where we can probably borrow seven-year fixed money at 4% and change. So, the financing's incredibly attractive.

So, we are typically seeing for, I would say, 3 to 4 star parks going in cap rates in that kind of 6% to maybe 6.5% range. So that's probably what you should expect.

Okay. Actually -- sorry, one last, just on the cash flow with respect to Fund IX. Is the expectation you've had so far pretty good cash flow? And I think you mentioned it was ahead of expectations. So is it -- is your expectation still that something in the order of CAD100 million for this year still achievable? Or is that pushed back a little bit?

Well, the CAD100 million this year would largely be dependent on what happens with Faria Preserve. And at this point in time, in our cash flow budget, we are assuming that we will sell Faria Preserve. We expect to have our entitlements in Q4. At that point, we would launch a marketing process. We have a price in mind. If we get that price, we would likely sell it. If not, we might build it.

But that -- so that will largely depend on, Jimmy, whether we hit that number for this year. But you know, again, it's a lumpy business. Some of it will be dictated by homebuilder demand and where they are with respective land or land pipelines. Some of them may be full for 2014. Some might not. Some might want to push it to 2015 to meet their budgets.

So, we could see a little bit of movement there, but we are generally on track. The other thing is obviously with Pine & Franklin, we decided to build that. And so we were going to see more cash coming back earlier in that. Instead, we decided to reinvest some of that cash and build it. And that project will be under construction probably sometime in September.

Okay, thanks. Thanks for the color.

Jenny Ma, Canaccord Genuity.

Most of my questions have already been answered, but I was wondering if you could provide a little bit more color on the cash flow from the Johnson investments? If you could -- assuming about CAD2 million-plus per quarter, based on the Q2 number -- if you could kind of split up what would be the proportion coming from development management fees, which I assume are a little bit more consistent, versus land sales?

Well, essentially all the fees -- you can call it -- call it whatever you want -- the fees or commission, they all come from land sales. So we think the easiest way to think about it is just lump it into one pot, even though Johnson may call them some -- definitionally may call them different things. But essentially, they are all fees from selling lots to public homebuilders or commercial land to institutional builders. So that all goes into the pot.

As we said, within Q2, the number was light. There's been -- there's a big backlog; certain things have been pushed back to the second half of the year. So we expect to have more growth in the back half of the year. But to give you a little bit more color, if it's helpful to you, Johnson sold about 750 lots in the first half of the year, and about $75,000 a lot. And if you apply, call it, 3.5% to that as a kind of blended fee commission income, you'd get to the CAD2 million of revenue. That's where that number came from. And we think they'll do a little bit better in the second half.

Okay. So, in other words, the fees is 100% dependent on the volume of land sales then?

Absolutely. Absolutely. (multiple speakers) Yes.

Okay. And I know you expected to ramp up because there was a bit of a backlog in the first quarter, but is -- can you talk about any element of just seasonality to land sales in general, notwithstanding the backlog?

Yes, I mean the seasonality is definitely -- and certainly in the first half was certainly affected by weather. It just took longer to complete lots. And therefore, that delayed sales and therefore delayed the fee income. So weather was a major factor in the first half and it's delayed a whole number of closings to the second half.

Okay.

But obviously, in a normal land market, there could be other economic or exogenous factors that would affect land takedowns. If the market is not there, if the market slowed down, that would obviously impact your fee income. But the Houston market remains very strong.

From a seasonality perspective, Houston isn't as impacted as, say, some of the Canadian marketplaces where you can't deliver lots, say, past November of the year, and then you have to wait until May of the following year before you can deliver again. Houston doesn't have those considerations.

Right. Okay, that's helpful. I have a second housekeeping question. With regards to the increase in the credit facility after the quarter, are you going to be paying any one-time fees associated with that increase?

Are you talking about the Deutsche Bank credit facility?

Yes. The one tied to the single-family rental portfolio.

We had to pay an additional commitment fee for the increase.

Would you be able to quantify that?

Margaret, do you know -- do you remember the number?

Yes. They come -- they net out of the proceeds of the line, but I can follow-up with you on that, Jenny.

Okay, that's fine. Thanks a lot, everyone.

There are no further questions at this time.

Then thank you, operator. 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 November when we discuss our results for the third quarter of 2014.

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