Tricon Residential Inc (TCN) 2016 Q2 法說會逐字稿

Good morning. My name is Suzanne and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Capital Q2 analyst conference call.

(Operator Instructions)

Mr. Wojtek Nowak, you may begin your conference.

Thank you, Suzanne. Good morning, everyone. Thank you for joining us to discuss Tricon's results for the three and six months ended June 30, 2016, which were shared in the news release we distributed yesterday.

I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. Please refer to our most recent Management Discussion & Analysis and Annual Information Form, which are available on the SEDAR for more information.

Our remarks also include references to non-GAAP financial measures; these measures are also explained and reconciled in our MD&A. I would also like to remain -- remind everyone that all figures are being quoted in US dollars, unless otherwise stated. Please note that this call is available by webcast at triconcapital.com, and a replay will be accessible until August 18, 2016.

Lastly, please note that during this call, we will be referring to a supplementary conference call presentation, which we have posted on our recently updated website. If you haven't already accessed it, it will be a useful tool to help you follow along during the call. You can find the presentation in the Investor Information section of triconcapital.com, under Events & Presentations.

With that, I will turn the call over to Wissam Francis, our Chief Financial Officer, for a review of our financial results, followed by Gary Berman, our President and Chief Executive Officer, who will discuss our operational results and provide a strategic overview of our investment verticals.

Thank you, Wojtek. And good morning, everyone. Our prepared remarks this morning will include highlights of our Q2 2016 results, and a discussion of our growth initiatives in our business verticals.

Tricon continued to deliver strong year-over-year growth in the second quarter with our assets under management increasing by 27%, or $624 million year over year. Reaching a new milestone as $3 billion, or CAD3.8 billion. Since Q1 of this year, assets under management increased by 7%, or $185 million as a result of new investments across our verticals.

On Slide 5 of the conference call presentation, we show the change in our AUM over the past quarter, with the following highlights for Q2. In Tricon Housing Partners, our land and homebuilding investment vertical, we added a new condominium development asset located at 490 El Camino in the Silicon Valley town of Belmont, California. And Tricon American Homes, our single-family rental platform, we added 415 net new homes to the portfolio.

And in Tricon Luxury Residences, our Class A multifamily rental development vertical, we completed a new investment in Scrivener Square, and The Shops of Summerhill in the Rosedale/Summerhill neighborhood of Toronto, one of the city's most affluent neighborhoods. This growth in AUM was offset by distribution made by THP2 Canada as a result of condo unit closings at a Toronto-based project within the fund.

Turning over to Slide 6, where we outlined the various components of adjusted revenue. Contractual fees for the quarter increased by 7% compared to Q2 2015. Positive contributions came from the new TLR projects which generated development and management fees in Canada and equity supervision fees in the US, as well as higher fees from Johnson which increased by 25% year over year and saw substantial 61% rebound from Q1 of this year.

This was offset by lower revenue from legacy private investment vehicles, which are in harvest mode. At Tricon Housing Partners, investment income increased to $4.9 million compared to $0.6 million in Q2 2015. In the prior year's quarter, investment income was negatively impacted by change in the expected timing of cash flows from THP1 US.

Tricon American Homes investment income consisted of two key components realized investment income excluding fair value gains of $10.5 million compared to $8.9 million last year, a solid improvement of 17% related to the growth in the portfolio and consistent NOI margin of 60%. The other component was unrealized investment income, or fair value gain of $8.7 million, which compares to last year's figure of $14.8 million. This quarter's results was based on home price appreciation of 1.4%.

Let me emphasize that this was a quarterly increase of 1.4% of the entire portfolio which surpassed our expectations. In comparison, last year's investment income was based on a quarterly home price appreciation of 4.2%, which we view as unusually strong and less sustainable.

At Tricon Lifestyle Communities, investment income was $1.8 million compared to $0.2 million for Q2 2015, as the portfolio grew from two parts to 10 parts, with continued enhancements of operations. At Tricon Luxury Residences, investment income was $0.6 million as a result of fair value gains recognized on TLR US projects, as development milestones were achieved and the underlying business plans were advanced. Of note, construction started this quarter on The Maxwell in Frisco, Texas.

Let's move onto Slide 7, which provides a bridge of our adjusted revenue to adjusted EBITDA in earnings. In terms of corporate operating expenses, compensation expense was $5.7 million in Q2, an increase of $0.8 million from last year. The increase was largely related to expanding our team to support our foreign investment vehicles as we prepare for future growth.

We continue to expect total compensation expense to remain between $5.5 million and $6 million per quarter over the near term. General and administration expense was $1.8 million in the quarter, an increase of $0.4 million from prior-year as a result of an increase scale of our Company. Note that the Q2 expense load is typically higher due to annual public company expenses incurred in the quarter and we expect G&A for the full year to be in the range of $5 million to $6 million.

Adjusted EBITDA was $24.3 million, an increase of $0.9 million from the prior year due to higher investment income at THP, and higher realized investment income at TAH, offset by lower fair value gains at TAH. If we were to exclude TAH fair value gains, adjusted EBITDA increased by 81% from $8.6 million last year to $15.6 million this current quarter.

Adjusted net income, which excludes nonrecurring items, was $13.8 million, a decrease of $1.3 million, or 9% from the prior year, due to higher increase and tax expense in the current quarter. Likewise, adjusted earnings per share decreased year over year. Let me remind everyone that we have a higher number of common shares outstanding following the bought deal share offering completed in Q3 of 2015.

We issued approximately 13.2 million common shares for gross proceeds of CAD150 million, and deployed the net proceeds into new investment opportunities. They are expected to be accretive to earnings per share over time.

Slide 8 provides a summary of our investments since the bought deal offering. As you can see, we've invested $243 million from our balance sheet, including the proceeds from the offering, draws on our credit facility and cash flows from our investments. We expanded assets under management by $570 million since Q3, including the Trinity Falls investment completed last month. Many of these investments are in the development stage and have yet to contribute to earnings but position us well for future growth in 2017 and beyond.

Lastly, on Slide 9, we provide a summary of our liquidated positions. We have access to a credit facility of $235 million to deploy into growth initiatives within our various verticals. As of June 30, 2016, approximately $112 million was drawn on our credit facility. Another significant source of liquidity continues to be THP1 US.

While they are no distributions in Q2, we are on track to receive another $200 million or thereabouts between now and 2018. The next major project to track is Rockwell, a condominium development located in the Pacific Heights neighborhood of San Francisco. Construction of the building remains on schedule and the occupancy is expected to commence in Q3 2016, with meaningful cash flow distribution in late 2016 and the early 2017.

And finally, at Tricon American Homes, the dedicated warehouse credit facility was upsized from $300 million to $400 million in Q2 2016, giving TAH ample runway to grow to portfolio with approximately $314 million drawn. We are preparing for TAH second securitization transaction [later] in 2016, which should free up the warehouse facility once again and create room for continued growth within our single-family rental business.

I will now turn the call over to Gary, who will provide additional insight into our various business verticals.

Thank you, Wissam. I would like to walk you through some of our achievements this quarter and talk about the key operational and growth highlights for each of our verticals starting with THP on Slide 11. Recently, Tricon Housing Partners completed two transactions I would like to highlight.

The first investment is in 490 El Camino, a boutique condominium development situated in the Silicon Valley town of Belmont, California, profiled on Slide 12. This project is centrally located between two key employment hubs in San Francisco and Silicon Valley and is close to a variety of retail and entertainment amenities as well as major commuter arteries in public transit.

The plan is to develop the site into 73 condominium units within a four-story wood frame structure. We made this investment within a newly syndicated investment vehicle called THP US SP1, which includes El Camino as well as our Queen Creek investment made in Q1. The total pool of assets is $32 million with a new third-party investor committing 80% and Tricon retaining a 20% interest.

Second, on July 20, THP completed a $74 million investment in Trinity Falls, which is a fully-entitled 1,700-acre master plan community in metropolitan Dallas. This is a fantastic asset with a wealth of in-place amenities, including a resort-style clubhouse, a beach-style pool, neighborhood parks, and program activities for residents. The community includes over 450 acres of open space with more than three miles of river frontage and over 20 miles of trails for hiking and biking. With this investment, we are enhancing our presence in Dallas, the fastest growing new home and job market in the US.

You can see from the map on Slide 13, Trinity Falls is located in North Dallas near the town of McKinney and sits between two major transit thoroughfares, with direct access off the recently widened Central Expressway, or Route 75. The location offers convenient access to the Legacy West employment node and the Richardson Telecom Corridor, two the fastest-growing job nodes in the Dallas-Fort Worth MSA.

The Trinity Falls investment complements our investment in the Viridian Community, which is located between Dallas and Fort Worth and caters to an entirely different job node. Similar to THP's investments in Viridian and Cross Creek Ranch, Trinity Falls is an established cash-flowing master plan which has already sold 700 residential lots to homebuilders in the past two years, and the business plan is to continue the current pace development to deliver another 3,200 lots to homebuilders over the next 10 years.

The underwritten unlevered IRR for this investment is in the high-teens and in line with THP's other investments. This is also THP's fifth investment and partnership with the Johnson Companies, which will serve as the developer of Trinity Falls. Recall that Tricon owns 50.1% of Johnson, enabling us to capture additional revenue from the lot development fees, which typically amount to 3% to 5% of lot revenues and that would otherwise be paid to a third-party developer.

The El Camino and Trinity Falls transaction has demonstrated several aspects of Tricon's growth model at work, versus our ability to use our balance sheet opportunistically to acquire great assets under a quick timeframe as we've done with Trinity Falls. The seller in this case was a private equity investor with a life of fund constraint required a quick resolution and we were able to meet the requirements.

Second is our ability to warehouse assets on our balance sheet to advance the business plans and to bring in third-party investors when appropriate. The El Camino and Queen Creek syndicated transaction allowed us to partner with a new third-party investor, unlock some of our own capital and introduce a new stream of asset management fees and potential performance fees.

We believe that these aspects of THP's growth strategy will allow it remain at the forefront of the US land and homebuilding industry. With $1.5 billion of AUM, including Trinity Falls, THP is already one of the largest land and homebuilding investors in the US. We see nearly every major transaction that comes to market but remain incredibly selective in determining which deals to pursue.

Turning to Tricon American Homes on Slides 14 and 15. In Q2 2016, TAH continued to focus on operational execution while growing the portfolio. I would like to touch on several key metrics. First, TAH achieved its acquisition target by purchasing 452 homes and selling 37 non-core homes for a net increase of 415 homes in Q2.

As we've said before, there is no shortage of buying opportunities at our target cap rates and so TAH can consistently grow its portfolio at a healthy, manageable pace. Second, in-place occupancy of 89% and stabilized occupancy of 96% increased by 1% from Q1 in 2016, while tenant turnover of 30.1% was in line with our expectations in recent quarters.

Third, TAH was able to grow rents by 5% in Q2 includes 6.4% of new move-ins and 4.2% in renewals. TAH has been able to raise rents above inflation while still maintaining an occupancy bias. This demonstrates how much demand there is for single-family rental product. If anything, we have a high class problem in that TAH can't deal with all of the leasing demand it sees coming through its call center every day.

Fourth, operating margin remained at 60% year to date, which is consistent with the full-year 2015, notwithstanding an increase in homes and jurisdictions with higher property taxes and therefore, lower operating margins, as we've always thought the TAH platform is proving to be a stable and predictable business.

Our SFR peers are showing a similar trend of consistency in their results and judging by their recent share price performance, the US capital markets are quickly concluding that this business is not only scalable, but also operationally manageable. And lastly, net operating income reached $14 million in Q2, a 23% increase year over year as a result of growth in the portfolio and a stable margin.

Going forward, we continue to believe that TAH can acquire 400 net homes per quarter in its target markets at a blended cap rate of approximately 6.5%. With that said, over the next couple of quarters, we may divert funds from acquisitions to buy out the minority interest associated with our TAH platform. In aggregate, the local operating partners own approximately 10% interest in TAH's consolidated real estate holdings and a 45% interest in TAH OpCo.

As you may recall, we entered this business by forming partnerships with local operators, the first of which was signed in early 2012. These partnerships have five-year terms and buying out our partners will ultimately result in the eliminating the minority interest in the TAH financials, including the minority interest associated with our internal operating company. In aggregate, these buy-outs will simplify our financial reporting, eliminate legal and operational complexities, and allow us to own 100% of the TAH business.

In the short-term, it will also allow TAH to focus solely on operations and to drive in-place occupancy. Once these buy-outs are complete, normal acquisition activity should resume. Regardless of whether we buy out the minority interest or continue making new acquisitions, our objective is to allocate a similar amount of capital to the business in the coming quarters and to generate further growth and investment income for Tricon shareholders.

Turning our attention to Tricon Lifestyle Communities on Slide 16. We've recently achieved significant scale in Phoenix after completing the acquisition of a five-part portfolio in Q1 2016. For the total of 10 parts, nearly 2,500 pads, TLC has turned its attention to upgrading existing parks with a capital improvement program designed to drive rental growth in occupancy and improve the start classifications over time.

TLC's success at Longhaven has given us confidence that this value-add approach can be replicated across the rest of the portfolio. TLC's two existing stabilized communities, Longhaven and Skyhaven Estates has seen strong rental and occupancy growth since acquisition, with rents growing between 3.5% and 4% per annum and long-term occupancy improving by approximately 400 basis points and 200 basis points, respectively.

In TLC's recently acquired Communities, Glenhaven and Parkhaven, rents have increased by 3% to 3.5%, even though the capital improvement program has yet to commence. These operating metrics underscore just how attractive [MHEs] are as an investment and how our value-added strategy has tangible results. TLC's overall occupancy was 70% in Q2 compared to 76% in Q1, which also resulted in a sequential revenue decline.

This was a direct result of the seasonal nature of some communities. In the winter months, we aim to fill vacant pads with motorhomes or traditional RVs on a weekly or monthly lease term as snowbirds head south.

Slide 17 provides an illustrated snapshot of the fluctuations in TLC's expected portfolio occupancy over a typical year, assuming that TLC owns all the parts for the full period. You can see that occupancy usually dips in Q2 and Q3 and rebounds during the winter months of Q1 and Q4. We expect a similar trend this year.

An important metric that we will provide going forward is long-term occupancy, which strips out the seasonal component from the occupancy metrics. In Q2, long-term occupancy was 68% as compared to 67% in Q1 of 2016, reflecting underlying improvement in the portfolio. Likewise, year-to-date operating margin for 2016 was 58.5%, which is lower than the 59.8% for the full year of 2015 as a result of newly acquired parks, which are not yet undergone enhancement or repositioning initiatives and which have a higher proportion of seasonal tenants.

This is offset by higher margins on the same-store portfolio. Subsequent to quarter end, TLC purchased another age-restricted manufactured housing community in Mesa Arizona for $8.8 million, includes $6 million of long-term debt. This community is referred to Dollbeer and consists of 177 residential pads and has an occupancy of 86% with very minor seasonal variation.

Turning to Tricon Luxury Residences on Slides 18 and 19, the four existing projects owned as of the start of Q2 are progressing well and performing in line with the approved business plans and budgets. In the US, below grade construction continues to advance in McKenzie and on-site grading which has started at The Maxwell, formally known as Canals at Grand Park. The Dallas multifamily market continues to outperform our expectations with year-over-year rental growth of 5.5% and market-wide occupancy in excess of 95%.

Both projects are well-positioned near major job nodes in local amenities such as Highland Park and Legacy West and stand to benefit from a continuation of these strong rent and occupancy trends. In terms of new deals, while we continue to have an active pipeline of projects, we are witnessing a significant pullback in the availability of debt financing for new multifamily development projects across the Sun Belt as a result of a numbered factors, including a slow-down in rent growth in the major public REITs, which are concentrated in the gateway cities and the implementation of stricter capital requirements for banks under Basel III.

As a result, investment yields have tightened and in response, we expect to slow down our new investment activity in TLR US in the near-term. Fortunately, for TLR, both existing US projects have already secured attractively-priced construction loans, minimizing any financing risk for the current portfolio. In Canada, TLR continues to progress well at The Selby project, which recently reached a key construction milestone and poured the ground floor slab.

Tender results have been in line with business plans, with approximately 70% of hard construction costs now secured and the project significantly derisked. TLR Canada's second project 57 Spadina is currently in the design stage and scheduled to submit for site plan approval in Q4 2016.

Finally, we are excited to announce TLR's latest investment in one of Toronto's premier residential addresses profiled on Slide 20. On June 16, TLR Canada partnered with Diamond Corp and RioCan REIT to acquire The Shops of Summerhill and the adjacent land at Scrivener Square, in the affluent neighborhood of Rosedale/Summerhill. The total purchase price for the two acquisitions was CAD85 million.

In The Shops of Summerhill transaction, TLR partnered with RioCan on a 25/75 basis to acquire a landmark retail heritage property. For the Scrivener Square land transaction, TLR partnered with Diamond Corp and a 50/50 basis and intends to undergo a rezoning process to build a mixed-use development project that would include luxury apartment units and additional retail space that will complement the existing Shops of Summerhill. As for new deal flow, TLR continues to track a pipeline of sites in Toronto and will aim to expand its footprint in the city over the next few years.

Given the strong pipeline and new opportunities we are seeing in Canada and our intent to build Canada's leading Class-A rental apartment brand, we believe it is prudent to allocate funds that would have previously gone to TLR US over the remainder of 2016 and into 2017 to continue our expansion of TLR Canada. Such as the advantage of our diversified business model where we are able to quickly re-allocate capital resources across and within our investment verticals to take advantage of the best risk-adjusted opportunities that we see at any given time.

Moving onto our private funds and advisory business, where we received fees for managing third-party capital as well as development of advisory income streams from Tricon Development Group and our ownership interest in Johnson. On Slide 22, you can see that the main source of revenue growth was Johnson. In Q2 2016, Johnson recorded 493 lots sales, a 71% increase from the 288 lots sold in Q1 of this year, as the weather in Texas improved -- improved being a relative term and we were able to fulfill some of the order backlog that we previously reported.

While the lot numbers show a slight decrease from the prior year, Johnson fee revenue still increased as a result of higher commercial land sales in the current quarter. From the perspective of new home sales, we are excited that Johnson has been recognized as the only developer in the US with four of the top 30 master plan communities in terms of new home sales through the first half of the year.

This demonstrates the strength of the Johnson brand and the confidence that consumers have buying homes at existing successful communities with desirable locations, in-place infrastructure, attractive family amenities, and stable builder programs. This is particularly important over a long-term investment horizon, as even in a slower market, these communities typically outperform slower one-off subdivisions.

We are seeing the benefits of this strategy today in a market like Houston, where despite a 14% decline in new home starts in the first half of 2016, Johnson sales are actually up 3% year over year. As Johnson continues to diversify its geographic footprint outside of Houston, with deals like Trinity Falls, we believe that its growing national presence will garner even greater recognition from home buyers and homebuilders, alike, to drive increasing fee revenue for Tricon.

In conclusion, Q2 with a successful and well-rounded quarter for Tricon, with solid AUM and investment growth and continued operational progress with their investment verticals. Many of you have heard me outline our long-term strategy of wanting to build out our stable cash flow and verticals of TAH, TLC and TLR to support our more cyclical but higher-return land and homebuilding business and the process created a diversified residential real estate investment company that will perform well across cycles. I'm pleased to say that we are well on our way towards achieving this objective and that we continue to see an abundance of growth opportunities for our Company.

With that, I will pass the call back to Suzanne to take questions and we'll be joined by other members of our investment team, including Jon Ellenzweig, Craig Mode, Adrian Rocca, and Kevin Baldridge.

(Operator Instructions)

Geoff Kwan, RBC Capital Markets.

Hi, good morning. I just had a couple of question on TAH. Just first off on the average rent increases of 5%, that's been increasing over the past number of quarters. So I just wanted to get your sense as to how sustainable that might be and if it does persist over the next little bit, does it have any potentially positive implications about how you think the NOI margin might gravitate over time?

I think the rent growth is definitely sustainable in the short term. To think that you can grow rent at 5% per annum and perpetuity is obviously, that is very aggressive. But I think on a short term, we are seeing far more demand than we could have ever imagined for the business. I think it's sustainable in the short-term, Geoff.

Will it result in a higher margin? It should over time. We're also seeing, obviously, increase in costs. Property taxes have been moving up. If we look at repairs and maintenance, labor and materials have been moving up. So you have to bear that in mind as well. But I think over time, particularly as we become more efficient in our business, that should start to translate into slight increases in margin.

Okay. And just my other question is you have about 8,000 homes. I know you talked about maybe having to ratchet that back over the short term. I'm trying to remember, I think you might have had a target of somewhere closer to 10,000 at some point, but just wanted to get a sense of how you're looking at over the next two to three years, where you think you can take this business and is it going to be maybe the same cities that you're buying in right now or is there a possibility that you might look to further expand to additional ones?

So if we buy out the minority interest, we will take a pause on new acquisitions and, really, all we're doing at that point is investing in our own business and obviously, we think that is a sensible thing to do. But I think once we get through that, we will probably continue at the pace of roughly 400 acquisitions per quarter. If you extrapolate out that 1,600 per year so we'd roughly get to 10,000 homes, let's say, close to the end of 2017 or early 2018 and then we'll go from there.

And then just from -- do you think you can reach that 10,000 within the current geographies you're in or would that imply that you might need to look to additional geographies?

No, I think we're happy with where we are. It's not to say that we would never enter new markets but I think there's still more work to be done in a lot of our existing markets. There's lots of buying opportunities at our target cap rates and we obviously want to continue to build scale in our existing markets. So I think the -- we're going to concentrate on the existing markets for now.

Okay. Thank you.

Stephen MacLeod, BMO Capital Markets.

Thank you. Good morning.

Hi. Good morning, Steve.

Hi -- excuse me. Just wanted to follow-up on the TAH questions. So in terms of the minority interest potential buy-out, can you just give an idea of what the cost of that would be? What the potential timeline would be and then if you were to proceed with that, I think the timing is the first half of 2017. Where would your home buying go from kind of the 410 to 500 per quarter now to where you might go if you do buy out the minority interest?

Well, I think buying out the minority interest is obviously independent from our overall acquisition strategy. We're just talking about capital allocation in the short term. With respect to buying out the minority interest, I can't speak to the price or the terms at this point, given we are in the midst of negotiations. But I can tell you the guiding principles and that will certainly be fair market value.

Obviously, fair market value of the homes, the imputed performance fees that we hear operators are also guided by the fair market value to homes. We do have a table in the MD&A, I think it is Table 14, which shows some minority interest, and I think that's roughly around $52 million or $53 million, just to give you a sense of where we're at but I can't speak into any more detail than that.

And then I think obviously once we are through that, we can continue to by 400 net homes per quarter. Again, as I said before to Geoff, we plan on buying in our existing markets and we also plan to obviously sell some non-core homes at the same time. Again, as part of the whole thing, we're also buying out OpCo and I think they guiding principle for OpCo will be (inaudible) asset management these we were going to pay our local operating partners under their contracts. It -- that is the way that we're going to approach it.

Okay. Okay. That is great. So in terms of reallocating capital to stabilizing the existing portfolio, for the back half of 2016 and then into 2017, does that 400 per quarter become 200 and does it go all the way to zero.

It is hard to say at this point because it obviously depends on the progress that we make with our local operating partners and that may take a bit of time. But I think given that we want to allocate a fairly even amount of capital per quarter, if we were to completely buy-out our minority interest, we might take a pause, a complete pause from buying. And I think the benefit of that obviously is we're investing in our own portfolio and really taking on stabilized property.

So for example, if the operators own 10%, we're essentially picking up roughly 800 homes, just to put that in a perspective, and we can also then focus on our own operation, drive efficiencies and in-place occupancy. Our in-place occupancy is obviously always under pressure because we're always buying new homes. If we were to take a pause, you'll see that in-place occupancy number move up.

Okay. And then would you expect to also yourself to see a related increase in the NOI margin over time?

Well, I think one thing doesn't have anything to do with another. What will lead to a higher NOI margin over time would be obviously, if rent growth would grow faster than our expenses. It is possible, maybe with a higher in-place occupancy, that, that would lead a higher -- well, it could lead to a higher margin. I think that could be a fair comment. I think over time, we also are going to look to internalize our maintenance.

It's -- something we've just started to do and we're piloting that in Atlanta. And I think if we do that, we could also see some gains in margin as well. So I think we've been very consistent, Steve, with the margin over many quarters. But I think as we -- I think if we just focus on operations and take a pause, we could see some slight improvements.

Okay. That's great. And then just my final question on the TLR business. We have seen some movement in the investment income on a quarter-over-quarter basis. And I'm just wondering how you expect that to play out over the next 12 to 18 months with the new projects that you've recently announced.

That is largely dictated by fair value adjustments, as we hit different milestones. So that's really going to ebb and flow. It will be determined based on where we hit our key milestones which would obviously be construction and obviously, bringing those projects toward stabilization and when they're stabilized, then we'll be generating obviously consistent rental income. But you should expect to see an increase in the fair market value on a fairly flatline basis, as we move towards stabilization.

Okay. Okay. That is great. Thank you.

Dean Wilkinson, CIBC World Markets.

Thanks. Good morning, everyone.

Hi, Dean.

I may have missed this, Gary. How many operating partners are there in that noncontrolling interest?

You did not miss it. There are seven.

Seven. That's seven different PSAs that you're going to have to do with those guys.

Yes. Yes. Correct.

Okay, perfect. And then just can you remind us on the securitization, that looks -- the second one looks like it's going to come back half of the year. How much are you looking for there?

So we started the process and I think now that we're a second time issuer, we expect that process to take three or four months so we do expect it to be a Q4 event. And I think in terms of size, it's hard to say where we end up with the rating agencies. But I would expect the size to be probably slightly smaller than our first issue.

A little smaller than our first one. Okay --

But in the ballpark.

Okay. I will just use that as a placeholder. And what have you seen in early indications of pricing, given that, where are we -- 150 on a 10-year right now?

I think what you should expect is that obviously, spreads have widened so our first deal was done at LIBOR-plus 196; you should not expect that. We've seen recent deals get done at around 260. So I think that's where the market is today.

Obviously, home price appreciate -- as we've talked about on the call has moderated. So we don't -- we can't speak to you yet on the amount of equity repatriation. But it should be -- we should lower our expectations on that as well. There, obviously, there's been some good HPA but it has not been as good as the first issue.

Right. But you should be able to get sufficient to be able to do with those noncontrolling interest and then put you back on the acquisition trail, right?

It should be a source of cash for us; absolutely. And then on -- and then in addition to that, also pay down the warehouse facility so we can kind of keep on going.

Right. Perfect. And then just on Trinity. Could you just give us a little color in terms of what the mix -- like, how big are the lots? Who were the builders? Is this one that Johnson owned before or are you guys both going into it kind of vis-a-vis the way you do with Viridian or just get a sense of --

Sure. Let me pass that on to Craig Mode to give you some more detail.

Hello Dean. So Trinity Falls is an acquisition by ourselves and Johnson. So it is acquired from a In terms of home prices in the community, the vast majority of lots ranged from 50 foot wide lots to 75 foot wide lots today, and they are just introducing 80 foot wide product. Homes today average anywhere from $250,000 to $400,000 per home. That's the vast majority ; there are some higher than that but that would tend to be the meat of the market. And most of the builders are large privates or public, so like, DR Horton is in there, Beazer, Ashton Woods. Large builders that you would see in most of the Johnson communities.

Okay. So it's basically, it looks like Viridian, or Cross Creek or any of the others that we've perhaps (multiple speakers) had a chance to see.

Correct.

Perfect. That's all I've have got. I'll hand it back. Thanks, guys.

Thank you.

(Operator Instructions)

Jimmy Shan, GMP Securities.

Thanks. Just to drill down again on the TAH. So Gary, I think your comment seems to me a little bit more reserved in outlook for the NOI margin and the rent growth compared with some of the US peers who have been, shall we say, more vocal and confident about the trends there. I wonder if that's just conservatism on your part or whether you're doing something or you need to scale or you're seeing something differently that would cause you to be more moderated in your outlook.

I think that's just my Canadian nature, Jimmy. I think we're -- I think I'm obviously trying to be a little bit conservative. Look, I think we're seeing ultimately the same market fundamentals that our peers are seeing, which is really robust demand growth and at this -- new industry is really taking off; it's a great value proposition for renters. It is a very, very tight market.

The one thing we have to keep in mind is that there's been a real occupancy bias for the entire industry, right? It's just been trying to get warm bodies into the home and not to push rent. So it's difficult to say at this point whether the rent growth is just because we had an occupancy bias before or because the market so strong. And that's really what I think we need to determine over time.

But when I look at the breakdown of the occupancy by region, there's a lot of market in there well over 96% or 97% occupancy. There are couple of markets that may be dragging that 96% stabilized occupancy down so to think that 5% and like, I would think that on a -- in a very near-term basis, that achieving higher than 5% doesn't seem too far out of reach.

I just -- I mean, we just -- I would never want to guide to anything above that. It's just -- I think let's just keep in mind that 5% rent growth is a very, very good number and remember that this business is about keeping your residents in the home for as long as possible. You want to keep that turnover low because that's ultimately what drives the margin.

You don't want to get ahead of yourself in terms of being greedy on rent growth. So I think we'll always have a bit of occupancy bias because we're really playing long-term. But I can tell you, I mean, if you want a little bit more insight, I can tell you that our rent growth on a blended basis was higher in July than it was in Q2.

Okay. And then you talked about the high-cut class problem, not being able to manage some of the inbound call. Do you have any of the metric or statistic you could share in terms of kind of leads that you're getting for market home or anything of that nature?

We get -- into our calling center, we get about 1,200 calls per day and we have about 8,000 homes. Just to put that into perspective, we - it's just unbelievable. 1,200 calls per day.

Okay. All right. Then on the buy-out, just to follow-up on the buy-out of the OpCo. You mentioned that the price is going to be based on the term left or the fees paid to be paid on the term left. That's how many years are left on the term?

So it's basically from when the time we internalized, which was late 2014, early 2015 to the end of the term of their partnership agreement -- or our partnership agreement. That is basically going to be to be the length of time to determine the foregone fees. But I think the overall value for OpCo, Jimmy, will be, I think fairly small compared to the overall consideration. This is not going to be one of those internalizations you've probably seen before. I think it is going to be fair.

Okay. And lastly, just on the Scrivener Square. Obviously a high-profile transaction. I know it's early stage, but how -- what does the IRR pencil out to be at this stage?

So I think for all of our TLR Canada projects, we are really targeting about a 12% net return to -- let's say we brought in an institutional investor, we're targeting a 12% net return to them. And obviously, with our ability to earn development fees and potentially performance fees, this is a deal we'll probably ultimately look to bring a third-party investor in as well. We obviously could do a lot better than that. But we're really hoping to get around the 12% over about a 10-year period.

Great. Okay. Thank you.

There are no further questions in the queue at this time. I'll turn the call back to the presenters for their closing remarks.

Thank you, Suzanne. I would like to thank all of you on this call for your participation. We look forward to speaking to you in November when we discuss our results for Q3 2016.

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