Tricon Residential Inc (TCN) 2016 Q3 法說會逐字稿

Good morning, my name is Virgil, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Capital Q3 analyst call.

(Operator Instructions)

Wojtek Nowak, you may begin your conference.

Thank you, Virgil. Good morning everyone, and thank you for joining us to discuss Tricon's results for the three and nine months ended September 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. For more information, please refer to our most recent management discussion and analysis and annual information form which are available on SEDAR.

Our remarks also include references to non-GAAP financial measures, which are explained and reconciled in our MD&A. I would also like to 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 November 17, 2016.

Lastly, please note that during this call, we will be referring to a supplementary conference call presentation, which we have posted on our website. If you haven't accessed it already, 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 the news releases tab. With that, I will turn the call over to Wissam Francis, CFO of Tricon Capital Group.

Thank you, Wojtek, and good morning, everyone. Before we discuss our third quarter results, I'd like to take a minute to talk about our commitment to simplifying our financial reporting. We sometimes hear from the investment community that our Company is complex. However, our research has shown that this perception does not apply to our business. The investment community generally understands what we do, and how we make money, rather the seems complexity pertains to our financial reporting, and understanding how the operating results of our various verticals tie to our income statement and balance sheet.

With that in mind, we set out to revamp our MD&A, and are pleased to unveil the new format this quarter. Let me highlight a few key changes we have made, as shown on slide 5 of the conference call presentation. First, we simplified the overall presentation of the results, and gave greater prominence to IFRS measures.

Second, we now provide a clear linkage between operating performance of investment verticals, and our IFRS balance sheet and income statement metrics. Third, we minimized the number of adjusting items between our IFRS financials and our adjusted measures, such as adjusted EBITDA and adjusted income. The new items we now adjust for are transaction costs, nonrecurring items, or non-cash items such as changes in the fair value of derivatives, and foreign exchange gains or losses.

Fourth, we've provided additional metrics in the Q3 MD&A that we have never disclosed before, such as funds from operations and core funds from operation for the REIT-like verticals, Tricon American Homes, Tricon Lifestyle Communities. We also added disclosure around the projected cash flows and performance fees to provide more clarity and transparency in our reporting.

And lastly, we added more visual way-finding techniques in the MD&A to clearly show how numbers are derived, how these numbers change from period to period, and how each investment vertical connects with the whole picture. We hope this new MD&A format will provide simple and transparent reporting to our investors, and help serve as value over time. And we welcome any feedback from analysts and the investment community on our new document.

Now let's discuss the quarter, and moving on to slide 6, we had a very strong quarter driven by growth in AUM. Our assets under management increased year-over-year by 23% to $3.1 billion or CAD3.1 billion (see press release -- inaudible on replay) in Canadian dollars. During the third quarter, Tricon Housing Partners, our land and homebuilding investment vertical added $100 million of AUM, largely driven from our investment in Trinity Falls, an existing master planned community acquired in July.

In Tricon American Homes, our single-family rental platform, AUM increased by $38 million, including $22 million of fair value gains driven by strong home price appreciation in the markets that we operate. The balance is mainly comprised of upfront renovation CapEx on homes acquired in Q2. During the quarter, we slowed down the acquisition pace of new homes, to prepare for the buy out of the minority interest in the business.

In Tricon Lifestyle Communities, our manufactured housing land lease business, assets under management increased by $11 million, mainly as a result of acquisition of Bright Haven, TLC's 11th age-restricted community in Arizona. In Tricon Luxury Residences, our Class A multi-family rental development vertical, all five existing projects continued to advance on schedule, with no material change to AUM. The overall growth in AUM was partially offset by $19 million of distributions from maturing investments, and the related reduction of invested capital in Tricon Housing Partners, specifically in THP2 Canada.

As you can see on slide 7, we continue to charge ahead with our growth plans adding $429 million of AUM since the start of the year, by deploying $182 million of equity capital across our verticals into a multitude of new investments that are expected to drive earnings over time.

Moving to slide 8, where we outline the various components of our IFRS income statement. Fee revenue from private funds and advisory business decreased by 9%, from $7.6 million to $7 million year-over-year. The fee revenue consists of first, contractual fees and private investment vehicles, such as TDG and Johnson, second, general partner distributions, and third, performance fees. The main point of the variance here was Johnson, which declined by $1.5 million from a very strong Q3 in the prior year. This was offset by growth in TDG development fees related to TLR Canada projects, performance fees related to THP, and the relatively stable asset management fees from private investment vehicles.

At Tricon Housing Partners, investment income increased by 19% this quarter to $6.1 million versus $5.1 million last year. This was driven by new investments in Trinity Falls' existing master plan in Dallas, as well as the THP US SP1 separate account, and partly offset by lower income from THP1 US This fund is in harvest mode, and so ongoing distributions result in a lower investment balance, and therefore lower investment income.

At Tricon American Homes investment income was $20.7 million, compared $10.7 million -- as compared to $5.0 million in Q3 last year, an increase of 37%. TAH investment income is comprised of net operating income and fair value adjustment, plus interest and overhead expense. TAH recorded a 29% increase in net operating income, mainly as a result of an increase in the number of core properties owned, as well as the higher fair value gain, driven by strong home price appreciation. The positive results were offset by higher overhead and interest expense incurred from operating a large portfolio.

At Tricon Lifestyle Communities investment income was $1.5 million, compared to $0.1 million from Q3 2015, as the portfolio grew from 2 parks to 11 parks, and TLC continued to enhance its operation. And at Tricon Luxury Residences, investment income of $0.6 million was the result of fair value gains recognized in TLR US projects, as development milestones were achieved.

In terms of corporate and operating expenses, compensation expense was $6.8 million in Q3, an increase of $1.8 million from last year, mainly as a result of higher [alted] accrual related to higher projected performance fees. The compensation expense also increased as a result of expanding our team, and supporting our future growth. Other expenses included a significant positive impact recorded in 2015 from changes in the fair value of the derivative embedded in our convertible debentures, which is driven by movements in our share price, as well as foreign exchange gains due to the depreciation of the Canadian dollar.

Such items tend to be volatile quarter over quarter, and in our opinion do not reflect the underlying performance of the Company. For this reason on slide 9, we present the adjusted metrics that we typically discuss in this call. These metrics are explained in section 6 of our new MD&A, and exclude the impact of transaction costs, nonrecurring and non-cash items to present a normalized picture of Tricon Financial's performance. Overall, adjusted net income was $21 million for the quarter, as compared to $12 million for the same period in the 2015. Adjusted basic earnings per share were $0.19 in the third quarter, a 58% increase from the $0.12 recorded in the prior year's period.

Adjusted diluted earnings per share were $0.17, a 70% increase from the $0.10 recorded in the prior year's period. The increase was driven by higher investment income from all verticals, offset to some extent by the higher interest and tax expense, and the higher number of common shares. Adjusted EBITDA in the quarter was $34.1 million, an increase of $8.9 million, or 35% for the same period of 2015. This was driven by the continued growth in our various verticals, which continued to contribute higher investment income.

As you can see on slide 10, our continued focus on growth in AUM is driving our growth in our adjusted EPS and our adjusted EBITDA. As part of our re-ramped MD&A, we also introduced new disclosure to help you assess our performance.

For THP, as shown in slide 11, we are presenting several new metrics. First, outstanding invested capital at cost, so you can see how this compares to fair value on our balance sheet. Second, projected distributions net of advances to Tricon, which tells you clearly how each, how much net income, how much net cash flow we expected from our THP investment on a go forward basis, relative to the outstanding invested capital. And third, investment income expressed on an annualized basis, as invested capital. This metric was $8.4 million in Q3, and we generally expect it to be in the range of 9% to 11% on a full-year basis, with Q4 typically being stronger than other quarters, as a result of the timing of annual appraisals.

For our REIT-like verticals, TAH and TLC, we introduced FFO and core FFO, a new performance metric to make the presentation more comparable to our peers, as shown on slide 12. FFO represents investment income excluding the impact of fair value adjustments and other non-cash items, while core FFO presents FFO as a normalized figure, adjusting for transaction costs and nonrecurring items, and is a metric commonly used by our peers. You can see here that our TAH vertical, core FFO was $5.4 million this quarter, 43% higher than last year.

On a year-to-date basis, core FFO was $17.4 million, reflecting a 53% increase year-over-year. Over time, we intend to introduce additional metrics for TAH such as same-home results, which should make its performance even more transparent and comparable to other single-family rental REITs. On that note, we have been working with our peer group, and the National Rental Home Council to develop and refine the definition of these metrics, so that key performance indicators are reported consistently across companies.

Lastly on slide 13, we provide a summary of our liquidity position. We have access to a credit facility of $235 million to deploy into growth initiatives within our various verticals. As of September 30, 2016, approximately $160 million was drawn on this facility. Another significant source of liquidity for us is our 68.4% interest in THB1 US As we have stated in the past, we continue to expect $200 million of cash to Tricon from this fund between now and 2018.

The next major project to track is Rockwell, a condominium development project located in the Pacific Heights neighborhood of San Francisco. Construction of the West tower is now completed, and closing began in Q3, with meaningful cash distribution expected in late 2016 and early 2017. Finally, Tricon American Homes has access to $400 million warehouse credit facility.

Subsequent to the quarter, TAH completed its second securitization transaction, and received gross proceeds of approximately $363 million. The bulk of this was applied to TAH's existing warehouse facility, reducing the outstanding balance of approximately $59 million, and giving TAH ample room to continue growing its single rental portfolio. Another $60 million was repatriated as equity to Tricon, and applied against our corporate credit facility.

At this time, I'll turn the call over to Gary who will provide additional insight into our various business verticals.

Thank you, Wissam.

Let's begin with Tricon Housing Partners on slide 15. During the quarter, THP completed a $74 million investment in Trinity Falls fully entitled 1,700 acre master planned community in metropolitan Dallas, increasing THP's AUM to $1.5 billion. Similar to THP's prior investments in Viridian and Cross Creek Ranch, Trinity Falls is an established cash-flowing master planned, which has already sold 700 residential lots to homebuilders in the past two years, and the business plan is to continue the current pace of development to deliver another 3,200 lots of home builders over the next 10 years.

Trinity Falls is our fifth investment and partnership with the Johnson Companies, who act as the developer of the project. At the current time, we plan to retain Trinity Falls in our balance sheet, given the anticipated run off in the investment balance of our legacy funds, and our desire to keep a relative balance between our TAH and THP principal investments. However, if the right opportunity comes up, we may change that decision, and ultimately syndicate it.

A point of emphasis related to Trinity Falls and our other existing investments in THP, is the focus we have on providing affordably priced product to cater to an important, but currently underserved segment of the housing market, the first-time home buyer. For Trinity Falls specifically, 82% of home sales in 2016 have occurred between $250,000 and $400,000, with an average year-to-date home sales price of $365,000. These affordably priced community should benefit from the so-called millennials, whose oldest members are reaching the age of 37, as they start to form families of their own, and move out of denser urban locations to areas with strong schools and family-oriented communities.

As you can see on slide 16, first-time home buyers represent 34% of all buyers in the US today, and this proportion has increased quietly yet conservatively over a three-year period. Another aspect of THP that we remain excited about is the meaningful cash generation projected for this vertical.

We plan to redeploy the principal portion of these proceeds into future land and homebuilding opportunities to maintain the THP investment balance, and to allocate the profits into our REIT-like verticals where we continue to build a base of consistent and stable cash flow.

We usually focus our conversation on THP1 US where we expect $200 million of cash flow to Tricon through 2018, but we want to draw your attention to our other investments in THP, which are going to be major cash contributors as shown on slide 17. For example, Trinity Falls is projected to generate net cash flow to Tricon of over $177 million over the next 10 years, on our $74 million initial investment.

In total, we expect THP investment to generate $580 million to Tricon over the next 8 to 10 years, with a profile of cash flow skewed towards the near-term. And I should add, this is before we take into account any management fees and performance fees we might earn. You can see why we called THP the rocket fuel that propels us, as we expect this vertical to provide much of the internal cash flow to drive our growth going forward.

Turning to Tricon American Homes on slide 18, we paused acquisitions this quarter in order to allocate capital towards the buy out of a minority interest in the TAH business. This process is also allowed us to hone in on our operations, and further stabilize the portfolio.

On slide 19, you can already see improvement in portfolio occupancy, as TAH slowed its acquisitions, with occupancy moving from 88.9% in Q2 to 91.7% in Q3. As we speak, the occupancy has already improved to 94%, and we are targeting 95% by year-end.

Turnover at TAH has been stable, around 30% for the past four quarters, proving out the consistency and predictability of our business model. TAH was able to grow rents by 5.1% in Q3, including 4.4% of renewals, and 6.3% on new move-ins. These metrics underscore the high level of demand for our rental product, allowing us to increase rents, while maintaining an occupancy bias. To give you a sense of how incredible the demand is, we received roughly 1,000 calls a day to rent our homes, while we only have 200 to 300 homes available at any given time.

Our year-to-date operating margin of 60% remained consistent with the full-year of 2015, and is line with management's full year expectations, given the current geographic mix of the portfolio. For the quarter itself, operating margin improved to 59%, compared to 56% in Q3 of 2015, but still represents a seasonal low as repair and maintenance expenses tend to rise in the hot summer months due to HVAC repairs.

Beyond these operating results, we've had a very exciting couple of months at TAH. To begin with TAH, closed a second securitization transaction, and was able to repatriate roughly $60 million of equity back to Tricon by borrowing against the incremental value arising from the meaningful home price appreciation in its portfolio. We were able to secure financing at a very attractive blended rate of 3.59%, which is basically the same as the floating rate on the existing warehouse facility, but at a fixed rate locked in for five years.

Secondly, as we alluded last quarter, TAH has recently completed the buyout of over 90% of the minority interest held by legacy operating partners in the business, giving it full control over its business and its destiny. We paid a total price of $65.7 million, which included three components, one, the minority interest in the fair value of the homes; two, the embedded performance fees to minority interest partners which were already being accrued on TAH's balance sheet every quarter; and three, the minority interest share at TAH's operating company, which was determined based on the foregone asset management fees that would've been paid to the operating partners over the remaining life of the partnership agreements. We believe the cost of this transaction is very reasonable, compared to other internalizations, and we expect the transaction to be immediately accretive to Tricon's earnings.

If you look to slide 20, you can see that the minority interest had a negative impact of $10.6 million on TAH's investment income over the past nine months, a significant expense that will no longer be incurred. To put this in perspective, if you annualized the foregone investment income, and multiply by the 92% portion we just acquired, and then divide by the acquisition price, you will arrive at nearly 20% return on investment which we view to be a very attractive return.

From a capital allocation perspective, instead of buying new homes in Q3 and Q4, we are simply buying stake in our own homes, which we know well, are renovated to our standard, and are cash flowing. In the short term, by focusing our capital on the buyout, and not acquiring new vacant homes, we're able to stabilize our business and focus solely on operations. We are also ultimately going to eliminate 13 different operating entities, which will greatly simplify the reporting structure, and the administration of the business.

Looking ahead, one of the most impactful initiatives TAH is undergoing is the internalization of repairs and maintenance. While TAH currently administers the repairs and maintenance function in-house, it relies on outside contractors, such as electricians and plumbers to actually complete the service calls. TAH has been running a pilot project in Atlanta for several months now, and expects to roll out its own service crews to nearly all of its markets by mid 2017, with the goal of performing 60% to 70% of R&M in-house by year end 2017. Based on initial pilot test results, we expect TAH to capture meaningful cost savings, while at the same time improving resident relations and customer service, by sending our own trained employees into our residents homes, as opposed to third-party vendors.

Turning our attention to Tricon Lifestyle Communities on slide 21, in Q3, TLC acquired its 11th park in Mesa, Arizona for approximately $[9] million. The new park called Bright Haven is an age-restricted community of 177 pads, including primarily manufactured home residence, alongside a small seasonal resident base. Brighthaven had an occupancy of 86.4% at the end of Q3, and implemented an initial rent increase of 4% during the quarter.

As you can see on slide 22, with this acquisition TLC's portfolio occupancy increased to 72.5%, compared to 69.8% in the June quarter. If we remove the seasonal component, TLC's long-term occupancy also improved to 7% compared to 67.7% in Q2.

Operating margin in Q3 was 56%, compared to 57% in Q2, with both quarters reflecting seasonal weakness and occupancy during the summer months. Operating margins is also lower than our long-term target, as a result of adding nine parks in the past three quarters, which have yet to be enhanced and repositioned. In Q3, TLC began the capital improvement process at these parks, with similar scope of work as Longhaven and Skyhaven. The improvements are expected to be complete in early 2017, and to lead to an improved occupancy and margin over time.

In terms of the acquisition pipeline, we continue to evaluate large and small acquisitions as we seek to build TLC towards a scaled portfolio that can ultimately attract the interest of third-party investors. We have one meaningful acquisition that is expected to close by year-end, which would expand TLC's presence from Arizona into California.

An important factor working in our favor in building out this portfolio, is the supportive lending environment for manufactured housing communities. Lenders in the sector such as Freddie Mac and Fannie Mae which are mandated to finance affordable housing, are offering long-term fixed-rate loans that are based on near historically low treasury yields. These loans typically include an amortization holiday with interest-only payments in the first few years.

As of Q3, our MHC loans had a blended average fixed-rate interest rate of 4.3% and a 63% loan-to-cost ratio. Current pricing on similar loans is approximately 25 to 50 basis points lower in the 3.5 to 4% range, which compares very favorably to our average acquisition cap rate of 6.1% in the TLC portfolio.

Our fourth vertical on page 23, Luxury -- Tricon Luxury Residences continue to advance on the two US and three Canadian projects under development. The two US projects are both tracking to budget and advancing on schedule. You can see on slide 24, pictures of the McKenzie, currently under construction, with concrete form work now moving above grade. In Canada, TLR's three projects in Toronto are also tracking as expected. As you can see from the photos of the Selby, construction has surpassed grade with form work now completed up to the third floor. The project continues to progress well, with the construction schedule and budget as per our original underwriting, and approximately 70% of the hard costs now secured.

Second project, 57 Spadina, remains in the design stage, with a recent submission for site plan approval. Construction is scheduled to commence in January 2018. And Scrivener Square, the most recent acquisition remains in the initial planning stage. We're currently collaborating with local community members and stakeholders to define the project, and we'll be holding an international design competition for the proposed development. We're hoping to reveal a preliminary design next year.

We remain very encouraged by TLR's existing presence in Dallas and Toronto. Both cities are seeing tremendous population growth, job creation and strong rental growth, as you can see on slide 25. In Dallas, average rents increased by 6% since last year, while Toronto has seen a whopping 10% increase. This bodes well for underwriting, which typically factors in a 2% to 3% rent growth.

Looking ahead to growth, as mentioned last quarter, we remain on the sidelines with respect to additional US investments, given tighter lending conditions for multi-family development, and then construction costs continue to escalate, making targeted returns more difficult to achieve. While we remain happy with the US projects we have in place, the focus on new investments will remain in Canada, where we expect to add another two projects next year.

TLR is a relatively new vertical for us, but we wanted to give everyone an appreciation for its potential impact to Tricon on slide 26. In section 4.4 of our new MD&A and on this slide, we present the total projected costs of TLR's buildings upon completion as being $391 million. This excludes Scrivener Square, where the development plans have yet to commence.

We generally underwrite these projects to a development yield of about 6% on average, with slightly lower yields in Canada, and higher yields in the US, which translates into approximately $10 million of potential NOI to TLR upon lease up, given its current ownership stake in the projects. As a result, the project should meaningfully enhance Tricon's proportion of recurring revenues.

In addition, we see the potential for a significant evaluation mark up on TLR's investment. Today's market cap rates are generally 150 basis points lower than our underwritten average yield of 5.8%, which implies a market-based cap rate of 4.3%. If you apply that 4.3% cap rate to the expected NOI of these properties, you arrive at a potential gain of $133 million, of which 45% is TLR's ownership portion. In dollar terms, the gain equates to about $60 million, which is basically a double on the projected equity investment of $68 million in these projects.

Moving onto our private funds and advisory business, I'd first like to touch upon the Johnson business on slide 28. In Q3, lot sales to home builders decreased 18% year-over-year, mainly as a result of the successful launch of the Harvest Green master plan in the prior year period. Note that launch events in new communities or new phases in existing communities will often make quarter to quarter comparisons difficult, which is why we tend to focus more on the annual trends.

In addition, lot sales can vary widely from actual home sales, since builders often take down large sections of lots upfront. As such, we generally look to home sales to monitor trends, since these are generally less volatile, and tend to be a good predictor of future lots sales activity.

In this regard, homes sold within Johnson communities this quarter are up 15% year-over-year, which is indicative of ongoing community count growth, and a consistent demand for new homes in Johnson communities. On that note, our most recent data from the Cross Creek Ranch master plan shows a 22% increase in year-to-date home sales versus last year, which is a phenomenal result in the context of a softer housing market in Houston.

I'd also like to take this opportunity to highlight the strength of Johnson business model for Tricon. Johnson currently operates 15 active master planned communities, including 4 of the top 30 master planned communities in the United States, with Trinity Falls and Viridian poised to be additional contenders in the top 50 next year. Of the 15 communities, only 4 are principal co-investments to Tricon through the THP business, and the remainder are financed by other investors.

As an owner in Johnson, Tricon benefits from the receipt of contractual fees on all lots and land sold across the Johnson portfolio, regardless of whether we have an ownership interest in the underlying real estate. These fees are generally in the range of 3% to 5% of lot revenues. This model allows us to leverage the Johnson brand with other property owners and investors to grow revenue and earnings for Tricon, without the need to always invest significant amounts of our own capital into new communities.

Another aspect of the private funds and advisory business I'd like to highlight is performance fees. During the third quarter, we earned performance fees from Five St Joseph, a Toronto condominium development within THP2 Canada that is nearing completion. The property is expected to achieve an annualized IRR of 15%, and is a good example of THP's ability to execute on projects with attractive returns to both Tricon and its third-party investors.

As we look ahead, we expect to performance fees to become a meaningful contributor to revenues over the coming years. Rather than have you guess the quantum of performance fees Tricon stands to make from its third-party investments, we decided to disclose the figures as part of our revised MD&A as presented in slide 29. In total, based on Q3 return estimates, we expect to recognize about $116 million of performance fees over the next 8 to 10 years, making these fees a potentially meaningful contributor to our earnings over time.

In conclusion, Q3 was marked by strong AUM growth, as well as investment income growth across all our verticals, which translated into very healthy earnings per share this quarter. We remain enthusiastic about the growth prospects for our diversified housing platform, and are encouraged by the robust trends we continue to see in the US housing market, which is still in the expansionary phase.

I also want to thank Wissam and his team, for all the hard work in revamping our MD&A. We hope that the investment community embraces our new reporting format, and finds our newest disclosures helpful in servicing the value we see in our shares.

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

(Operator Instructions)

Geoff Kwan, RBC.

Hi, good morning. Just had a question. We've obviously had the US election that happened earlier in the week, and then also we've had in Canada, some of the changes announced by the Department of Finance. Just wanted to get your take on what that means for your various business verticals?

Yes. Sure, Jeff. Well, I think the first thing I would say is that, I mean, from what we can discern from his policies, and certainly his economic policy, he seems to be intent on lowering taxes and adding fiscal stimulus through infrastructure spending. And he does have, obviously, he has the Republican support in the Congress. So we'll see whether or how much he is actually able to enact in terms of those ideas. But if he is able to do that, I would say that those are inflationary policies, and our land and housing business is set up to benefit from inflation.

A lot of our investors or pension funds will invest in our land business, because they believe land is a hedge against inflation. And obviously, inflation will lead to higher home prices, which is obviously great for a single-family rental business. Obviously, through higher, our HPA, we're able to borrow against that value, and then repatriate capital back to the business and continue to grow. So those are good things if they happen.

We obviously, although we have a Canadian ticker, we're essentially an American company, and we are an American taxpayer. So if there are lower corporate tax rates, that is a boon for Tricon, definitely for Atlanta homebuilding business, which has a less efficient tax structure. And obviously, I think is a benefit for the entire US economy. So I think, maybe north of the border here, I'm taking more of a contrarian view, but those economic policies, as long as they don't lead to hyperinflation, would be a positive thing, I think for Tricon's land and homebuilding business.

In Canada, the change in the mortgage finance world, I think, largely makes affordability an even bigger problem. They're trying to slow down home prices, but I actually think it's going to lead to less affordability, because in return, I think the banks and lenders are going to have to raise rates. And so, that's a real problem that we've identified and that's why, in Canada, our focus is on multi-family rental, because we've seen this in the US.

When there's an affordability crisis, people, certainly young people, are going to have to rent for longer. And so we think we're uniquely positioned with our multi-family brand here, Tricon Luxury Residence, to take advantage of that and we're already seeing, as I said, some very impressive rent gains in Toronto, which is indicative of this affordability problem.

Okay. Thanks. And the other question I had was on -- you've been growing your business quite significantly over the past few years, and you've added headcount as a result. I just wanted to get a sense from you, in terms of when you kind of take a look at your organization right now, kind of where you see it, are there other, are there areas that you need to kind of fill some gaps in?

And also from a G&A perspective, for stuff like systems or other stuff, are there other things that you need to hav? Or do you have that scalability that you need to take yourself through the next couple of years?

Yes, so I think we always try to plan ahead, Geoff, and we don't want to find ourselves in a reactive situation, where things slip through the cracks. We're always planning to staff up ahead of future growth, and we've been doing that all along. I would say we're pretty good in terms of, I think, our headcount, certainly at the corporate level.

I think where we do need to add is potentially with a private funds person. We do want to increase our ability to raise third-party capital, especially as our verticals become more stable, our income producing verticals. And so I think, ultimately, having a private funds person, and obviously, we've seen companies like Brookfield or Blackstone ultimately build up big departments, but I think that's something we can certainly benefit from.

We might need to ultimately hire a chief marketing officer, as we've obviously vertically integrated and many of our verticals are now more consumer-facing. So I think those are opportunities we've identified, but apart from that, I mean, we're in very good shape. At the TAH level, for example, we now have 250, roughly 250 employees. So we've done a lot of hiring there and we're well-positioned to continue to grow, and we have made heavy investments in technology. We've implemented Yardi at TAH and we're investing in our technology here at Tricon as well.

Okay. Great. Thank you very much.

Mark Rothschild, Canaccord.

Thanks and good morning, guys.

Hey, Mark.

Maybe on [part of] TAH buying out the partners, clearly it looked like a profitable and good investment for Tricon. But if you could just give little more color on what motivated the partners, and what mechanisms you were able to use to encourage or push them towards selling to you, how that process worked?

Yes, and we'll just remind you when we had gone into the business, we entered partnership agreements with those operators, and they have a term of five years. So they were essentially going to mature early next year, so we were going to have to deal with it sooner than later. The other thing I would say is our partners had substantial amounts of their own capital invested in this business. And so they were obviously looking to redeploy that capital, and welcomed the liquidity event.

The other thing is I think they recognized, and we collectively recognized, how difficult it was to administer a business with literally 13 different operating entities. It made it harder for us to arrange financing through securitization, and so we all knew that it would be inevitable, that it made sense for us to take out the operating partners, and control our own destiny.

Okay. Great. That makes sense. And with the new securitization, how much capacity do you have to grow this business now without maybe additional equity from your other parts of Tricon or external equity?

Well, I mean, if you look at the equity, I mean, obviously there's a lot of different ways to look at this. But I think if you look at the equity that we've repatriated, and then you now look at the new capacity, the additional capacity in our warehouse line, I think if you run through the math, depending on what you assume for the average home price, call it, $130,000 to $150,000, it basically allows us another full year of growth. And our current, our 2017 business plan assumes that we'll buy 400 homes per quarter. So again, that gives us a lot of runway to continue to add.

And would you feel comfortable levering up, let's say, to that extent?

Yes, I mean we're comfortable in the TAH vertical going to 70%. Our acquisition facility allows us to borrow 70% of cost, and then obviously, through securitization, we can board roughly 70% of value. So if home prices move up, that's how we are able to repatriate equity. But you have to remember that we take a holistic view of leverage, and with THP we're essentially using virtually no leverage. So we're really looking to blend, and make sure we don't get over our skates.

Okay. And then just lastly, as your portfolio obviously Texas has being doing quite well as far as Dallas goes, and even some of your projects there in Houston have done well, even with some of the softening that's been in that market. Are there new markets in the US that you're more focused on or are you going to continue to focus on growing in Texas?

Well, I mean, if you look at our different businesses, really THP and TAH, we're in 14 different markets. And so, I don't really think we need to expand into new markets. I mean, we could, for example, in single-family rental ultimately go into a place like Orlando. I mean there's other markets we could add on the margin.

But in general, we've already identified I think the markets that have the best fundamentals, the best population growth and job growth, and obviously, we want to maintain a good diversity. Even though Texas is, and Dallas is red-hot, and even though Houston is performing better than I think anyone would of thought, we certainly believe in diversification. We don't want to put too much concentration into any one market.

Great. Thank you very much.

Thanks, Mark.

Lauren [Kamaller], TD.

Hey, good morning.

Good morning.

Just a quick question on the Tathere value gains. Were there any particular markets that contributed more than others?

Not really. I mean, I would say it was pretty even across the board. Obviously, there's a couple -- there might be 1% or 2% different from market to market, but on the whole, we're seeing very good home price appreciation across the board.

Okay. Great. Thanks.

Stephen MacLeod, BMO.

Thank you. Good morning.

Hi, Steve.

Just on the TAH business, I just want to clarify what is your current minority interest position, or what's sort of what's the proportion of minority interest that's outstanding today? Are you fully (multiple speakers) now?

No, no. So when we talked about the buyout at $65.7 million, that's for 92%. So we still have a little bit of work to do. We've got two more partners, and we're not making any promises, but we're hoping to get them wrapped up by the end of the year as well.

So then that's 92% of the minority interest position that you just bought?

Correct. Correct.

Okay. And then we obviously saw the benefit of sort of the slower home buying activity in the quarter. Can you talk about whether that accelerated post quarter? And then how many homes do you expect to purchase in Q4? Is it back to 400, or does that sort of trickle into Q1 2017?

No, again, from a capital allocation perspective, we decided that rather than buying new homes in Q3 and Q4, Steve, that we would just allocate the capital to buying out the minority interest. So you should not expect any new acquisitions in Q4. And as I said, if you look at our in-place occupancy today, it's already grown to 94%.

Okay. That's great. And then in terms of the TLC business, you mentioned that you had sort of an acquisition in the pipeline that would expand your business into California. Can you talk a little bit about if there are any major differences between the California market and where you are currently in Arizona?

What I will tell you is that we are going to be buying, I think, a higher quality portfolio. I think what we own in Phoenix is really kind of 3.5, 3 to 3.5 star parks, and obviously, you've seen that we wanted to add value to those parks, so we can grow occupancy and rent. The portfolio that we're looking at in California has definitely, is more stabilized, it's got higher occupancy, and I would characterize it more as 4 star parks.

And obviously, we view this as very positive because we've been looking to diversify. And I think this really adds a lot of value to the overall portfolio. I'm sorry, I can't really tell you a lot more than that, but that's where were at.

Okay. That's great. And then just one last one. In terms of the cash flows that you expect to receive in from THP1 US, is that $100 million -- or sorry, the $200 million you expect, is that all principle that you would expect to deploy, or is only a certain portion of that principal that you will deploy?

So we're going to redeploy all of it. It's just a question of how we do that, right? And do we take that $200 million and allocate it back into land and homebuilding or do we allocate it towards, the more REIT-like or income producing verticals? So that is kind of a work in progress. But I think as we said in our prepared remarks, we do want to allocate a good amount of that to the REIT-like businesses so we can continue to grow and generate more stable cash flow.

Okay. That's great. Thank you.

Jimmy Shan, GMP.

Thanks. Gary, you mentioned internalizing a significant part of your R&M crew. How do you think that translates into margin improvement, or is that just more of a customer service impact? Maybe you can share what your experience was with respect to the pilot project that you did.

No, I think there will be an economic benefit, Jimmy, although it's too early to see what that is. But I can tell you from our pilot project in Atlanta, we felt that we were able to save 20% of our R&M budget. So right now, R&M is roughly 12% of revenues. And if you're able to save 20% of that, you're going to add roughly 2% to your margin. So there's a real opportunity to grow the margin there over time. This is a nickels and dimes business, so that's very meaningful cash flow.

Obviously, from a customer service perspective, one of the issues we've had, apart from not -- having -- being more difficult to control your costs, is that when third-parties go into our homes, they're given a prescribed list of what they can do. And a resident will say, now that you're here, maybe you can help me fix the screen door, for example?

And the third-party vendor would say, sorry we can't do that. So that's not that's not great customer service, and we can do it ourselves, and we can fix all the issues for a resident in their home, and then we don't need to come back. So I think it's a game changer for us, and we're going to implement it over the course of 2017, or a good amount of it.

Okay. All right. And then just on the new disclosed performance fees, would you have a -- so what would the cash distribution profile look like? You did that with THP. Just wondering like you mentioned over 8 to 10 years, but is that skewed evenly or?

Not really. I mean, it's more back ended, Jimmy, and we're not -- because this obviously can move quite substantially from quarter to quarter, depending on how our estimates change, or our projects get pushed forward or backwards, we haven't wanted to give the distribution profile, but I would say it is skewed towards the back end. We should expect to see some nominal performance fees next year, and larger amounts in 2018 and 2019 based on what we know today.

Okay, fair enough. And lastly, just going back to that THP, the new disclosure on the projected distributions. So how do we think about -- so you mentioned that part of the proceeds from THP1 US could go to its other verticals. But is the idea that the goal is to maintain that distribution profile, such that a cash distribution from shorter-term investment will fund equity commitment on longer-term investment, so that that business becomes somewhat of a self-funding business? Is that sort of kind of part of the thinking? Or is it just that the interim cash flow would just be reallocated somewhere else?

Yes, well, I would think of it this way. I mean, if you look at -- the reason we're now showing you -- we're showing you two new things that are important: how much capital we currently invested in the business, as opposed to just the fair value, and also what we project the future distributions net of advances to be. So you can essentially look at a multiple between those two numbers, and I think we're telling you right now, we expect that number to be about two times, which means we're essentially going to double our capital.

So the idea at this point of time, and this is just somewhat crude, but we would reinvest the principle back into the business, so we basically maintain those balances. And then we take the profits, which is -- and put it into the other income producing verticals. So I'm not sure if that makes sense, but we're, again, we're trying to double. So the one would go, 1.0 would go into THP, and the other 1.0 would go into to the income or REIT-like verticals.

Okay, got it. Okay, thank you.

Okay.

(Operator Instructions)

Dean Wilkinson, CIBC.

Thanks. Good morning, guys.

Hi, Dean.

Gary, just on the acquisition of those minority interests, are the fees that you expect to save from that all below the line? I guess the question is does it impact the NOI margin?

No, not really.

No. So the 1 --

Yes, it affects investment income, not so much NOI.

Okay, so the operations number is actually G&A, not operations of the assets itself?

Yes, I mean I'm not going to say there's no impact on the NOI, because obviously, the operators are getting their pro rata share of whatever operating income there is, but the vast majority of those savings are really below the line, in fact, investment income. And a lot of it's obviously coming from the HPA, or the fair value gain, that otherwise we'd be paying to them in deemed performance fees.

Okay. Got it.

And one thing to remember is that, I just want to explain this. I mean, in our limited partnership agreements with them, they're acting -- when they were acting as GP, they received performance fees. And that could be, I can't remember the exact number, but it could be 20% or 25% over a pref. So once you clear that pref, which we have, they continue to get 20% or 25%. So it's a significant number. So we're saving that. We're basically, we're stopping that with this.

Right, right, got it. And then, just on the Cross Creek, and we've talked about this before, the volume that went through is probably surprising to everyone, yourselves included, obviously evidence of what Johnson's able to achieve down there. Was there a change in pricing, or was is it just been the continued asset mix towards the more affordable stuff?

No, there hasn't been really, there hasn't been a change really in price per front foot or lot. It's more that we've been able to change the mix. And people often criticize Houston and say there's no zoning. Well, actually that's been a huge benefit for us, because we set, essentially are the master planner.

We are the city, and we can change the product very quickly. And so, recognizing last year or two years ago that things were going to get tougher, we shifted our mix to smaller lot products. So instead of doing 80 and 90 foot lots, we're doing more 50 foot lots. That brought the lot price down. It's obviously brought the lot home price down, and that's led to more absorption.

And that's a trend that's continuing?

Yes, and I think, it's a trend that's continuing, and we've identified it as just a general opportunity across the board, because as I said, there is lots of so-called millennials that are now, at the beginning on this trend, they're going to become, they're going to have to ultimately move out of the cities and into more suburban communities as they have families and children.

And the key thing, in order to support them, is going to be affordability. And so, we in the industry really need to provide more affordable product, and we can play a major role in that through Johnson, by bringing on smaller and more affordable lot product.

And are you finding the same things where adjustments are needed to be made at say like a Viridian, or is that a little bit more balanced in that market?

No, Viridian, I mean, one of the things we loved about Viridian is there's really a lot of small lot product there already. I mean, we've got a lot of townhomes, we got 20, 30 foot lot product. So we're already there. The issue for Viridian is we've had major weather problems at the beginning of last year, which has prevented us from putting the lots online.

But we're now there, and so we should have a very good sales year in 2017. But we've been looking for that. So when we looked at Viridian and Trinity Falls, we're looking for communities that have the ability to sell affordable product.

Perfect. That's it for me. Thanks, guys.

Thank you.

There are no further questions at this time. I'll turn the call back to Gary Berman for closing remarks.

Thank you, Virgil. I would like to thank all of you on this call for your participation. We look forward to speaking to you in March 2017 when we discuss the results for the fourth quarter of 2016.

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