Tricon Residential Inc (TCN) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Capital Group Q2 analyst conference call. (Operator Instructions)

I would now like to turn the call over to Wojtek Nowak, Director of Corporate Finance and Investor Relations. You may begin your conference.

Thank you, Julie. Good morning, everyone, and thank you for joining us to discuss Tricon's results for the 3 and 6 months ended June 30, 2017, which we shared in the news release we distributed yesterday.

I'd 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's 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 U.S. dollars, unless otherwise stated. Please note that this call is available by webcast at triconcapital.com, and a replay will be accessible there following the call.

Lastly, please note that during this call, we will be referring to a supplementary conference call presentation posted on our website. If you haven't already accessed, 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 and Presentations.

With that, I will turn the call over to Wissam Francis, CFO of Tricon Capital group.

Thank you, Wojtek, and good morning, everyone. Our prepared remarks this morning will include highlights of our quarterly results and a discussion of our various investment verticals.

Starting on Slide 5 of our presentation. Tricon continues to deliver strong growth in the second quarter of 2017, with assets under management increasing by 53% year-over-year to $4.6 billion.

During the quarter, the acquisition of Silver Bay added $1.4 billion to our Tricon American Homes AUM. In addition to that, TAH also had a fair value gain of approximately $20 million, resulting from strong home price appreciation of 1.2% this quarter or 4.8% annualized, with Silver Bay homes held at cost.

Tricon Housing Partners added $80 million of AUM, mostly related to a higher third-party commitment to Arantine Hills, a land development project in California, where additional capital has been approved to allow for more flexibility to the business plan. And Tricon Luxury Residences added $30 million of AUM, as they continue to advance construction on its existing projects. The overall growth in AUM was partly offset by distributions from maturing investments within Tricon Housing Partners.

Moving on to our financial results on Slide 6, you can see that on an IFRS basis, we recorded a diluted loss per share of $0.17 compared to diluted earnings per share of $0.13 last year. There are 2 important variances here to highlight: first, TH incurred $28.7 million of nonrecurring transaction costs related to the Silver Bay acquisition, which are expensed under IFRS; and second, Tricon incurred a $19.2 million loss related to a change in the fair value of a derivative financial instrument this quarter versus a $2.4 million gain in prior year period. This loss was caused by an increase in the value of the conversion feature of our convertible debenture, as our share price strengthened during the quarter. These 2 items caused the vast majority of the year-over-year variance in our reported EPS.

To provide a more normalized view of performance, we present the adjusted income metrics that you see on Slide 7, which remove the transaction cost and change in the fair value of the derivative, as well as other nonrecurring and noncash items. As such, on an adjusted basis, we reported strong basic and diluted earnings per share of $0.17, which is 42% increase from the $0.12 reported in last year's results.

Looking deeper into these metrics, you can see at the bottom of Slide 7 that our adjusted EBITDA almost doubled year-over-year to $47.6 million, reflecting the substantial growth in our operations. The main contributing factors include: first, strong growth and investment income at Tricon Housing Partners, as we added new investments over the past year; namely, Trinity Falls and THP US SP2. And we also experienced consistent operating results across other investments.

Second, a strong quarter for Tricon American Homes, where net operating income doubled, mainly as a result of the Silver Bay acquisition, while robust home price depreciation continued to drive fair value gains. Of note, Silver Bay is included in our results as of May 9, and there were no fair value gains recognized on Silver Bay homes this quarter, given the close proximity of the transaction cost of the transaction date to our quarter-end.

Third, solid growth and investment income at Tricon Lifestyle Communities, as our results included 14 parks as compared to 10 parks last year. The growth in investment income also reflects the value added from implementing capital expenditure programs across various parts.

And lastly, strong results at Tricon Luxury Residences, driven by increasing value of the existing development projects, as construction continued to advance. These items were partially offset by higher corporate overhead, as we expanded the scale of our company and added staff. While we experienced solid growth in adjusted EBITDA, you can see that as you bridge from adjusted EBITDA to adjusted net income, we also incurred interest expense year-over-year. The adjusted interest expense presented here captures the interest expense across all investment verticals and most notably from the incremental debt used to finance the (inaudible) acquisition as well as the recently issued convertible debenture, which accrued interest as of March 7 -- 17.

To wrap up our financial overview, I would like to touch on our balance sheet and liquidity position on Slide 8. The acquisition of Silver Bay was completed with a very efficient capital structure from our -- for our shareholders, involving approximately $1.2 billion of debt and $320 million of equity and convertible debentures. We are comfortable taking on additional debt at TH, given our strong corporate liquidity profile, the high visibility we have into our future cash flows across various businesses and the minimal leverage we carry within our THP vertical.

At the corporate level, we continue to have a flexible liquidity profile through our corporate revolving credit facility. We had $93 million drawn in the facility at the end of Q2, with $272 million of available capacity, giving us ample room to continue our growth trajectory into THP, TAH and TLR, Canada.

In terms of cash flow visibility, we have 4 key sources of cash flows to highlight. First, we have identified 1,600 homes, including 1,300 homes from Silver Bay and 300 homes from TAH as noncore homes that we plan to dispose of. These homes are generally geographic outliers or those that do not fit our middle-market focus, with rents that are either too low or too high. We may sell these homes -- noncore homes on a portfolio basis to national buyers or sell them one-off, overtime.

Second, we continue to anticipate significant cash flows from Tricon Housing Partners. In aggregate, we expect approximately $517 million of [net] distributions from THP to Tricon over the next 8 to 10 years. We continue to forecast approximately $125 million to come from THP1 US over the next 2 years. The remaining cash flows are largely expected to come from various separate accounts, which all -- are all long-dated, master-planned community investments projected to generate fairly consistent cash flows over 8 to 10 years.

Lastly, we expect the disposition of our manufactured housing portfolio in U.S. multifamily assets to generate meaningful cash proceeds to Tricon. All of these combined, we estimate approximately $400 million to $500 million of cash flow to be generated from these sources over the near term, giving us significant flexibility to invest in attractive growth opportunities and to pay down debt.

At the same time, we're working on implementing a more flexible capital structure at TAH. We are in the process of refinancing the $1.2 billion Silver Bay acquisition credit facility with more permanent long-term financing. We recently launched a new 5-year fixed rate, private label securitization of approximately $460 million encompassing about 3,500 homes, of which 90% were acquired from Silver Bay, with the proceeds of this financing to be used to reduce the balance of the Silver Bay acquisition credit facility. We're also evaluating a number of options to refinance the remaining balance, including private label securitization as well as bank or insurance company originated term loan and potential GSE financing, with a goal of laddering debt maturities, utilizing both fixed and floating-rate instruments and mitigating refinancer risk by diversifying our financing sources.

With that, I will now turn the call over to Gary, the proud new father of a new baby girl, to provide additional insight into our business verticals.

Well, Sam, thank you very much for the plug. We didn't announce a major acquisition this quarter, so I figured we could sneak in a baby.

Second quarter was a period of remarkable growth for Tricon, and we achieved solid operating results across all our investment verticals. Let's begin with Tricon Housing Partners, or THP, our land and homebuilding vertical on Slide 10.

THP continued to generate solid results this quarter, with investment income of $6.6 million, increasing by 33% from the prior year. For the first 6 months of this year, THP generated investment income of $12.2 million against outstanding invested capital of $241 million, translating to a 10.1% annualized net return on invested capital, which is in line with our expectation of 9% to 11% net return for the full year. Please recall that the net return numbers we highlight here are net of asset management fees, development fees and forms fees paid to our Private Funds and Advisory business. So in many cases, the gross returns on the investments are substantially higher. As you can see, the key driver of THP's investment income was Trinity Falls, a massive planned community we acquired last July, which generated $1.8 million of investment income in the quarter. As a new principal investment with growing investment income, Trinity Falls provides a good counter weight to THP1 US, where the investment balance and investment income are decreasing, because of the advanced nature of many of the projects in the fund and the related cash distributions. The performance of THP's other investment vehicles was also stronger than last year and consistent with our expectations.

THP's performance this quarter reflects a robust market fundamentals underpinning the U.S. housing market. As summarized on Slide 11, we are seeing a number of positive indicators, including strong existing home sales and home prices as well as low unemployment. Meanwhile, new housing starts remain well below historical long-run averages and are struggling to keep up with household information, driving new home prices upward and benefiting owners of well-located lands, such as THP's master-planned community portfolio. We view these as favorable tailwinds to support ongoing strength in THP's operating results and growth in the business.

As we think about the future outlook, we often describe Tricon Housing Partners as the rocket fuel that propels us, which refers to the strong, albeit episodic cash flow generation and above-average risk-adjusted returns that this business is capable of producing for us. THP remains an important part of our business, and we see it being roughly 20% to 25% of our asset mix going forward. We will look to add new products as some of the older ones roll off and are currently tracking a meaningful pipeline of deals, but we'll remain selective and only pursue the very best opportunities.

Let's now turn to Tricon American Homes, our single-family rental business, on Slide 12.

TAH received very strong operational results in Q2, while successfully navigating the closing and integration of Silver Bay. Let me share with you some of the operational highlights. TAH's net operating income increased by 98% year-over-year. This is driven by 96% increase in total revenue, mainly as a result of adding Silver Bay, but also from achieving strong portfolio occupancy of 96.9%, while generating above-average rental growth of 4.9% including 4.4% of renewals and 5.7% on new move-ins.

On the expense side, TAH has focused attention on controllable expenses, such as repairs, maintenance and turnover costs. In particular, TAH is in the midst of internalizing the majority of the R&M function, which has reduced costs and improved customer service and provides an opportunity to spend more time inside the homes, which allows TAH's field staff to spot potential issues and address them proactively. All of these efforts have allowed TAH to achieve a very healthy NOI margin of 60.8%.

We are very pleased with these results, especially given that our anticipated synergies from the Silver Bay transaction are still in the process of being realized. We still remain comfortable projecting a full year NOI margin of 60%, but with an upper bias, given the trends we are seeing thus far.

As we move down TAH's income statement, this quarter included the contribution of Silver Bay revenues as of May 9, but essentially carried a full quarter's personnel on overhead cost burden, as we prepared for the acquisition and worked through the integration. As a result, you will notice high corporate level expenses and fairly flat core FFO relative to last year, which we expect will improve over the coming quarters, as our integration initiatives and GNA synergies are completed.

We think the best way to track TAH's operational progress is through same-home metrics, which provide a glimpse of what is achievable for our entire portfolio on a stabilized basis.

Turning to Slide 13. The same-home portfolio metrics for TAH include 47 rental homes that have been stabilized for at least 90 days, prior to the start of the comparable period of last year. TAH's same-home portfolio generated NOI growth of 9.3% year-over-year, driven by a 230-basis-point increase in occupancy, a 5% increase in average monthly rent and tight expense control that resulted in NOI marketing spanning to 61.5% compared to 60.6% last year.

Although we continue to see property taxes increase as a percentage of revenue, largely a byproduct of rising home prices, this was partially offset by lower repairs, maintenance and turnover costs as a percentage of revenue, partly as a result of the R&M internalization initiatives.

Annualized turnover on a same-home basis was 31.7% this quarter compared to 33.9% last year, which also served as a driver of expense reduction and NOI margin improvement during the quarter. You recall that a key part of our investment strategy is to focus on the middle market or those households earning between $50,000 and $95,000 per year. We expect to see low resident turnover, translating to stronger margins and returns over time.

Moving on to Slide 14. Let's turn our attention to the Silver Bay acquisition and integration process. Following the acquisition of Silver Bay, TAH is now the fourth largest publicly owned company in the SFR industry, with 16,660 homes concentrated in high-growth U.S. Sun Belt markets. Actually, third pro forma for the Invitation/Starwood merger announced today. Last quarter, we spoke about how the combination of 2 complementary single-family rental portfolios is expected to unlock meaningful operating benefits and efficiencies and how we expect to realize substantial cost synergies from doubling our SFR portfolio. We are happy to report that the integration is progressing well and is ahead of schedule.

Even before announcing the acquisition, the TAH team had carefully crafted an implementation plan during the due diligence process to ensure that all critical functions were integrated seamlessly upon closing of the transaction. Within 2 days of closing, all Silver Bay residents were transitioned onto the Tricon American Homes online portal, allowing them to pay rent and access their account information. Also within 2 days of closing, all of the Silver Bay homes were added to the TAH leasing website and all Silver Bay yard signs were subsequently replaced with Tricon American Homes signs.

On the staffing side, Tricon American Homes has hired 60 field operating staff from Silver Bay on a full-time basis, and local facilities were combined in all markets with geographic overlap. The Silver Bay field staff were promptly transitioned onto TAH's technology platform and received upfront training on TAH's standard operating procedures.

Lastly, the accounting and back offices were integrated as planned, which allowed for timely and accurate financial reporting. As a result of the smooth integration process, the operating performance of the Silver Bay portfolio was better than expected this quarter. The NOI margin for Silver Bay homes on a stand-alone basis was 60.7%, which was above our initial expectations of 60% for the full year.

In terms of corporate overhead synergies, we had outlined a plan to remove approximately $10 million of annualized overhead cost from Silver Bay's operation from the initial run rate of about $14 million. This included eliminating duplicate head office expenses, facility costs and public company reporting costs. These initiatives are largely complete, although we continue to retain a number of Silver Bay staff on a consulting basis and continue to incur various transitional costs, which are reflected in our corporate overhead expenses. That said, we are comfortably ahead of schedule and expect to fully realize our projected synergies in the first half of 2018.

Looking ahead, we remain excited about the growth prospects of Tricon American Homes. The institutional SFR companies represent only 2% of the 16 million rental homes across the U.S. The vast majority of the market is managed by inefficient mom-and-pop operators, who cannot deliver the high-quality product and customer service that we believe we can for our residents. As such, we believe there is a tremendous roll-up opportunity, and we are aiming to resume our acquisition program in Q1 2018. While our business plan assumes a onesie-twosie acquisition program, we're evaluating various options to accelerate growth, including build to rent and portfolio acquisitions.

Moving onto Tricon Lifestyle Communities, our manufactured housing land-lease business. 2017 is the year focused on asset management, as TLC works to complete capital expenditure programs at the existing parks and reposition its communities to drive higher occupancy and rent, in order to ultimately maximize value in the portfolios sold. As you can see on Slide 15, TLC has completed the capital expenditure programs at 6 parks, and the remaining 8 parks are in various stages of their enhancement programs, which should be completed by the end of the year. We can see this value-added strategy at work, when we isolate the operating results for the 10 parks owned since last year. For these parks, long-term occupancy has gone up by 2.3% from 67.7% to 70%, and average monthly rent increased by 5%, from $376 to $392 in the past 12 months.

Since we announced our intention to exit the TLC vertical a few months ago, we received strong unsolicited interest in the portfolio from many parties and plan to run a brokered process, once the capital expenditure program is complete.

Turning to Tricon Luxury Residences, our multifamily and development and rental platform, where progress continued on the 3 Canadian and 2 U.S. projects that are currently under development. On Slide 16, you can see the status of the 3 projects that are already under construction. The Maxwell and The McKenzie in Dallas, our TLR U.S. projects, are both on track to completion by late 2018. We expect to exit from these investments once the buildings are stabilized.

The Selby, which is our first development in Toronto located at Bloor and Sherbourne, is tracking ahead of schedule and is expected to start lease-up in the second half of 2018. Our second development, 57 Spadina, located in Toronto's entertainment district, is scheduled to start construction in early 2018.

We would also like to share some exciting news on the newest development, Scrivener Square, a prime site located in the Rosedale/Summerhill neighborhood, Toronto. We submitted the zoning application for the project on May 29, and on Slide 17 we are sharing with you the preliminary rendering of the project. Let me introduce some of the key attributes.

The proposal entails a mix-use development, consisting of a 182-unit Class A rental building, with integrated retail and public courtyard space at street level. We ran an international design competition involving various world-class architectural firms to arrive at our design concept. We selected COBE, a leading Danish architecture firm, based on their track record designing residential projects centered around a vibrant public realm that puts people first and incorporates heritage buildings. Our project includes a central open-air courtyard that will serve as a gathering place for the community to interact and experience outdoor entertainment and art exhibits. The COBE design integrates multiple brick patterns and colors inspired by the surrounding structures, while telling -- tying in a lighter materials used at the adjacent LCBO and Scribner buildings.

We see tremendous potential for this project, both as a highly desirable rental property and as a vibrant amenity in retail node for the surrounding community. We look forward to sharing with you the details as the zoning process advances.

As we think about the growth for the TLR business vertical, we remain focused on expanding in Canada, where multifamily fundamentals remain very compelling, particularly in the city of Toronto. The growth opportunities in Toronto are driven by rising rents, declining vacancy rates, elevated home prices and a lack of Class A rental product. As you can see on Slide 18, average monthly rents in Downtown Toronto have experienced a 10% increase year-over-year to $3.24 per square foot in Q2 2017. Meanwhile, the vacancy rate for newer purpose-built rental stock was almost nonexistent at a record low of 0.1% compared to 0.4% in the previous year.

On the supply side, we believe there will be a slowdown in construction starts for new purpose-built rental apartments in Toronto, following the introduction of the Ontario Fair Housing Plan, which enacted rent control for all buildings constructed after 1991, amongst other measures. Lower purpose-built rental construction starts will further reduce rental inventory and could possibly have the unintended consequence of raising market rents higher.

To give you some context of how these market dynamics translate into returns for Tricon, let's take the Selby as an example. We underwrote the project assuming average rents of $2.90 per square foot and annual rent growth of 2% to 3%. The current market is already above our rent assumptions. Moreover, our projected development yields on the Canadian projects are 5.25% to 5.75% compared to current cap rates sometimes below 4% for older product. Bringing these fundamentals and metrics together, you can see why we're excited about the opportunity for TLR Canada to earn compelling returns while providing a much-needed housing alternative. I will also remind you that purpose-built rental investments are very capital efficient from Tricon's perspective, since we aim to combine Tricon's equity co-investment with a larger equity contribution for pension fund partners, along with construction financing at currently attractive rates. This structure allows us to earn investment income, as we add value through the development phase as well as recurring rental income once the buildings are stabilized and recurring fee income from managing third-party capital.

We see significant appetite for multifamily product from third-party institutional investors and believe we have a unique opportunity to leverage our 30 years of development expertise to build a sizable Class A rental portfolio that currently does not exist in Canada.

Lastly, I would like to speak to our Private Funds and Advisory business on Slide 19. PF&A generated $6.4 million of revenue in Q2, a 6% increase from the prior year's results. Within this figure, we saw an increase in private investment vehicle fee income, offset by a slight decrease in development fees from our Johnson business. In response to current market conditions, Johnson has proactively shifted its product mix towards smaller lots, which in turn allow builders to sell more affordable product to new home buyers. This shift drove a 25% increase in the number of lots sold compared to the prior quarter, that resulted in lower development fees per lot. On a year-to-date basis, Johnson revenues were up 8% from last year. We're also pleased to announce that Johnson was the only development manager in the U.S. to have 6 communities ranked in the top 50 master-planned communities for the first half of 2017 in terms of wholesale -- home sales, as reported by RCLCO, a leader in master-planned community market research and consulting.

Over the past 12 months, we've extensively focused our efforts on principal investment opportunities, but private funds and advisory has always been a core aspect of our business. And we intend to use third-party capital to proactively grow all of our business verticals, going forward.

With that in mind, we are pleased to announce the addition of Evelyne Dube as our new Managing Director of Private Funds. As profiled on Slide 20, Evelyne is a senior executive with over 20 years of experience in real estate investment and capital raising. She's held senior business development, investor relations and fundraising positions with a number of leading European real estate private equity firms, including Forum Partners, Apollo, Citi Property Investors and (inaudible) Europe and has developed key institutional relationships throughout North America, Europe, the Middle East and Asia. Evelyne's mandate is to help us broaden our relationships with private investors and educate the private market about our investment opportunities, helping us raise third-party capital and grow our stream of recurring management fees.

Another aspect of our growth strategies are evolution towards integrating operating businesses within each of our investment verticals. This evolution requires the talents of senior executives with extensive backgrounds in operating mature, consumer-oriented businesses. In this regard, we are pleased to announce the hiring of Andy Carmody and Alexandra Blum.

Andy Carmody will join us as Managing Director and Co-Head of Tricon Housing Partners alongside Jon Ellenzweig. Andy has extensive experience in the acquisition, development and asset management of large-scale, master-planned and mixed-use communities. Most recently, he was President of the Residential Business at Crescent Communities, overseeing a $680 million portfolio of residential investments. In addition, he's a broad management background, spanning previous roles at Kitson, a large institutional land developer based in Florida; Centex, a former top 5 public home builder; and McKinsey Consulting. In his new role, Andy will oversee all aspects of THP's strategies: Stakeholder relationships, asset management, sourcing new investment opportunities and management of our investment team. A key aspect of Andy's mandate is to expand THP's master-planned communities business by leveraging our Johnson platform. Andy will be taking over from Craig Mode, who recently left us after 10 years with Tricon. Craig was a valuable member of our investment team. We would like to thank him for his meaningful contribution, and we wish them luck in his future endeavors.

We also welcome Alexandra Blum, who joins us in the role of Chief Marketing Officer. Alix comes to us from Fairmont Hotels, where she was Vice President of Global Public Relationships and part -- Global Public Relations and Partnerships, providing management, leadership and guidance in all areas of external communications and contract strategy for nearly 120 luxury hotels. As a key strategist and brand champion, Alix will be in charge of building and maintaining our brand, including aligning marketing programs with the business goals of our operating subsidiaries. Her focus initially will be on our Canadian Multifamily platform, as we launch a consumer-facing marketing strategy in conjunction with the public launch of the Selby.

With these new additions to our team, we are very well positioned to execute on our strategy of building scale and leadership in our targeted housing verticals and creating value for our shoulders and private investors by taking an integrated operating approach to each business. We also remain encouraged by the robust trends we see in the U.S. housing market as well as in the Toronto rental market.

Lastly, I would like to commend our team, not only for the progress they have made in integrating Silver Bay, but also for their strong performance across all business verticals, which is reflected in this quarter's results.

With that, I will pass the call back to Julie to take questions and will be joined by other members of our senior management team, including Jon Ellenzweig, Andrew Joyner and Kevin Baldridge.

(Operator Instructions) And your first question comes from Mark Rothschild with Canaccord.

In regards to the Silver Bay acquisition, you made a point of noting that there were no fair value gains, yet -- I mean, this portfolio. But obviously you had some strong mark-to-market in your original portfolio. Is it possible to give any guidance at all or any information for us to have some idea of the quantum of gain that we should expect? And what the timing could be? How this will flow through for the Silver Bay portfolio? Because it does appear that this could be pretty powerful.

Well, obviously, we needed to record at a cost, given we just made the acquisition. And I think as time goes on, certainly from an HPI perspective, we'll revalue at each quarter going forward, now that we have the baseline. And also as we securitize, we will be doing broker price opinions. So we're just in the process of pricing our first securitization, which largely includes Silver Bay homes. And that process will evolve as we do other securitizations or other financings, let's say, over the next 12 to 18 months. So as we do that, we expect to see a pick up, but I can't comment any more specifically than that.

But would it be entirely in one quarter that we would see all of the assets marked? Or would it take a number of quarters?

No. It would take a number of quarters.

Okay. And with the announcement today of the transaction between the -- a couple of the other SFR companies in the U.S., does this send a message as far as scale that may be needed? Or is that there's a big benefit from -- in this sector in the U.S. -- and something that we should think about for you guys, going forward, that there was continued benefit with getting larger and larger?

Well, I think it's a really exciting development for the industry, because it raises the profile of the business, and it, certainly, potentially, unlocks some value for some of the smaller players like us. It's definitely a scale business. But I think the real scale comes from G&A and corporate savings, not necessarily from property-level savings. I was interested to note that they only showed $15 million of projected property-level synergies, which is basically less than $200 per home per year, or less than 1% of revenue. So I'm not convinced at this point that by being much larger, there are substantial property level synergies, but there's definitely G&A synergies. And we've seen that with Silver Bay. And the market should start to see the benefits of our synergies from Silver Bay, as we move into 2018.

Okay. And then maybe one more question regarding the Toronto residential market and the rental apartment, in particular. You've been very bullish in your comments on that market. But you're not the only one we're seeing from -- whether it's [Retail Week] in Canada or pension funds, private equity funds in Toronto, we're thinking lot of interest in that market. Do you think maybe there is a risk that it's going to -- that it's too hot, as far as development going forward? And that there is going to be too much money flowing into this over the next few years?

No. I mean, I think relative to other construction in Toronto, including condo starts, it's a very, very small part of the market. Actually, I think what could happen over time, depending what happens with rent control, is that purpose-built multifamily development could become a larger part of all multifamily starts, as you would see in U.S. markets. But at this point, I mean, there's a lot of interest in this sector, which is obviously very good for us. We've seen a lot of interest from pension plans. But in terms of actual construction starts, there's really not a lot.

Your next question comes from Jonathan Kelcher with TD.

Just sticking with the -- or going back to, I guess, the Tricon American Homes valuation gains. When you do the securitization and get the BPO gains there, would you flow those through in that quarter?

Yes, we would.

Okay. So you should have a pretty good jump in Q3, then?

Well, I can't comment on the quantum. But it will definitely be reflected in Q3. And I would expect upside.

Okay. And then on the actual FFO that you generated for the quarter, I guess there is a big increase in the overhead, and it was there before Silver Bay closed. Is that $5.2 million? Is that a good run rate?

Yes. I think $5.2 million for 2016 is definitely a good run rate. I think we had a tough comp this quarter. And obviously, it was a bit noisy quarter with the Silver Bay acquisition. But the FFO was definitely lower this quarter, because we had to substantially ramp up our overhead in anticipation to the acquisition, the integration. But I think as time goes on, we will see it pick up.

Okay. So the 5 -- and how scalable will that $5.2 million be? Like how big a part is your $16,600 now?

Yes. It's -- I mean, we should -- like we should really start to see G&A synergies as we move forward. But it's going take us a bit of time. I think we'll start to see pickup, really, probably more in Q4. But definitely by the first half of 2018, we should see the full benefit of those synergies.

Okay. I was more asking the question as how -- like if you assume kind of $5 million an overhead is a good run rate, how big a portfolio can that support?

Sorry. I didn't understand your question. My apologies.

Jon, do you want to talk to that?

Yes. Sure. So I would say, Jon, if you look at our G&A side and you look at the senior management team, we have a team in place now that could manage a significantly larger portfolio; well, more than double what we have. I would say below that, we might add a few bodies as the portfolio grows. So I would say it's largely scalable. If we were to double the business, it wouldn't stay at $5.2 million a quarter, but it certainly wouldn't double either.

Your next question comes from Stephen MacLeod with BMO.

Just sticking with TAH. Can you talk a little bit about some of the factors that led to Silver Bay's NOI margin being so strong relative to what you bought it at? Was there anything specific in the quarter, maybe some seasonality? Or was it just something that went on in the quarter?

Yes. No. I mean, there's definitely seasonality. That's why we're cautious about how we guide on NOI margin. And then Q3, for example, tends to be a tougher quarter with the hotter summer months and HVAC repairs. But certainly, some of it was driven by really strong rent growth. And in fact, their rental growth was higher than the legacy TAH portfolio, which certainly, I think, speaks to some of the loss of lease in their portfolio that we've talked about in the past.

Okay. That's great. And can you give an update on your disposition activity for the combined portfolio. Like, have you already started that? And is suppose -- is that expected to be loaded to the front end of your synergy period? Or is it pretty evenly distributed?

Yes. Jon -- I'll let Jon answer that.

Sure. And I think -- as we noted in the script, we plan to sell approximately 1,300 homes that we acquired from Silver Bay and also have plans to sell about 300 of our pre-existing homes. So combined, those 1,600 homes, we project will be sold over an 18-month period. And we're looking at a few avenues for those dispositions; in some cases, one by one, in some case, smaller portfolios. But also, we are speaking with some larger national buyers. But our business plan shows those sales over an 18-month period.

Okay. Great. And then just finally on the THP business. With THP1 US, the investment balance is declining. And Gary, you mentioned in your script that the deal pipeline was strong. You've obviously added a new body specifically focused on capital raising. Can you talk a little bit about -- has your expectation for new projects in THP accelerated? And are you focused on separate accounts? Or still sort of smaller separate accounts? Or even some larger co-mingled funds going forward?

Yes. I mean, the focus is definitely going to be on one-off acquisitions. We've got a pretty robust pipeline, although I'd say -- and it's really geared I think more towards master-planned communities. But this stuff, I would say, is still more in the preliminary stage. But I think with our new additions, not just Evelyne Dube, who helps us on the private fund side, but Andy Carmody, who's going to help lead THP with Jon, we have more bodies to really focus on it. And I think -- so I think we've got a pretty compelling pipeline, Steve. But what we pulled the trigger on is a different story. We're trending to be very, very selective. And at this point, really, just replace what's rolling off. So THP1 US is obviously rolling off pretty quickly. Trinity Falls is providing a counterweight. As other investments start to roll off, we'll be looking at other master-planned communities or other land investments to bolster that.

Your next question comes from Dean Wilkinson with CIBC.

Congratulations, Gary. I'm sure that she's already accretive.

Absolutely, absolutely. Not accretive to sleep.

Not to sleep, yes. You'll catch that when you're older.

When you look at the invitation -- Starwood as a point of reference, how do those homes compare to sort of what you've got in the portfolio now? It looks like they've got a much higher investment in there on a per-door basis. But the rents might only be sort of $0.10 a square-foot difference from where you are. Could you sort of just comment on the --

Yes. Sure. So I mean, if you look the combined portfolio -- I took a quite look at their presentation. I mean, their average rents are above $1,600. Their average rent per foot is $0.89 or $0.90. Our average rent is about $1,250, and it's about $0.80 per foot. So they're -- we're playing in a lot of the same markets. We also have a coastal focus. We certainly have a -- maybe a bit more of a Sun Belt focus than they do. But we're largely playing in the same markets.

The difference more is that we have more of a middle-market approach. So we talked about what that means. It's really appealing to households that earn $50,000 to, let's say, $95,000 and can pay $1,000 to $1,600 a month in rent. They're the upper end of that, and we're really more smack in the middle. And it's a conscious strategy decision. Obviously, we could have bought more expensive homes. We could also buy cheaper homes. But we feel that by focusing on the middle market, we'll have lower turnover over time, and we'll be able to run a steadier business. So there's really 2 different business models. But I think the combination of Invitation and Starwood, now really -- you've got that group and AMH. It's really just focused on the upper end of the market. And we are alone focused on the middle-market, which we think prevents -- presents a very compelling opportunity for us to keep on growing.

Okay. Great. And then just -- the integration cost of the acquisition. Are all of the one-times behind you there? Or is there some residual stuff that might flow over into the next quarter?

Yes. Well, Sam is going to talk about that.

Most of the big chunks have already been incorporated. But there's a few more coming over the next few quarters, as more invoices are received and more accruals are booked. But don't expect a very large number over the next quarter or 2.

Okay. So back to a normalized amount, then, in terms of the G&A that we should expect for that?

That's correct.

And have you guys got any indicative pricing of where the securitization might end out, rolling out?

Yes. Jon will talk to that.

Yes. Sure, Dean. So as you recall, last year we priced the securitization at 3.59%. I would expect this transaction to price, plus or minus, 10 basis points of that. But recall that, that securitization was at about 72% loan to value. This one is closer to 76%. And so all in all, we're very happy with where the execution looks like it's playing out on this deal. And frankly, what's happened is that spreads have tightened but swaps have widened. So we end up at almost the same place, just 2 different factors that are driving it.

Okay. Fair enough. And you were looking of a 5-year IO?

5-year fixed IO, correct.

Okay. Perfect. And then just last one for me. In terms of the initiatives for raising capital and more third-party management, given the new hire and the focus there, what's your capacity to be able to bring new dollars in the door? And what should we be thinking about over the next 18 to 24 months on that front?

Well, it's really increased substantially, because in the past -- for example, Dave and I were largely doing it as a hobby. And now we're trying to professionally organize our private funds business, just as we have done on the public market side. So it's a great opportunity for us. We're out meeting with some of the largest private institutions. And quite frankly, those meetings are going really, really well. We'd like to bring in private capital to all of our businesses. And so it's a function now of finding new opportunities and then bringing them to private investors. I think the wild card, Dean, obviously is single family rental. Right now all the private capital we've raised we've used for development, which is very efficient, obviously, from a public company perspective. The real question is: Do we ultimately bring in private capital into single-family rental? So that's something we are continuing to explore. We have spent the last year or 2 really educating private institutions on the industry, to give us an opportunity if we want in the future to raise private capital, so we can do that.

Okay. Great. That's good color. I wish we could all have such successful hobbies.

Your next question comes from Geoff Kwan with RBC.

All my questions have been asked. But the one that I did have was -- on the (inaudible) side, I think, you've mentioned -- you mentioned in the past, Gary, that obviously you've got the focus currently in Toronto. But, say, looking out to Vancouver, that wasn't an area. And I can't remember if it was just you wanted to focus on Toronto more. When you look at Vancouver, the rents are high and have good increases, vacancy rates are low. But you do have a bit of an offset of finding real estate as well as construction cost. Just wanted to get your thoughts on that.

If we were going to do multifamily development in any other city in Canada, the next logical city would be Vancouver. And we did highlight that up front in our strategy. But at the end of the day, this is a scale business as well. And so I think at this point we are better off to just focus on Toronto and get more scale in the GTA before spreading our wings further. But certainly, as you said, I think the economics would be compelling in Vancouver. The offset to that is, you know, can we find enough sites to get scale? It's obviously a very, very competitive market from a real estate perspective. I would say in some cases more so than Toronto. At this point in time we just think we can do a lot in the GTA.

(Operator Instructions) Your next question comes from Jimmy Shan with GMP.

Just on the acquisition case, TAH, you mentioned you intend to resume the program early next year. How do plan to finance these acquisitions? Also you made reference to potentially seeing some portfolios. I wonder if you could talk about what you're seeing out there in terms of size, portfolios and pricing points.

Yes. So I think -- looking ahead to 2018, we will continue our normal pace of acquisitions, which is roughly 400 to 500 a quarter. We can finance that through internal cash flow, potentially from any proceeds we earn -- also from refinancing existing debt. So I think that will largely be financed organically. And in terms of -- there have -- actually, since Silver Bay, we -- it certainly has increased or raised our own profile, and we've seen quite a few portfolios. There are probably 4 to 6 relatively large portfolios out there from, call it, 1,000 to 3,000 homes. The issue with many of them is that they may be cats and dogs in terms of where we want to concentrate our portfolio. In some cases, the pricing expectations from the seller are too high. But ultimately those portfolios are going to move. So if those type of things were to happen, it certainly would allow us to go a little bit faster. And certainly, if we were able to buy smaller portfolios -- there's lots of groups out there that own 50 or 100 homes. That's another way to accelerate the growth. But our business plan just assumes onesie-twosie acquisition plan.

Okay. And these portfolios usually would come at a bit of a premium, in terms of the cap rate? Or how do you --

Yes. There's definitely a premium. For example, with Silver Bay, we obviously paid a bit of a premium compared to where we would buy that one-by-one in the market. But obviously it takes time to buy one-by-one, a 3,000-home portfolio. So it's a trade-off between paying a -- I would say a fairly slight premium to taking the time to get a higher yield, you know, one at a time. So -- but we are typically seeing premiums. And certainly, the GI portfolio that sold -- took -- or I guess now Starwood, certainly went at a premium.

Okay. Just going back to the Colony Starwood Invitation Homes announcement. So you certainly point out to the fact that the property synergy doesn't seem to be that, at least that meaningful. I wondered if you had any thoughts as to why they did go ahead with the merger. And whether there's any broader implications? How we should think about that transaction to the industry?

Well, I -- like I said -- I mean, I just said up front, I think it's great for the industry. It raises the profile. It potentially unlocks value for some of the smaller players, like us. It's just really good.

I think single-family rental now will be viewed in the same class as some of the more established REIT food groups. So I just think it's a very, very positive thing. I can only surmise of what the expectations -- or what each group was looking for. The cynic in me would say that Blackstone was really just looking for a way to accelerate their monetization. This thought price hasn't increased a lot since they went public. Maybe it was -- it was fully valued, and maybe they feel here with all the G&A synergies, which are pretty substantial, they're going to see a higher price, and that will be able to make it easier for them to obviously exit their position.

And I think with respect to Starwood, I never -- my first opinion was I never saw Colony or Starwood as long-term players. The initial investments came from private funds. And so it just seemed at some point that those companies would go away. I'm surprised at how quickly it's happened. But I think on the whole, it's a real positive.

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

Thank you, Julie. 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 2017.

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