Tricon Residential Inc (TCN) 2017 Q3 法說會逐字稿

Good morning, my name is Megan and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Capital's third quarter analyst call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Wojtek Nowak, Director of Corporate Finance and Investor Relations, you may begin your conference.

Thank you Meg, and good morning, everyone and thank you for joining us to discuss Tricon's results for the 3 and 9 months ended September 30, 2017, 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 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, 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.

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 continued to deliver strong growth in the third quarter of 2017 with assets under management increasing by 51% year-over-year to $4.7 billion, largely as a result of the Silver Bay acquisition, which closed in May. During the third quarter, assets under management increased by $109 million primarily driven by fair value gains at Tricon American Homes and advancing construction on multi-family development projects at Tricon Luxury Residences.

Moving on to our financial results on Slide 6, on an IFRS basis, we reported diluted earnings per share of $0.29 up 71% compared to $0.17 in the same quarter last year. The biggest driver of this increase was Tricon American Homes investment income, which benefited from the Silver Bay acquisition as well as strong fair value gain. This was partially offset by $12.3 million of transaction cost at Tricon American Homes largely related to the securitization transaction completed in August. I would also like to point out that this quarter's results also includes a gain of [$13.5 million] related to a change in the fair value of the derivative embedded in our convertible debentures.

This is why on Slide 7, we present the bridge to adjusted income metrics to show a more normalized view of our performance by removing transaction costs and change in fair value derivatives as well as other nonrecurring and noncash items. On an adjusted basis, we reported diluted earnings per share of $0.37, a record result for Tricon, which represents 118% increase compared to $0.17 reported in prior year.

Looking deeper into these metrics, you could see on Slide 8 that our adjusted EBITDA almost tripled year-over-year to $95.8 million. All verticals contributed to the success this quarter, but clearly TAH stands out given the exceptional performance. TAH's adjusted EBITDA of $93 million included 2 main components. The first was net operating income of $35.9 million, an increase of 158% year-over-year as a result of including the first full quarter of Silver Bay into our earnings as well as strong rental growth across the portfolio. The second component was the fair value gain of $63 million, driven by robust home price appreciation. This fair value gain is the product of home price appreciation of 1.2% for the quarter or 4.8% annualized, based on our Home Price Index methodology. In addition, BPOs completed [up] on almost 2,800 homes. These BPOs were related to 2017-1 securitization transaction completed in August and included a large portion of the Silver Bay homes. Let me remind everyone that these homes have been held at their acquisition cost basis and that BPOs represent their updated fair value assessment since the acquisition.

In our other business verticals, TLC saw solid growth related to an increase in the number of parks compared to last year, as well as higher rents and occupancy. This was offset by lower adjusted EBITDA from Tricon Housing Partners as distributions were made and investment balance declined.

On the expense side, compensation expense was higher this quarter than the corresponding quarter in 2016 as our team has expanded to accommodate growth of the company and we accrued a larger annual incentive plan expense. I will remind you that our policy is to accrue 15% of adjusted base EBITDA for the company-wide annual incentive plan. This is an accrual that is adjusted in Q4 for each year based on actual bonuses paid to employees for the year, which are generally based on company, departmental and individual performance.

Lastly, I would note that our interest expense increased this year mainly as a result of the incremental debt and convertible debenture used to finance the Silver Bay acquisition. Nonetheless, the solid growth in adjusted EBITDA translated into strong growth in adjusted net income to $56.9 million this quarter from $21 million in the prior year period, representing 171% increase. Let's shift the focus now to our balance sheet on Slide 9. Our corporate liquidity position remained strong with $262 million available under our corporate revolving credit facility. In addition, as discussed last quarter, we have very good visibility into $400 million to $500 million of near-term cash flows intended to help reduce aggregate leverage of Tricon. The first initiative occurred subsequent to quarter-end with the disposition of noncore homes at Tricon American Homes, which we successfully achieved ahead of schedule with the recent portfolio sale of 1,523 noncore homes for total proceeds of $153 million. The other initiatives, including monetization of TLC and TLR U.S. as well as cash flow generation from THP remain on track. At the same time, we are in the process of implementing a more balanced capital structure at TAH with the objective of reducing Tricon American Homes cost of debt over the long-term, laddering its maturities and diversifying the sources of financing.

Let me give you an update on the progress we've made so far as seen on Slide 10. First, in August, TAH completed a $463 million securitization transaction at a fixed rate of 3.5% over a 5-year term. Second, in October, TAH repaid its 2015-1 securitization releasing 3,200 homes from the collateral pool in order to optimize the collateral pools for future financing vehicles and access the embedded home price appreciation into these homes. Third, to facilitate the repayment of 2015-1, TAH upsized its existing warehouse credit facility to $500 million and extended the maturity date to October 2019 with the interest rate remaining unchanged at LIBOR plus [300]. And lastly, also in October, TAH entered into a new $348 million 5-year term loan with Morgan Stanley at a floating rate of LIBOR plus [200]. With these initiatives, TAH has paid down its Silver Bay acquisition facility from $1.2 billion to $370 million and is currently evaluating a number of options to refinance the remaining balances on the acquisition and warehouse credit facilities. Needless to say, TAH is on track to complete this refinancing plan by mid-2018, which is ahead of expectations. I will now turn the call over to Gary to provide additional insights into our business verticals.

Thank you, Wissam. The third quarter was a period of record results for Tricon. Let's get into the specifics of each vertical starting with Tricon Housing Partners or THP, our land and homebuilding business on Slide 12. THP generated investment income of $4.7 million this quarter compared to $6.1 million in the prior year period. The variance was largely driven by lower income from THP1 U.S., a significant cash distributions were made throughout 2016 and 2017, which in turn reduced the outstanding investment balance. The second largest variance was in THP2 U.S., which post an exceptionally strong quarter last year as a result of positive valuation revisions for 2 multi-family assets within the fund.

For the first 9 months of the year, our THP generated investment income of [$17 million], a 3% year-over-year decline, which reflects the harvesting of THP1 U.S., although much of this has been offset by the addition of Trinity Falls as a new investment in mid-2016. Year-to-date investment income translates to a 9.3% annualized net return on invested capital, which is in line with our expectation of a 9% to 11% return for the full year. Please note that the return numbers, we highlight here are net of asset management fees, development fees and performance fees paid to our private funds and advisory business. So in many cases the gross returns on the investments are substantially higher.

If we step back to consider the industry dynamics affecting THP, we would characterize the current home building market as one of moderate and steady growth where the achievable investment returns are generally at the lower end of our expectations. In a broad sense, what we're seeing is a demand-supply imbalance as depicted on Slide 13. In our view, there is a healthy demand for new housing increasingly driven by the so-called millennial demographic cohort, which we define as individuals born between 1980 and 2000, whose oldest members are in their late 30s and are on the cusp of forming new households and families. With 92 million members, this cohort is larger than the boomers that preceded then and should be a key driver of demand for smaller affordable starter homes.

On the supply side, we are facing industry-wide problem of extended cycle times to build homes and more challenging land economics. One underlying issue is the shortage of skilled labor as many construction workers who lost their jobs during the great recession permanently shifted to other industries or in the case of Mexican labor have returned to their homeland. Millennial seem reluctant to enter the construction field even at higher wages which exasperates the labor shortage even more.

The second major issue is the rising regulatory cost in new construction, including zoning costs, which increased by approximately $20,000 per home over the past 5 years, according to the National Association of Home Builders. These factors are constraining the supply of new homes. If you look at the building intensity chart on Slide 13, housing starts relative to the U.S. population remain low by historical norms and after years of recovery are still no higher than the 1991 recession. At the same time, escalating costs are causing the average price of a new home to move up steadily. This makes it difficult to deliver the type of entry-level housing product that is in high demand by the millennial buyer.

At the other end of the spectrum. We have the active- adult market, which is benefiting from robust demand from the aging baby boomers. However, this segment has attracted many builders in recent years, resulting in a broad range of competing products that make it difficult to drive absorption in individual communities such as our [shape] Trilogy projects. In a sense, the active-adult market has become a victim of its own success. The reduced absorption coupled with rising cost and elongated timelines is eroding returns and may impact our ability to earn performance fees on these particular active-adult projects. THP is doing its best to mitigate these pressures by focusing on master planned communities where we have more control over product delivery and segmentation.

Under the new leadership of Andy Carmody, THP is refreshing its pipeline of opportunities and is aiming to leverage the Johnson platform as the key driver of future growth. Master plans typically allow for more flexibility in tailoring the product mix to service the first-time homebuyer, as well as the active-adult customer. They also have a competitive advantage in attracting labor by providing more consistent employment for the trades. And lastly, there are amenities and diverse builder programs made for compelling offering relative to otherwise lifestyle options. On that note, I'd like to touch upon the resilient performance of our master planned communities in Houston. Given the recent impact of Hurricane Harvey both Cross Creek Ranch and Grand Central Park , which are principal investments for THP in Houston, reported no material flooding or damage on site. While construction activity and sales efforts were temporarily on hold during the storm, buyer traffic and home sales resumed at regular levels within 2 weeks.

Let's turn to Tricon American Homes, our single family rental business on Slide 14. TAH achieved exceptionally strong operational results in Q3 with core FFO of $10.1 million up 87% from the prior-year mainly as a result of the inclusion of the Silver Bay homes and the realization of some of the operational synergies we identified at the time of the acquisition. Let me share some of the highlights with you. TAH reported net operating income of $ 36.9 million excluding the impact of recent hurricanes, which represented 166% increase year-over-year. This is driven by 153% increase in revenues, mainly as a result of the full quarter inclusion of Silver Bay, as well as underlying rent growth of 4.6% including 4% on renewals, and 5.6% on new move-ins. These rent growth metric speak to the level of demand and quality of TAH homes , as well as the ability to increase rents on certain Silver Bay homes which we believe were rented at below market rates. TAH also achieved strong portfolio occupancy of 96.1% despite temporary pressures on vacancy. As a result of recent hurricanes in markets such as Houston. Excluding the impact of hurricanes, TAH's NOI margin was 61.6% in Q3, which we view is quite healthy, given the elevated HVAC expenses that occur in Q3, as a result of the hot summer months in the Sun Belt.

On a year-to-date basis, the NOI margin stands at 61.3% and is tracking above our full-year projection of 60%, leaving us with an upward bias on margin and strong rent growth and internalization driven improvements in repairs and maintenance take hold. As noted in our press release last month, we were fortunate that Hurricanes Harvey and Irma resulted in the meaningful damage to only 43 out of 8,300 homes in the affected areas. Based on our assessment, we estimate total property damage of $ 4.1 million, of which $ 1 million was expensed in the quarter for minor damage. We expect TAH to incur an additional $ 3.1 million of hurricane-related capital expenditures in the [next 2] quarters. I will remind you that TAH's homes are insured under property and casualty insurance policies, which cover wind and flood damage, as well as business interruption cost and all the amounts I have just mentioned are before taking into account any potential insurance proceeds.

Turning to Slide 15, we present the same home portfolio metrics for TAH, which includes 4,424 rental homes that have been stabilized for at least 90 days prior to start of the prior year. Let me walk you through the highlights.

TAH same portfolio generated NOI growth of 11.9% year-over-year, a very strong result. This was driven by same home revenue growth of 11% reflecting an occupancy increase of 230 basis points and blended rent growth of 4.6%. NOI margin increased to 58.6% compared to 58.1% last year. The biggest contributor to margin expansion was very strong top line growth, which more than offset the growth in expenses and particularly property taxes, which largely increase in accordance with home price appreciation. Repair maintenance and turnover expense was normally improved as a percent of revenue. This is partly driven by lower turnover of 29.2% this quarter compared to 34.1% in the prior year, which speaks to the robust demand for TAH homes and effective screening of potential residents to attract long-term middle market renters. With that said, R&M was still relatively high as a percentage of revenue in Q3 given the seasonal factors I mentioned earlier. Please note that this quarter's reported same home NOI margin excludes approximately $0.3 million of nonrecurring expenses related to the hurricanes.

On Slide 16, I would like to provide you with additional color on TAH's recent sale of noncore homes. On October 24, TAH completed the sale of 1,523 homes to a national single-family rental operator, including 1,247 homes acquired from Silver Bay. The homes were sold for $153 million, reflecting our effective acquisition cost basis and representing a cap rate of approximately 6% based on in-place NOI. The purpose of this disposition was not only to reduce debt, but also to optimize the rental portfolio by removing homes we deemed as noncore to TAH's strategy.

The disposition portfolio included homes in 3 general categories. The first is homes in Tucson, Arizona and Columbus, Ohio, which are non-core markets for TAH. We believe these markets have slower population, employment growth trends in TAH's target Sun Belt markets. As a result of the disposition, TAH moves from 18 markets to 16 core markets.

The second category is homes with rents below $1,000 per month, which typically fall outside of TAH's, middle market strategy. You can see on Slide 16, the average rent of this [post] homes was $1,075 per month compared to our overall portfolio average rent of $ 1,256 per month in Q3. On a pro forma basis after the disposition, our remaining portfolios in average rent of $ 1,274 per month, representing a 1.4% increase over the Q3 reported metric.

The third category of noncore homes includes homes that are geographic outliers within TAH's core markets. These homes may be located on the fringe of cities, making them less efficient to service one less desirable neighborhoods. With the sale of the noncore homes behind us, the TAH team can now turns it attention towards acquisitions heading into 2018. In Q1, we expect to resume an acquisition pace of 400 to 500 homes per quarter offset to a small extent by continued pruning and refinement of the portfolio.

Turning to Slide 17, TAH will focus on 10 growth markets where homes can be acquired at attractive cap rates of approximately 6% where we see opportunities to drive operating efficiency to increase scale. We believe the single-family rental industry [is in stormy] early innings of consolidating and professionalizing a highly fragmented universe of homes run by mom-and-pop operators and we see tremendous opportunities for growth in this vertical.

As I mentioned in my earlier remarks, there's an acute shortage of entry-level housing in the U.S. and TAH is offering as part of the solution as it provides professionally managed starter homes for workforce families. Let's move onto Tricon Lifestyle Communities. Our manufactured housing land-lease business. In Q3 2017, TLC remain focused on asset management, working through the capital expenditure programs at existing parks and repositioning the communities to drive higher occupancy and rent. As you can see on Slide 18, TLC completed the capital expenditure program at 6 parks and the remaining 8 parks are in advanced stages of their enhancement programs. We see this value- added strategy at work and we isolate the operating results with 11 parks on since of September of last year. For these parks, occupancy has gone up by 4.1% and average monthly rent increased by 3.6% in the past 12 months. These operating results will position us well to exit this vertical next year, as part of our simplification strategy. Turning to Tricon Luxury Residences, our multi-family development and rental platform. Progress continued on the 3 Canadian and 2 U.S. projects that are currently under development. On Slide 19, 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 for completion by late 2018 with stabilization in mid- 2019. 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 Street is tracking ahead of schedule, and is expected to start lease-up in the second half of 2018.

Our second development of 57 Spadina located in Toronto's entertainment district, the [king] of Spadina is scheduled to start construction in early 2018. Our third development in Scrivener Square in Toronto's Rosedale/Summerhill neighborhood remains in the design stage with the formal zoning application submitted in Q2. As we think about the growth opportunities for the TLR business vertical, we are focused on expanding in Canada where multi-family fundamentals remain very compelling, in particular, the market in Toronto continues to experience rapidly rising rents, declining vacancy rates and a lack of Class A rental product.

If you turn to Slide 20, you can see that the average rent in the City of Toronto increased by 11% year-over-year to $3.44 per square foot in Q3 2017 for condo rentals. And the notes that are specific to our projects, the rents have increased substantially and are ahead of our underwritten assumptions for the 3 projects. Higher rents are being driven by ultra- low vacancy, which is almost nonexistent for purpose-built rentals, at 0.2% compared to 0.6% the previous year, while vacancy for condo rentals is currently around 1%.

These metrics underscore our view that Toronto is a very attractive market for TLR to expand in. While on the topic of multi-family rental, I would like to briefly touch upon the new mortgage lending rules that were introduced last year -- last month. We believe that the new lending restrictions will make it more difficult for first-time home buyers to qualify for a mortgage and will ultimately bolster the demand for purposeful rental product. When coupled with the lack of rental supply, this dynamic could have the unintended consequences of raising rents even further for initial lease-up of new buildings, as well as for new move-ins.

Having said this, the new rules do not appear to be hindering new condo development in Toronto, resulting in a very competitive land market. We are being selective in our acquisition process and are currently tracking an active pipeline including 3 to 5 large opportunities that would very quickly give us a path to meaningful scale. When we combine the strong market fundamentals, our pipeline for new investments in our in-house expertise and multi-family development, you can see why we're excited about growing the TLR platform in Toronto and on a very unique position 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 21. PF&A generated $6 million of revenue in Q3, a 15% decline from the prior year's results. Within this figure, we saw a decrease in asset management fees as our legacy funds continue to mature and distribute capital leading to a reduction in the investment balance. We also saw a decrease in development fees from our Johnson business as a result of a shift in product mix towards smaller lots, notwithstanding a 3% increase in the number of lots sold. We often look at third party home sales as an indicator of consumer demand for Johnson communities. Third party home sales were down 8% in Q3 compared to the prior year as the hurricane activity during the quarter had a temporary impact on homebuilder sales. On a year-to-date basis, however, third party sales were up a healthy 14% over last year, which speaks to the quality of the product offering and the relative strength of the Dallas and Houston housing markets. Johnson represents a key growth platform for Tricon that we intend to use opportunistically to acquire and develop master planned communities, thereby transforming THP into more of an MPC business over time, while generating fee revenue for Johnson. I'd like to conclude with Slide 22, which gives you a holistic view of how we think about our diversified housing brand and how we structure investments. Tricon aims to be a one-stop shop for exposure to residential real estate for both public and private investors. We do this through complementary business verticals [and expand the] risk spectrum from opportunistic land investments in THP to value add investments in TLR which have a development and rental income component to highly predictable both rental income streams in TAH and TLC, which we view is core real estate investments.

In each of these verticals, we aim to generate 15% to 20% annual returns, although we use different tactics and leverage ratios to achieve our desired return targets. With a renewed focus on achieving scale and leadership in all our businesses, we made the decision to exit TLC, but believe the consistent income profile and defensive nature of manufactured housing communities can be replicated for investors and our single-family rental business. Lastly, it remains our intent to bring third party capital into all of our verticals to leverage our own equity and generate contractual fee income. We've been successful to-date in raising third party capital for development verticals THP and TLR and are hopeful that we will be able to do the same into TAH one day as well.

And so as we look forward to growing the company, we see tremendous opportunity to add scale in our existing core verticals by reinvesting our cash flow and partnering with third party investors and we are encouraged by the health of the North American economy and housing market to serve as a backdrop for all of our investments. With that, I will pass the call back to Megan 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) Our first question comes from Jonathan Kelcher with TD Securities.

First on the valuation gains you took at TAH. Are you now fully caught up on the Silver Bay portfolio? Or is there more to come there over the next couple of quarters?

Well, I mean, first of all, it's very difficult to predict the BPO process as we go forward, but remember, we only included about 2,700 homes or 2,800 homes in total and the vast majority of those were Silver Bay. So look at it another way, the vast -- the majority of the Silver Bay homes have yet to go through that process. So from what we see, we should expect more gains, but again it's hard to say.

Would that -- I guess with you doing another securitization over the near term would bunch of those Silver Bay homes will go through the process in Q1 maybe Q4, Q1?

Yes, I mean, yes, we're looking to do probably another 2 securitizations, which would happen by mid- 2018. So that's where you -- if there was a BPO pick up, that's where you would see it.

And then just secondly on the margins in that business, obviously doing better than you thought. How much room do you think you have to grow that? How high do you think you can get, I guess, annual margins in that business?

Look I would just say there's an upward bias, because obviously the demand for homes remains incredibly strong. So we're continue to see very strong rent growth. We think there' s loss to lease in the Silver Bay portfolio, which will continue to drive that and I think we can be better on the expense side. And I think, the other thing I would say is that property taxes have continued to increase at a very high rate, in some cases higher than home price appreciation lately as a catchup. And so that's really been dragging down the margin. So I think, if property taxes come back more in line, we should have a stronger upward bias in the margin. I can't say Jon, whether we can get it to [62 or 65]. I really would be guessing, but I would say there's an upward bias.

Your next question comes from the line of Stephen MacLeod with BMO Capital Markets.

I just wanted to follow-up on just on some of your commentary around the THP business, which sounded a bit more cautious maybe than previous quarters. So I'm just curious in terms of your outlook and the supply-demand situation that you put forth, like is that something that's new or is that kind of creeping into your thinking over the last few quarters as you think about the THP business?

I mean it's not new, it's been happening for the better part of the year and we see strong demand. So the issue is on the demand side, it's more that we're having trouble supplying the homes. And as I said in the comments, we're seeing elongated cycle times, real meaningful labor pressures, which may be permanent. And so we think the market should understand that. And so what that means is that when we look at our cash flow, discounted cash flow analysis or appraisals, because things are taking longer, it will pressure our returns. And so, we're just highlighting that for the market and I would expect to see some pressure in Q4 when we [give] our appraisals. I don't -- it's nothing material on given the overall business, but it's just something that we did want to highlight. And the other thing I would say is that in some cases, it appears that the analyst community is not fully realizing how much capital we've distributed for THP1 U.S. about $130 million over the last 2 years and remember, we paid $260 million for the acquisition. So you do need to take into account that those investment balances are coming down fairly substantially and that will impact the amount of investment income.

Okay. And do you see that returns are to getting -- dipping below your 9% to 11% target?

No. They are just on the lower end of -- I mean 9% and 11% is the guidelines we give over course of the year. Remember, it can be -- it can ebb and flow from quarter- to- quarter, but it's 9% and 11% over a full-year period. And we typically see more of a pickup in the fourth quarter, more at the higher end of that range. But I'm not sure we're going to see that this year. That's what we're really foreshadowing. But the returns, the returns are still healthy. I just think when we look at new investment, Steve, we have to take into account the fact that it's taking longer to build homes -- and then we have to be careful about when we underwrite. But we are looking at a kind of a new pipeline of deals. I don't know if we are going to land them. But some exciting deals where we continue to think we can hit our returns. But I think the returns are more, if we're targeting 15% to 20% unlevered returns that probably on the lower end of that 15% and 20% range than where they were, let's say, 2 or 3 years ago.

Right, okay that's helpful. And then when you look at the TAH business, you will be resuming your home buying program again in the Q1. What's your target markets when you think about where to add homes?

Well, we have a slide in the presentation, where we outlined 10 markets and they're largely Southeast and Texas markets, where we see lots of opportunity, still very attractive cap rates of roughly 6%, areas where we think we need more scale. Examples would be, Jacksonville and Orlando. Our markets where, we need more scale and want to ramp-up. So it's broad over 10 markets, but we don't think there was any shortage of acquisition opportunity, and we hope to be buying 400 to 500 homes per quarter going forward.

Your next question comes from Geoff Kwan with RBC Capital Markets.

So on the TAH side, you mentioned just now where you're looking to be more active. But are there any new cities that you guys are considering or you think you've got enough runway in the cities that you're in and where you see the opportunities?

There is other markets we like to be in. I could think of Tennessee for example. There is probably a smattering in markets that would make sense to enter. But I think, the key thing for right now, especially with the [1Z, 2Z] acquisition process, it's just a focus on the markets we're in and continue to build scale on those existing markets. If a portfolio came along, that would allow us let's say, to get into Nashville, that would be very interesting to us. But it may not make sense International in the 1Z, 2Z acquisition process. So that's typically the way we think about it.

Okay, and just the other question I had was with the cash flow that you're generating. I'm just thinking about capital allocation here. How you're thinking about versus your various verticals, versus the buyback, versus dividends?

Well we're generating -- we're going to generating a large amount of cash flow. A lot of that coming from THP. Some of that THP cash flow will definitely be reinvested back into that business, as we see opportunities, and we tend to be opportunistic there. So if a great opportunity and irreplaceable piece of land comes up, we're going to jump on it. But then obviously, the substantial cash flow, this is going to come from the exits of the TLC and the TLR U.S. businesses, that's largely going to be used to pay down debt, as we previously announced. And then, I think about obviously we've been buying back stock, we've been doing a little bit of that. We think that makes sense, when we feel the stocks materially undervalued and -- but I think being a growth company, the vast majority of our capital is going to be allocated over time to growth, not to buybacks, because we believe over time the markets will be efficient, will reward us for the value we're adding. And then I think with respect to dividends, Geoff, we don't have any specific policy. But I think over time, if the company is doing well, we do believe in raising dividends and rewarding our shareholders.

Okay. So if I understand you right. So outside of using the cash flow that you're targeting to delever TAH and obviously, you've got some lines of businesses that you are exiting. Is it fair to say that the focus on your business lines is probably gearing more towards TAH and on the TLR side?

Yes, definitely TAH. I mean TAH is a scale business, and we've got cash that we're generating internally and we think through repatriation of equity in future securitizations, that we can use to continue to fund TAH organically. And so again, if you think about it 400 to 500 homes per quarter, it could be up to 2,000 homes per year that we're going to fund organically. So that's a big use of cash. We're very excited about the opportunities in TLR Canada, but it's not a particularly capital-intensive business, because we're partnering with third party investors. So we do want to allocate a lot of capital to that business, but maybe not a lot from Tricon. That's the way we think of it. And THP, again, we'll be opportunistic -- if a big opportunity comes up, we'll look to pounce on it and we clearly look to partner with third party investors, if that makes sense.

Your final question comes from the line of Jimmy Shan with JMP Securities.

Thanks. So just on the TLR business. So Gary, you did mention [3 to 5] large opportunities that you're looking at in Toronto. I wondered if you could talk a little bit about that, maybe the size -- size- wise and given that land is indeed very competitive, but rent has been growing. I wonder, how would the development yield on these projects compare with the ones that you have right now on the go?

Yes, it's a very, very competitive land market. I mean the condo development industry is in an absolute frenzy right now. But what we do find is that there's a number of landlords that are really looking for rental solutions, maybe because they want to partner with us or they want to own this long-term. And so that gives us competitive advantage to look at those type of properties, and I would characterize of our pipeline, a good amount of that is in opportunities, which were really specific only to purpose-built rental. And the other thing I would say is when we're looking at sites that have a larger retail component or commercial component, that definitely gives us an advantage over a typical condo developer, and those are cases where potentially we could partner with other REITs or commercial developers that have an expertise on that side, and again, it gives us a competitive advantage over your bread and butter condo developer. In terms of yields, we continue to look for development yields in the -- I would say the 5% untrended range, Jimmy, 6% if you factor in rent inflation. I would say that on our existing deals, I mean, look it still early days and we haven't even got to the lease-up yet at the Selby. But my guess is that on those projects because rents have moved up a lot, we'll probably see development yields at the upper end of our underwritten range. But on new deals going forward, we would underwrite and closer to a 5% untrended development yield.

And that's with the commercial mix use component to it?

Yes. There could be. Again, it may not be a major component, but if it's enough, it can definitely drive the economics to our favor, given the the cap rate you would put on the commercial income.

Okay. And you would expect these 3 to 5 large opportunities to materialize over the course of the next year. I Presume?

Yes, I would say over the next 6 months. But in all cases, I mean, all land today basically run through a marketed process. It's very, very difficult to do anything off-market. So again, we don't know it will be successful, but we're excited about these opportunities, and if we're able to land some of them, it will be very meaningful to our pipeline.

Okay. And then just 1 question on the TAH business. Obviously, the operating metrics are still very, very strong and there was an article though recently about how home ownership rate in the U.S. nationally has picked up a little bit, and I wondered if you guys are now starting to track reasons for move-outs and whether you're seeing any discernible trend there that would support that?

Well remember, we built our business to really have a very balanced approach. And so we think the major demographics are just going to take place going forward is the millennial cohort. The more affluent ones are going to continue to buy homes and we'll service them through THP, and the workforce are going to rent homes through landlords like TAH. I think with respect to TAH, we have a very sustainable business model that we're targeting more in the middle market. And in this case, either because residents don't have a down payment or maybe they have credit issues , they're less likely to move into home ownership. And so if we look at our turnover compared to our peers, it's much, much lower. I think, which gives us a lot of confidence, and I think if we look at our own survey results, the percent that are moving out to buy new homes, probably only rent 15%, which is again is much, much lower than what our larger peers with higher rental price points are reporting. So again, that's by design, and then we do think that -- on the ownership side, it is getting more favorable, lending requirements are loosening, but you still need a significant down payment. And so I think in a rising economy, that we're seeing right now, actually both of our businesses are going to do very well.

Okay, and that 15% has stayed at that level for some time now, it's been relatively stable?

Correct.

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

Thank you. Megan. I would like to thank all of you on the call for your participation and we look forward to speaking to you in March when we discuss our fourth quarter and full year results for 2017.

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