Tricon Residential REIT: Opportunity Follows Fear (NYSE:TCN)

For Rent sign in front of new house

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Back in March, I published a bullish perspective on Tricon Residential (NYSE:TCN) and at the same time confessed that I had just, reluctantly, sold my shares due to a number of macroeconomic concerns. I fretted about inflation, Ukraine, and that the Fed would raise interest rates later that week (The Fed did raise rates and hiked by another 75 BPs on June 15!). All of these factors have wreaked havoc on markets and TCN shares in particular.

TCN share price

S&P Capital IQ

A recent report from John Burns Real Estate Consulting, however, indicates that the 35% price decline has taken TCN into oversold territory and that the SFR sector might actually benefit from the issues we all fear.

National cost of owning vs renting single-family starter home

John Burns Real Estate Consulting

According to the report, the cost of owning vs renting went from near parity in April 2021 to owning being about $839 per month more expensive in April 2022. The cost drivers here are mortgage rates rising from ~3% a year ago to ~6% today (the Fed). And while over the same period Single Family Rents are up nearly double digits (Inflation), the rent escalation is modest relative to the rise in mortgage payments.

Cost to own vs burns single family rent index

John Burns Real Estate Consulting

When you acknowledge that consumers are also facing crippling price increases at the grocery store and gas pump (Ukraine/Inflation), it becomes clear that many prospective home buyers are simply being priced out of home ownership. Higher interest rates and inflation reduce home purchase affordability, but the appeal of living in a single-family home remains strong: would-be home buyers will join the already substantial ranks of home renters. Addressing this enhanced demand is where institutional landlords like Tricon, American Homes 4 Rent (AMH), and Invitation Homes (INVH) try to bridge the gap.

If you look at TCN’s top 10 markets, you can see that they are already heavily exposed in the price advantaged cities like Atlanta, Tampa, Phoenix, and Charlotte. That huge cost to own vs. rent difference gives TCN a lot of head room for further rent increases in both renewals and new leases.

Tricon Residential - targeting the middle-market demographic and high-growth sun belt states

Tricon

Is TCN Now Opportunistically Priced?

With share prices falling from the low $16 range in March to below $10 today, TCN is obviously cheaper. The real question, however, is whether purchasing Tricon Residential at $10 today will produce outsized investment returns going forward.

In its June 2022 Investor Presentation, TCN describes where they are today, their ambitious growth agenda, and how they plan to achieve it. Within the presentation, management provides updated 2022 earnings guidance that accommodates the anticipation of rising rental receipts being offset by higher interest rates, property taxes, and inflationary cost pressures.

Tricon Residential 2022 guidance

Tricon

At the $0.62 midpoint core FFO/share guidance, a $10 share price translates to 16.1x 2022 FFO. This compares to consensus estimates of 21.5x and 20.3x for AMH and INVH, respectively.

Looking further out, TCN is posturing for significant portfolio growth (from 31,000 homes today to >50,000 in 2024) and the related expansion of its asset management fee income. They target a 15% FFO/share CAGR over the period.

Tricon Residential Performance Dashboard

Tricon

While these goals are ambitious, I do not see CEO Gary Berman as an optimistic naif. In a March 60 Minutes interview with Lesley Stahl and again at REITweek in June, he deftly addressed all the opportunities and difficulties the institutional SFR industry faces today. I am convinced TCN has an achievable plan.

The Takeaway

Inflation, rising interest rates, the war in Ukraine and myriad other problems will make all of business difficult to forecast in coming quarters. Recent reporting has indicated that Single Family Rental should be resilient in this environment. TCN looks oversold. I’m happily long again.

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