Tricon Capital Group's (TCNGF) CEO Gary Berman on Q4 2016 Results - Earnings Call Transcript

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Tricon Capital Group Inc. (OTC:TCNGF) Q4 2016 Earnings Conference Call February 23, 2017 10:00 AM ET

Executives

Wojtek Nowak - Director of Corporate Finance and Investor Relations

Wissam Francis - CFO

Gary Berman - President and CEO

Analysts

Geoffrey Kwan - RBC Capital Markets

Jimmy Khing Shan - GMP Securities

Dean Wilkinson - CIBC

Mark Rothschild - Canaccord Genuity

Stephen MacLeod - BMO Capital Markets

Keith Lam - CIBC Asset Management

Operator

Good morning. My name is Tashan and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tricon Capital Group Inc. Fourth Quarter and Year-End 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] Thank you.

I would now like to turn the call over to Wojtek Nowak. The floor is yours.

Wojtek Nowak

Thank you, Tashan. Good morning, everyone, and thank you for joining us to discuss Tricon's results for the three and 12 months ended December 31, 2016, which were shared in the news release we distributed yesterday.

I would like to remind you that our remarks and answers to your questions may contain forward-looking statements and information. This information is subject to risks and uncertainties that may cause actual events or results to differ materially. For more information, please refer to our most recent Management'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 which we have posted on our Web-site. If you haven't already accessed it, it will be a useful tool to help you follow along during the call. You can find the presentation in the Investor Information section of triconcapital.com, under Events & Presentations.

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

Wissam Francis

Thank you, Wojtek, and good morning everyone. Our prepared remarks this morning will include highlights of our Q4 and full year 2016 results, and a discussion of operating highlights and growth initiatives in our various business verticals.

Tricon continued to deliver strong growth in 2016. As you can see on Slide 5, assets under management have increased year-over-year by 12% to $3 billion, or 4 billion in Canadian dollars. Let's talk about what changed over the course of 2016.

In Tricon Housing Partners, our land and homebuilding investment vertical assets under management increased by $92 million, primarily as a result of new investment in Trinity Falls, and THP US SP1, a new separate account investment, as well as fair value gains in THP co-investments.

In Tricon American Homes, our single-family rental platform AUM increased by $205 million. Approximately $152 million is related to the acquisition of 948 homes and the disposition of 376 homes, as well as our renovation of new homes and the buyout of the minority interests owned by our initial operating partners. The remaining $53 million is related to fair value gains, driven by 5% home price appreciation recorded during the year.

In Tricon Lifestyle Communities, our manufactured housing land lease business assets under management increased by $80 million, mainly as a result of the acquisition of nine properties in 2016 as well as an investment in capital enhancement programs.

In Tricon Luxury Residences, our Class A multi-family rental development vertical assets under management increased by $147 million, largely driven by one new acquisition in Canada, Scrivener Square, along with advances on the existing four development projects in Canada and the U.S.

This overall growth in AUM was partially offset by $210 million reduction in THP AUM, largely driven by distributions for maturing investments.

Moving onto Slide 6 where we outlined the various components of our IFRS income statement. Fee revenue from Private Funds and Advisory business for the fourth quarter of 2016 was $7.8 million, an increase of 16% from Q4 2015. The increase primarily came from our Johnson development master planned community business which experienced strong growth in residential lot sales and commercial acreage sales compared to last year, as well as from higher development fees earned by Tricon Development Group.

At Tricon Housing Partners, investment income was $10.1 million in Q4, a 67% increase year-over-year. The increase was driven by robust lot sales at various separate accounts and our investment in Trinity Falls master planned community, offset by lower investment income from THP1 US which is in advanced harvest mode.

At Tricon American Homes, investment income was $3.4 million in Q4, compared to $12.7 million in the same quarter last year. This year's results included a one-time transaction cost of $10.1 million in TAH's second securitization transaction, which is expensed under IFRS accounting. Excluding this item, investment income would have been $13.5 million, an increase of 6% quarter-over-quarter. I would remind you that TAH investment income is comprised of net operating income, plus fair value adjustments, less interest and overhead expenses. Net operating income for the quarter was $15.9 million, a 32% increase compared to last year, while interest expense also increased as a result of growth in the rental home portfolio.

Moving on to Tricon Lifestyle Communities, investment income was $1.7 million in the fourth quarter of 2016, compared to $0.7 million in Q4 of 2015. The increase was primarily the result of higher net operating income as the portfolio grew from 5 properties to 14 properties.

Tricon Luxury Residences recorded an investment loss of $1.2 million in Q4, compared to a loss of $0.2 million in the same period in prior year. The result was largely related to a fair value reduction in the McKenzie project in Dallas where we increased the scope of the hard cost budget while holding expected revenues unchanged.

In terms of corporate operating expenses, compensation expense was $5.9 million for the fourth quarter, a decrease of $2.5 million from the same period last year. The decrease was primarily from a lower LTIP accrual due to a reduction in projected performance fees as well as lower AIP expenses which reflect the true-up for actual payments which were less than what we had accrued during the year.

Other expenses included the net change in the fair value of derivative instruments, which is driven by changes in the value of the conversion feature of our outstanding convertible debentures. Here, we had a $1 million gain in Q4 2016 compared to a $15 million gain in the prior year. Other expenses also included an unrealized foreign exchange gain from the depreciation of the Canadian dollar, which was $1.6 million this quarter versus a larger $3.4 million gain in the prior year. Such items tend to be volatile quarter over quarter and in our opinion do not reflect the underlying performance of the Company.

For this reason, on Slide 7 we present adjusted metrics which exclude the impact of non-recurring and non-cash items to present the more normalized picture of Tricon's financial performance for the quarter. For instance, this is where we would remove the impact of non-cash gains on derivatives and foreign exchange.

Overall adjusted net income in the fourth quarter of 2016 was $18.8 million, an increase of 33% as compared to $14.1 million for the same period in 2015. To summarize, the key drivers included; substantial growth in NOI from our rental income verticals, Tricon American Homes and Tricon Lifestyle Communities; strong investment income from Tricon Housing Partners; a solid quarter from Johnson on higher lot sales; lower compensation expense and lower tax expense. The main offsetting factor was higher interest expense as we grew the Company.

Likewise, adjusted basic earnings per share were $0.17 in the fourth quarter of 2016, a 31% increase compared to $0.13 in the prior year. Adjusted diluted earnings per share were $0.15 in Q4, a 25% increase compared to $0.12 in the prior year. Adjusted EBITDA, which is another metric we use to track our performance, came in at $29.7 million in Q4 2016, an increase of 19% over the same period in 2015 for the reasons mentioned earlier.

In summary, on Slide 8, we had a very strong quarter on a normalized basis; AUM up 12%; adjusted EBITDA up 19%; adjusted diluted earnings per share up 25% compared to last year.

Lastly, on Slide 9, we provide an overview of our liquidity position. We have access to our corporate credit facility of $235 million to help manage cash needs across our various verticals. As of December 31, 2016, $113.8 million was drawn on the credit facility, leaving approximately $121 million available. You will note that our credit facility balance declined by $46.5 million during the quarter. The key drivers for this decrease included, $57 million of net cash distributions from THP, $60 million of equity proceeds repatriating from TAH to second securitization transaction. These were offset by various investments in TAH, TLC, TLR, as well as general corporate purposes.

Another source of liquidity is our Tricon American Homes warehouse credit facility. In December 2016, TAH reduced the size of this facility from $400 million to $275 million, after significant repayment following the securitization transaction. This reduction is intended to lower the standby fee on the facility in the near-term. As of year-end, approximately $63 million was drawn on the facility, giving TAH ample room to continue growing its single-family rental portfolio.

Finally, another significant source of liquidity for us is cash flow generated by our 68.4% interest in THP1 US. In 2016, this investment generated $116 million of cash flow to Tricon, of which $57 million occurred in Q4, and we estimate additional cash flow of approximately $140 million to Tricon through 2019.

With this, I will turn the call over to Gary who will provide additional insights into our various business verticals.

Gary Berman

Thank you, Wissam. Let's begin with Tricon Housing Partners or THP, our land and homebuilding vertical, on Slide 11. THP had a great quarter overall. So let me recap some of the highlights. Investment income for Q4 was $10.1 million, growing by a strong 67% from Q4 2015. Across all THP investment verticals, the volume of lots and units sold almost doubled from the prior year, reflecting a solid U.S. housing market, particularly in the Sun Belt states.

On Slide 12, I would like to speak of the key drivers of THP's investment income this quarter. The first was separate accounts which generated $4.8 million investment income, well above last year's level of $1.2 million. Let's highlight some of the specific projects.

Viridian, a master planned community in Arlington, Texas recorded 345 lot sales and 146 home sales in 2016. Builders are now working on a new model part which is scheduled to open in early 2017, and when combined with an expanded amenity centre and lake club are expected to drive strong home sales this year. At the Cross Creek Ranch master planned community in Houston, Texas, 397 lots were sold to homebuilders during 2016, compared to 220 lots last year, an increase of 80%. And at the recently launched Grand Central Park master planned in Houston, 145 residential lots were sold to seven builders in the first phase and another 220 lots are currently contracted to be acquired by builders over 2017 and into 2018.

A second driver of THP investment income was the Trinity Falls master planned community acquired in July of 2016. Trinity Falls contributed $1.9 million of investment income in the quarter. As a new principal investment, Trinity Falls provides a good counterbalance to THP1 US where the investment balance is decreasing because of the advanced nature of many of the projects in the fund and related cash distributions.

On a full-year basis, THP's investment income of $27.6 million translates to an 11.6% return on the outstanding invested capital at cost. We typically expect the return on invested capital to be between 9% and 11%, and so the 11.6% return is at the higher end of the spectrum, which thesis the solid performance we had in 2016.

We would also like to remind everyone that investment income represents Tricon's share of the net returns of the investment vehicles. These investment vehicles also pay management fees separately to our Private Funds and Advisory business. Do also note that our Q4 results are typically stronger than other quarters on the account of annual third-party appraisals that impact the value of THP separate accounts.

THP continues to be a strong and consistent cash flow generator, producing cash flow which is well above its reported investment income. Turning to Slide 13, THP1 US contributed $171 million of cash to investors this year, including $116 million to Tricon. Of the total, $74 million was generated from the Greater Bay Area Portfolio; $72 million from the Rockwell project in San Francisco, much of this coming in Q4; and $24 million from bulk lot sales from the Phoenix Lot Portfolio. When we acquired a 68.4% interest in this fund in 2013, we told investors that Faria Preserve in Rockwell will be the key catalyst to the success of our investment. It is great to see this come to fruition.

If you look at the THP vertical in aggregate, we expect approximately $520 million of net distributions to Tricon over the next 8 to 10 years, compared to $237 million of invested capital in THP, which equates to an attractive ROI multiple of more than 2x on our original investment. Of this amount, we expect about $140 million to come from THP1 US from now through 2019.

Again, the solid performance this quarter was largely driven by master planned communities, most of which are managed by our Johnson subsidiary, and so we wanted to take this opportunity to highlight the importance of master planned for THP's future and Johnson's pivotal role in this strategy.

We believe master planned communities or MPCs make our land and homebuilding business more predictable and defensive, and consequently attractive to both public and private investors. Active MPCs are essentially long-duration cash flowing businesses that generate multiple income streams through the lot sales, commercial land sales and municipal bond issuance to recover infrastructure cost.

Our experience has also shown us that MPCs perform much better than conventional housing projects or subdivisions in a down market as there is a flight to quality whereby consumer is offered the security of established communities with multiple builder programs, good schools and extensive amenities.

Let me now elaborate on what Johnson means to Tricon. Johnson has provided THP with the expertise and scale to transition from being solely a provider of equity like capital to third-party builders and developers to being able to directly leverage a leading fully-integrated master planned developer.

As you can see on Slide 14, revenue from Johnson accounted for about 43% of Tricon's total contractual fees in 2016. These fees are earned on lot sales from Johnson's 15 active communities, including four other Tricon co-investments and 11 that are financed by other third-party investors. In addition, about 29% of THP's investment income for 2016 was generated from master planned communities in which Johnson acted as development manager. In total, Johnson impacted 17% of Tricon's revenues in 2016 and is at the core of our long-term growth plan for THP.

One of the key success factors of Johnson strategy has been its relationships with homebuilders and the ability to reposition MPCs to capitalize on current trends, including shrinking lot sizes to capture demand for affordable homes and launching new state-of-the-art amenities to stay one step ahead of the competition. This successful formula is attractive not only to homebuilders looking for a reliable development partner with a proven track record, but also to home buyers looking to live in thriving communities. It is no surprise that Johnson once again ended the year as the only developer in the U.S. to have four of the top 30 master planned communities, when ranked by new home sales.

While we are always looking for established MPCs such as Trinity Falls, we remain opportunistic in our investment approach. Our primary focus for THP this year is to more fully integrate Johnson into our operations so that we can ultimately prepare for the next wave of growth, which could include expanding Johnson's geographic footprint and adding investor relationships.

Even before considering new MPCs, our Johnson subsidiary has an ambitious development plan for this year with the grand opening of Veranda and Grand Central Park, the relaunch of Viridian, and the expanded amenity and builder program for Trinity Falls. And if the first two months of 2017 make a trend, it should be another solid year for Johnson as new home sales in most communities were up double digits year-over-year.

On Slide 15, we turn our attention to Tricon American Homes, our single-family rental business, which serves as a strong counterweight to THP in our diversified housing focused investment model. We have been surprised by how much demand there is for single-family rental product in the U.S., and barring any unforeseen adverse economic conditions, the demand could get even stronger.

We are about to experience a great demographic shift as the so-called millennials start to form families and have children. The more affluent millennials will continue to buy homes, but the work force is more likely to rent, given high levels of student debt and a tougher regulatory environment for mortgages. On the supply side, new home supply as a percentage of the population is still close to historical lows.

These supportive industry dynamics are evident in TAH's results, as shown on Slide 16. I would like to highlight a number of key metrics. First, TAH ended the year with in-place occupancy of 95.6% and stabilized occupancy of nearly 97%. Since launching this platform in 2012, we have always targeted a 95% occupancy rate, and while we have consistently hit this on a stabilized portfolio, our decision to pause acquisitions during the second half of the year allowed it for the total portfolio to catch up.

Rental home count decreased slightly during the quarter as TAH disposed the 241 homes and allocated capital towards the buyout of its legacy operating partners instead of buying new homes. This ongoing portfolio optimization strategy allows TAH to prune non-core homes and constantly reallocate capital towards more attractive homes that can be serviced more efficiently.

Second, TAH was able to grow rents by 4.7% in Q4, including 4.4% on renewals and 5.1% on new move-ins. These metrics underscore the strong level of demand for high quality single-family rental homes, allowing TAH to increase rents while maintaining an occupancy bias, even during the winter season which typically sees a slowdown in leasing demand.

Third, the turnover was an exceptionally low 20%, again reflecting lower turnover during the holiday period. The annualized turnover rate was a strong 26.8%, implying that families live in TAH homes for three to four years on average. This is a testament to the quality of the resident underwriting and customer service, and an affirmation of what we refer to as our middle-market strategy, providing high quality homes for the work force. Let me expand on this thought.

Over the past couple of years, TAH has focused on addressing the rental needs of the middle-market demographic, which we define as households earning between $50,000 and $95,000 per year, who have stable jobs but often face difficulties in buying a home due to stringent mortgage underwriting criteria and rising resale home prices. We believe these families are likely to be long-term renters, reducing the turnover rate and turnover cost and ultimately driving a high return on equity for the TAH vertical.

And lastly, with respect to TAH's operating results, the full-year operating margin of 60% remained consistent with the full year of 2015 and is in line with management's expectations given the current geographic mix of the portfolio. We should point out, the strong rental growth TAH has experienced is largely being offset by rising property taxes which are catching up to home prices.

Subsequent to the year-end, Tricon American Homes achieved another milestone by completing the buyout of its minority interest partners and cleaning up its ownership structure. We would like to take this opportunity to thank TAH's original business partners. Their involvement was critical in establishing this business and elevating TAH to its current status as one of the leaders in the SFR industry.

Slide 17 gives you a sense of the illustrative economics of the buyout transaction. The all-in cost was $71.5 million to acquire 100% of minority interest in the properties and the operating company. We believe this was a win-win for all involved. Our partners were able to crystallize a handsome return on their investment, while TAH is able to capture the full extent of rental income and home price appreciation on the portfolio going forward. As a point of reference, the investment income attributable to minority interests for the full year of 2016 was $14.4 million, which represents an attractive 20% return on our investment.

Looking ahead, we remain excited about the growth prospects for Tricon American Homes. The SFR industry itself is remarkably fragmented. Leaner institutional peers only own approximately 1.5% of the SFR market, providing a tremendous opportunity to rule the industry and achieve outsized growth. We resumed our regular acquisition program in Q1 and continue to be able to buy individual homes in our active markets at roughly the same cap rates as in Q2 2016. While our business plan assumes a onesie-twosie acquisition program, we recognize that scale is important in the business and we will look to grow faster if larger opportunities present themselves.

In addition, TAH continues to focus internally on operational excellence and has already embarked on a number of initiatives to streamline its administration, reporting and treasury functions following the minority interests buyout. TAH is also on track to internalize its repair and maintenance functions across all markets, which is expected to be largely completed by the end of 2017.

Turning our attention to Tricon Lifestyle Communities on Slide 18, TLC experienced significant growth in 2016 by acquiring nine manufactured housing communities or MHCs, bringing the total to 14 communities and 3,065 residential pads. The three most recent acquisitions extended TLC's footprint from Arizona to the highly desirable California market. The three communities have a combined occupancy of 95.5%, meaning they are essentially stabilized and help augment the quality of TLC's portfolio.

On the operating front, Slide 19 shows the 2016 year-end occupancy of 82.2% compared to 72.5% in Q3 2016. The increase is attributable to a change in portfolio mix as a result of new acquisitions this quarter as well as seasonal strength that is typical in the winter months. The more relevant figure we use to track TLC's progress is long-term occupancy, which excludes seasonal tenants and demonstrates a consistent improvement over the last four quarters.

Operating margin at TLC was 55% in Q4, as compared to 56% in Q3, again reflecting a change in portfolio mix. TLC's new California assets carry a lower margin as a result of higher property taxes and utility costs compared to its Arizona assets.

Looking ahead, we expect 2017 to be a year of focus on asset management at TLC as we implement capital expenditure programs at existing parts and reposition the communities to drive higher occupancy and rent. We've often highlighted the success of our capital improvement program at Longhaven, TLC's first acquisition made back in late 2014. Since completing the program in Q4 2015, Longhaven has experienced a 2% increase in occupancy, coupled with a 4% increase in rents. Subsequent to year-end, Longhaven increased rent by another 4%. TLC's second acquisition of Skyhaven in 2015 also recently completed its capital improvement program and achieved an occupancy increase of 6.3%. The remaining 12 parts remain in various stages of their CapEx programs with operational improvements expected to take effect over the next one to two years.

Moving on to Slide 20, our fourth vertical, Tricon Luxury Residences continue to advance on the three Canadian and two U.S. projects currently under development. On Slide 21, you can see the progress being made on TLR's two most advanced projects with photos from Q3 and Q4 side-by-side.

At The Selby in Toronto, formwork is commenced on the eighth floor. The project is currently tracking ahead of schedule and budget with 73% of the hard cost now secured. 57 Spadina remains in the design stage with design development scheduled to be complete in the second quarter of 2017. And TLR Canada's most recent acquisition, Scrivener Square, located in Rosedale/Summerhill, remains in the preliminary design and rezoning process. The formal rezoning submission is scheduled to occur in the second quarter of 2017, at which point we look forward to sharing with everyone the preliminary design.

At The McKenzie in Dallas, which is depicted on Slide 21, construction continued as planned. Concrete is being poured on the eighth floor and over 50% of the trades are now bought out. Given strong rent growth in the Dallas market and our desire to position the building at the top end of the market, TLR and its development partner decided to enhance the building finish standards including upgrading the amenities, common areas, lighting and exterior trim details. The net effect of these changes is an increase in project cost. However, we assume no corresponding increase in the rental rates at this time, which resulted in a fair value write-down in the quarter. The second U.S. project, The Maxwell, is progressing as planned with over 50% of trades under contract.

Looking ahead to our future plans, the growth focus for TLR will be our new investments in Canada where multi-family fundamentals remain very compelling, particularly in our target market of Toronto. The city has seen tremendous population growth, rental growth and historically low vacancy rates. As you can see on Slide 22, Toronto has experienced a remarkable 12% average rent increase in the past year, while vacancy rates for newer rental stock have decreased to just 0.6%. Toronto may well be one of the tightest rental markets in the world, which bodes well for our underwriting where we typically factor in 3% rent growth and higher structural vacancy.

To finish off our prepared remarks, I would like to speak to our Private Funds and Advisory business on Slide 23. The business had strong revenues of $7.8 million in Q4, an increase of 16% from the prior year. Let me recap some of the highlights.

First, the solid result from Johnson, as mentioned earlier, with 52% revenue growth in the quarter. Johnson communities sold 879 lots in Q4 of 2016 versus 452 lots in the prior year period. This is a result of material lot leases at master planned communities such as Cross Creek Ranch, Harvest Green and Viridian, as well as the addition of new communities such as Veranda, Jordan Ranch and Trinity Falls. And second, stable asset management fees from private investment vehicles. Essentially, new investments are helping to replenish the fees from investment vehicles that are in runoff mode, which stabilizes this income stream.

In conclusion, 2016 was another strong year of growth across all of our businesses. Our income producing verticals, TAH and TLC grew NOI significantly year-over-year, driven by rising rents and improved occupancy. TAH also experienced strong home price appreciation at 5% during the year, albeit a more moderate pace than the 8% we saw in 2015. Meanwhile, the development verticals, THP and TLR, reported a solid year of investment income reflecting attractive market fundamentals and advancements on the projects. And so, we are starting 2017 on solid footing as our various housing verticals continue to execute on their business plans.

We are in the process of three major shifts in our business model that are appearing in our Q4 results and will shape the year ahead. First and foremost, we are focused on growth with the aim of gaining relevant scale and operating efficiencies and ultimately being a leader in any vertical we pursue. Second, we are continuing to integrate our operations so we have better control of our business, generate superior economics and position ourselves better to manage third-party capital. And lastly, we are shifting the business mix towards more stable revenues, which encompasses not only our rental verticals of TAH, TLC and ultimately TLR, but also long-term cash flowing master planned within THP. With these strategic initiatives taking form, I'm optimistic about our prospects for 2017 and confident that our diversified housing investment strategy will continue to create value for our shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] You do have a question coming from the line of Stephen MacLeod with BMO Capital Markets. Your line is open. Stephen MacLeod, if you're on mute, please unmute. Your line is open. And on to the next question, your next question comes from the line of Geoff Kwan from RBC Capital. Your line is open.

Geoffrey Kwan

Just my first question is on the THP side, if you can talk about kind of the pipeline that you see in terms of if you can talk about geographies, types of properties that you're looking at, because obviously you're still going to be getting quite a bit of cash coming in from THP1 US and then you have talked about THP2 US that you're going to start to get some more sizable distributions?

Gary Berman

And Trinity Falls obviously is definitely going to help offset some of that runoff. The focus I think will continue to be on land, smaller land investments. We are looking at some deals in Arizona. And also we obviously remain opportunistic and will look for those majors MPCs. Those come up couple of times a year, Geoff, but obviously when those opportunities do avail themselves, we'll take a good look at them.

Geoffrey Kwan

Okay. And then just the other question I had was just some thoughts, albeit granted it's a bit early, just housing season, anything you're seeing geography-wise and how it looks kind of on a year-over-year basis?

Gary Berman

It looks good, and obviously you saw the results for Q4 which were very good year-over-year compared to 2015. In Q1, I can tell you that our Johnson communities' builder sales are up robustly over the same period year-over-year. Now, it's hard to say if whether a couple of months make a trend, but in many of our communities, those sales increases are up solid double-digits. And so, I think that's indicative of the fact that the U.S. housing market is strong, higher rates, higher mortgage rates do not seem to be having any impact, and we're confident going into 2017.

Geoffrey Kwan

Okay, great. Thank you.

Operator

Your next question comes from the line of [indiscernible] with TD Securities. Your line is open.

Unidentified Analyst

On Rockwell, I just wanted to clarify, have you guys received the payout in Q4 2016 or is that going to be a Q1 2017 event?

Gary Berman

No, that was a Q4 event. And when we talked about the big distributions in 2016, roughly $50 million in Q4 came from Rockwell and we expect some additional distributions in Q1.

Unidentified Analyst

Okay, great. And on the Tricon American Homes acquisition pace, are you guys still looking to do 400 a quarter?

Gary Berman

Yes, we have resumed our regular onesie-twosie acquisition program in Q1, and so that is going well. As I said on the call, we're continuing to be able to buy homes at the same cap rates we were buying before we stopped acquisitions in Q2. And we certainly recognize that scale is important in this business, and if we see opportunities to go faster, we will.

Unidentified Analyst

Okay, great. And on the Tricon American Homes NOI margin, you guys were about 60%. I was looking at a couple of the other public SFR players and they were a little bit lower. Any idea or inkling as to what's driving you guys' margin higher than your competitors?

Gary Berman

Our margin has been steady and unfortunately dramatically higher property taxes have been offsetting our rent increases. With respect to our competitors, I mean look, sometimes it's just not apples-to-apples and a lot of it does come down to geographic mix. So, for example, if your portfolio was concentrated in Texas, your margin could be 55%, if it was concentrated in Georgia, it could be 65% to 70%. So a lot of that is just determined based on property taxes. And so, it's not necessarily fair to say, because we are 60%, we got much better results than someone else. A lot of it could just be geographic mix.

Unidentified Analyst

Fair. All right, I'll turn it back.

Operator

[Operator Instructions] Your next question comes from the line of Jimmy Shan with GMP Securities. Your line is open.

Jimmy Khing Shan

I wanted to just get a better understanding of some of the drivers behind these strong metrics. So first on TAH, as you mentioned Gary, the turnover rate was incredibly low. What do you attribute that to and do you think that's a number that's sustainable?

Gary Berman

I don't know if it's sustainable. That's a record print for us. I've never seen anyone get to 20%. I got to tell you, we didn't think it was possible, Jimmy. That basically assumes that someone will be staying in our home for five years. The full year is 27%, or is about 27%. So, I think a lot of it really relates to our strategy, which is a lot of the – I think in single-family rental, a lot of us have just talked about how the industry compares to multi-family but we haven't really talked about segmentation or differentiation within single-family, and we've certainly focused on what we call our middle-market strategy which is more work force. And at the end of the day, we think with that strategy targeting rents in $1,200 to $1,300 a month, we can really make the case for residents staying longer. And I think that along with a really good customer service and as we continue to internalize maintenance, that hopefully keeps the residents in our home for as long as possible. So, I think that's one key thing that would be driving our lower turnover rate compared to maybe some of our peers.

Jimmy Khing Shan

And I don't think there should be any seasonality impact though, would there be?

Gary Berman

Yes, there definitely could be seasonal impact, right. I mean the winter months tend to be a quieter time, there's less leasing activity, it obviously depends on when the leases stagger. So there definitely could be some seasonal impact there. And I would always caution you, not necessarily to draw too much attention just to one quarter, I mean you should try to look at things more on an annualized basis.

Jimmy Khing Shan

Okay. But does that give you a little bit more confidence though in your ability to get more aggressive on the rent side, given where the occupancy stand, given what looks to be, I know it's just one quarter, but it looks to be a very low turnover rate, does that change the revenue strategy a little bit?

Gary Berman

Yes, it definitely gives us more confidence to maybe push rents a little bit, certainly in some markets. But again, I think we've got to be careful with that. I mean the rent growth at 5% is very, very good, and we'd rather meter that out over a longer period than really push hard and then find down the road we see some hiccups. So, it's more of I would say a long-term greedy approach and you have to be – the ultimate goal here is to retain your residents. Turnover is obviously costly.

Jimmy Khing Shan

Okay, fair enough. And then turning to THP, a similar sort of line of question, in terms of the accelerated lot sales in some of the projects you guys mentioned, Viridian, Cross Creek Ranch, what do you think is driving that? Is it product mix change, market conditions, Johnson doing a great job, what would you…?

Gary Berman

Obviously, I mean our Johnson subsidiary is doing a great job and market is strong. Some of it is case by case, but in some cases it could simply be that we had weather problems last year which didn't make for a good comp. But I think what we're really trying to do strategically is bring on smaller lot product. And you've probably heard a lot of the builders looking to drive their absorption as opposed to margin. Well, we are providing them with that smaller lot product and we have that flexibility with our master plans to do that. So it's really kind of staying a step ahead and making sure we deliver the product that the builders and consumers ultimately need.

Jimmy Khing Shan

Okay. Actually just one last one, when I looked at the Invitation Homes IPO, they talked about a replacement cost for their portfolio to be in the $320,000 range. I wondered if you guys had a similar analysis where you looked at kind of what would be the replacement cost for your TAH portfolio.

Gary Berman

I mean it wouldn't be that high because they are obviously targeting more expensive homes in their strategy, and again, we've gone for a more middle-market approach, and they are typically targeting consumers with much higher incomes. I could tell you that we have been buying homes for roughly $130,000 all-in, including the renovation. I don't know off the top of my head what the replacement cost is, but it would be substantially higher than that. We could probably come back here on that, Jimmy.

Jimmy Khing Shan

Okay, that's great. Thanks.

Operator

Your next question comes from the line of Dean Wilkinson with CIBC. Your line is open.

Dean Wilkinson

Gary, on the fair value adjustment on McKenzie, I mean as I recall that was a pretty high-end building and certainly a very high-end neighborhood. What's the nature of how you had to readdress that and kind of a little color around what you think the outcome of that is going to be?

Gary Berman

I mean, look, it's a decision as you build something, you kind of re-evaluate. Sometimes you have something on plans, when you actually see it get built you have to re-evaluate. And this was just a case where we thought we needed to put more money into some of the finishes. It was always going to be a high-end building but we really wanted to take it to the next level. And it wasn't just on the interior, it's also on the exterior, so we made some upgrades there, and we just decided not to take any commensurate increases in rent rates. And so, if you do that, you're going to get a write-down. It's really there is nothing more to it than that.

Dean Wilkinson

Okay. And then I assume in the next quarter or two or as you get closer to completion, you are going to reverse the view on those rents and that comes back?

Gary Berman

Yes, I think we would do that as we get closer to pre-leasing, Dean. I don't think there would be any reason for us to do that now. But we certainly, as we get closer to pre-leasing period, then we'll obviously – we have a much better view of where rent will be, then we'll make the adjustments.

Dean Wilkinson

Got it. And was that one of the larger contributors in the reduction in the estimated performance fees to Tricon, sort of this quarter relative to last quarter?

Gary Berman

No, because again, in our project we don't have – the third-party capital is our development partner's third party capital, it's not coming from an institutional investor. The reduction in performance fees really is a whole number of projects is extended timelines. The profitabilities remain largely intact, but certainly in some of our projects in the U.S. weather has played a major issue. We have also seen higher labor issues, which has increased cycle times on homebuilding. And so, all of that has extended timelines and in many cases we have lost at least a year, and when you lose a year, you're going to be losing, your returns are going to be affected and obviously that drives down our projected performance fees.

Dean Wilkinson

Got it. So it's not a dollar amount, it’s a time value of money issue.

Gary Berman

Correct.

Dean Wilkinson

But like there's no impairments in there anywhere?

Gary Berman

No, this is largely related to time.

Dean Wilkinson

Something we wish we all had more of.

Gary Berman

Exactly. It's frustrating but it's just kind of it is what it is.

Dean Wilkinson

Yes, I mean I think the last project that got built on time and on budget was pyramids, so no big deal there. A question for Wissam, looks like you had a tax carryforward on TLC that sort of flowed through to give you a lower effective tax rate. Was that like an accelerated depreciation and will that pool burn off somewhat quickly or how should we be thinking about that?

Wissam Francis

So it's attributed to both TAH and TLC where we had a catch-up on amortization and depreciation this quarter, and it's not going to burn off quickly, it's going to be staggered as we continue to grow our portfolio and increase the amortization and depreciation for the size of the portfolio. So we expect that to continue over the next couple of years at least.

Dean Wilkinson

But not in the same magnitude as what we saw in this quarter?

Wissam Francis

Not in the same magnitude that we saw this quarter. This quarter was a catch-up for the year as well.

Dean Wilkinson

Okay, that seems fair enough. And then the last question for me, just back on the TAH, Gary, how many of those homes have actually been identified as what you call sort of non-core, sort of that sub-$900 a month lower quality tenants?

Gary Berman

So we've got probably another 400 that we've identified as non-core, Dean. And so, we'll try to meter those out and sell roughly 100 per quarter.

Dean Wilkinson

Right, and then offset that with the 400?

Gary Berman

Yes, and that's why typically when we talk about our kind of business as usual acquisition program, we often talk about 400 net homes. It's really kind of 500 offset by 100.

Dean Wilkinson

500 offset by 100. And then looking at the balance sheet, it looks like you've probably got about two years' worth of dry powder in terms of acquisitions before you'd have to do something, vis-a-vis another securitization or something. Would that be fair?

Gary Berman

Yes, more or less.

Dean Wilkinson

More or less. Okay, perfect. That's it for me. Thanks a lot guys. Take care.

Operator

Your next question comes from the line of Mark Rothschild with Canaccord. Your line is open.

Mark Rothschild

Just following up on your comments on TAH and the margin, have you revised at all or increased what you think is possible on the margin side as you grow this business? Do you think there are more efficiencies you can add to spread across the bigger portfolio in the market or do you think that 60% is really a good stabilized number that we should expect to be around going forward?

Gary Berman

I mean [indiscernible] and we certainly in a sense guided everyone and our results have been very consistent over time at 60%. There has been pushes and pulls. But I think as we continue to learn this business and we become more efficient, there are opportunities. And we have talked about the internalization of repairs and maintenance, and in obviously doing that ourselves, there are definite efficiencies there. We're certainly able to provide better service to our customers. We think there will be some savings there. Repairs and maintenance is obviously probably the largest controllable item in the margin. And so that is where if we're going to have any success in improving the margin, a lot of it will come there.

Mark Rothschild

Okay. And then in regard to the homes that you're looking to sell, just clarifying your comments to Dean that you just made, that other 400 that you would possibly look to sell, that's on top of the 350 or so that are already considered for sale?

Gary Berman

No, no, that's part of it.

Mark Rothschild

That's part of it, okay. And then lastly, you mentioned doing more in Toronto as far as in apartment development. Have you looked at other areas in Toronto as far as home development or other aspects, because obviously there is a shortage of housing in general in the GTA now?

Gary Berman

It's obviously very difficult to find any land to do any horizontal construction here, and that's always been the case actually. That's why we have typically always focused on the high-rise market and that's where we'll continue to focus going forward. So I think in Canada, our housing strategy is very much going to be focused on multi-family rental, even though I recognize there is a need for more single-family type housing, but obviously it's easier for us to get entitlement to do high-rise and we also need to get scale in this business. So we will be continuing to grow our TLR Canada portfolio.

Mark Rothschild

Got it. Thanks a lot.

Operator

[Operator Instructions] Your next question comes from the line of Stephen MacLeod with BMO Capital Markets. Your line is open.

Stephen MacLeod

Sorry I had some technical difficulties. I just wanted to just ask a question about the TAH business. As the activity resumes at the 400 homes per quarter, I mean can you just talk a little bit about the give and take you expect to see at occupancy versus margins?

Gary Berman

I mean that's why we often – that's often why we talk about stabilized occupancy, because there is no question as we add homes, our in-place occupancy is going to come down. And so, I don't know that math off the top of my head, but you could certainly see the in-place, if we extrapolate that out, you could definitely see the in-place occupancy come down by let's say a couple of hundred basis points. But the other thing I think that will be helpful to you is that in Q1 we are hoping to put out same-store numbers, both for TAH and TLC, and that will allow you to see a steady-state comparison over time.

Stephen MacLeod

Okay, that's great. But you wouldn't expect much difference from the 60% NOI margin that you are putting up [historically] [ph]?

Gary Berman

No, no. No, I think the margin should be steady, but we would definitely see some pressure on the in-place occupancy. Stabilized occupancy should obviously hopefully be steady.

Stephen MacLeod

Right, okay. And then on the TLC business, I mean I guess it's been a little bit noisy through the quarters as you have been growing the portfolio. Can you just talk a little bit about how you expect occupancy and margins to stabilize in that business as well? Have we seen any major changes in the outlook?

Gary Berman

So, I think on the occupancy side we definitely made some gains. But again, you are right, we've been adding parts, so that's made the comparison obviously a little bit disjointed, and I think that's why if we can move to same-store numbers in Q1, it will help everyone's comparison that much better. I think we definitely have more wood to chop on the occupancy. There is still a fairly large portfolio of homes, vacant homes on pads that we can sell and obviously drive our occupancy there. So I think we can do better.

Now keep in mind there are seasonal factors, right. So we are going to see slowdowns obviously in the summer months, but we have been pushing that long-term occupancy up and I'm hopeful we'll be able to continue to make more gains there.

And on the margin, the margin should also steadily improve obviously as we drive occupancy and rent growth. And so, our rent growth has been in that kind of 3% to 4% range. But the noise really is just the – the noise this time, Steve, is really the addition of the California portfolio where the margin is about 50%, because in those parts there is certainly much higher property taxes in the Arizona parts and we also are responsible for water, sewer, trash whereas at a lot of the other parts in Arizona those are pass-throughs.

Stephen MacLeod

Oh, I see. But you finished the year at a 57% NOI margin, but you could see that sort of creep higher over the next couple of years as occupancy improves and your pass-through [indiscernible]?

Gary Berman

Yes, it should. That's our plan. We are hopeful that we'll be able to make some gains there. I don't think huge gains, but we should be able to inch it up.

Stephen MacLeod

Okay, great. And then on the performance fees, I know you talked about it just in the last sort of questions, but what's kind of a reasonable expectation over the next couple of years, like into 2017, 2018 in terms of what you expect to achieve in terms of performance fees?

Gary Berman

So I think it's going to be – I think this will be fairly there won't be a lot this year in 2017, but 2018 and 2019 – a lot by the way, in our performance fee schedule, I will tell you a lot of that is back-ended. Where we show that roughly 100 million, and we talked about that being over 8 to 10 years, a lot of that is back-ended, given the long life of a lot of these investment vehicles. But I think we start to see – we should see more performance fees from Five St. Joseph this year and we should see some more performance fees in 2018 and 2019.

Stephen MacLeod

Okay.

Gary Berman

So I mean I think modest performance fees this year. It should pick up hopefully materially in 2018 and 2019.

Stephen MacLeod

Okay. And then on the THP projected distributions, do you still expect that that $580 million over an 8 to 10 year timeframe?

Gary Berman

I think it's $520 million now because obviously we received a lot of distributions in Q4, but yes, we expect the $520 million over 8 to 10 years and we're going to continuously update that every quarter. So that's the schedule you should pay attention to.

Stephen MacLeod

Yes, okay. That's great. And then just finally on the tax rate, I know Dean asked it, but what's the reasonable expectation for the tax rate for 2017?

Wissam Francis

If we were to model that, probably about anywhere between 15% and 17%. We have very good tax planning set up in place that will allow us to focus and control that to about between 15% and 17% on an annualized basis.

Stephen MacLeod

Okay, that's great. Thank you very much.

Operator

Your next question comes from the line of Keith Lam with CIBC Asset Management. Your line is open.

Keith Lam

Just had a question on, if you could refresh me on how you're thinking about your capital allocation just given the liquidity position of the Company, dividends, buybacks, just kind of walk me through that and how the thinking is for the next year or two years?

Gary Berman

So first of all I think in terms of the capital allocation, I think we said on the call Keith that we are going to allocate our capital increasingly to the rental income verticals and we obviously talked about our growth plans for TAH. So you should expect to see more of that as we try to steady the cash flow profile of the Company and make it easier, obviously make it easier to value. And then I think with respect to thinking about dividends and buybacks, I mean, look, this is a growth business. So in that environment, we're better off to focus our capital, our precious capital on growing rather than thinking about dividends or buybacks. If I had a bias to either one, it would be to dividends over buybacks.

Keith Lam

Okay, perfect. Thank you.

Operator

I do not see any further questions over the phone. I'll turn the call back over to Gary Berman for closing remarks.

Gary Berman

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

Operator

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

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