This article was sponsored by Tricon Capital. It appeared in the Residential supplement with the June 2019 issue of PERE magazine.
By the end of June, Tricon Capital is poised to close a $1.4 billion deal to acquire the Starlight portfolio of 23 US multifamily properties totaling more than 7,000 units mainly located in the US Sun Belt. The publicly quoted residential property company is also a leading operator within the US single-family rental (SFR) sector, signing a $2 billion joint venture with two institutional investors in June 2018. Tricon Capital has 30 years of residential investment experience spanning single and multi-family rental, and for-sale housing. President and CEO Gary Berman tells PERE’s Stuart Watson how common factors are driving demand within the different sub-asset classes.
Tricon has made a big bet on the US single-family rental market, building up a portfolio of 18,000 units. Why is that asset class appealing to investors?
The SFR industry was created out of the foreclosure crisis in the late-2000s, which allowed institutional investors like Tricon to buy homes at scale. In the meantime, the development of new technology has allowed us to manage them efficiently. It is really a tech and logistics business first, rather than a real estate business. It has been propelled by the same confluence of technologies that has allowed Uber, Amazon and Airbnb to succeed: cellular mobility/broadband, cloud computing and artificial intelligence. The combination of these technologies has allowed us to manage a complex set of activities and turn this into an institutional business.
The increased efficiencies also help us to provide an affordable housing option to our residents. In our portfolio, the average rent represents around 22 percent of residents’ household income. By contrast, mortgage payments are typically underwritten to 30 to 40 percent of household income. The larger gap between income and expenditure attracts SFR residents by providing them with a healthy financial cushion of disposable income every month, which is particularly appealing in a downturn.
The sector has resonated with public institutional investors. Single-family rents generate a predictable, recurring income and cash-flow stream, which is attractive to pensioners, retirees and public shareholders. On the private side, we announced a joint venture last year with a sovereign wealth fund investor and a US state pension plan. That will provide $750 million of equity leveraged to buy 10,000 homes at a cap rate of around 6 percent with a value of $2 billion. We are about a third of the way through that and expect to be fully invested over the next two years.
Most importantly, we are providing a very compelling value proposition to the consumer and that, in turn, drives the economic opportunity for investors. Our residents get to move into what feels like a new home that is ‘hotel ready’ and then live a maintenance-free lifestyle without going through the hassle of obtaining a mortgage. Instead of spending their weekends repairing their home, our residents are afforded more time to be with their families.
How do you differentiate your single-family strategy from that of competitors?
It is very much focused on the Sun Belt and what we call middle-market housing. Across our portfolio, the people living in these homes are families with children and pets with household income between $50,000 and $95,000 paying about $1,350 a month in rent on average. We believe middle-market residents are generally longer-term residents. They may not necessarily have the credit score or down payment to buy a home, as is more prevalent at higher rent levels. Conversely, in a downturn, their relatively low ratio of rent to income makes it easier for them to withstand economic hardships and ultimately remain in their home. This is apparent in our industry-low resident turnover metrics and makes for a very defensive strategy.
Our Sun Belt theme is driven by demographics. Around 40 percent of the US population lives in the Sun Belt and it is going to get 60 percent of the growth going forward. Americans are moving from north to south in search of jobs, lower taxes and better weather – that trend is going to continue. The Sun Belt states have had higher population growth, household formation and job growth than the national average.
Is there much scope for further institutional investment in the single-family sector?
Around 16 million American families rent single-family homes. It is a $4 trillion market. We are the third-largest publicly traded company focused on single-family in the US, and probably the fourth largest overall, but all institutional investors combined own only 1 to 2 percent of the industry. The average owner owns something like one-and-a-half homes. We are still in the early days of institutionalization of the single-family asset class, and there is a tremendous consolidation opportunity, both within the institutional sector and of the properties owned by ‘mom and pop’ landlords. Morgan Stanley recently published a report that said the industry could grow quickly to ten times its current scale.
You also invest in mid-market multifamily housing in the Sun Belt. Why combine the two strategies?
We are one of the first companies to go into both sectors in the US, and the two businesses are very compatible. There are definite back office synergies available on the property management side. Call center, accounting, legal, IT, procurement and resident underwriting can be done from one centralized office so that as you buy an additional single-family home or multifamily property, management expenses are spread over a relatively fixed-cost base. We are working toward this. From a procurement perspective, we can have the same team and suppliers provide materials to both businesses. There are also learnings between the two product types as we start to understand the overall housing market better. Finally, there are potential long-term synergies over the lifetime of the resident, so if someone is renting one of our apartments and decides to have children and form a family, we can rent them a single-family home without them leaving our company.
The common factor driving our decision-making in both US multifamily and single-family is the dearth of new housing. We use the building intensity metric to measure starts and permits per 1,000 population. Ten years after the financial crisis, the building intensity in the US is less than it was in 1982 and 1991, two of the worst real estate recessions on record. The US is not supplying enough affordable housing because of land economics and major issues with labor and material cost pressures, which is why everything we do is relatively affordable. In that environment, when the US economy is growing as much as it is, particularly in the Sun Belt, you really want to own the existing stock, whether it is single-family or multifamily, so you can provide that growing workforce with a high-quality, affordable place to live.
Asset case study: The Selby
In addition to buying existing rental homes and apartments in the US, Tricon is pursuing a build-to-core multi-family development strategy focused on its home market of Toronto.
Supply in the Canadian city is “very constrained” says Berman, with vacancy standing at just 0.3 percent and a predicted annual shortfall of 10,000 units of rented housing through 2021. In November, Tricon completed construction of The Selby, which Berman describes as “one of the first US-style multi-family developments in Toronto.” The 50-story building is one of seven rented residential projects Tricon is developing in the city.
The Selby was funded by Tricon together with a Canadian pension fund, which owns an 85 percent share. Its 502 units are priced to appeal primarily to professionals with rents of C$3.70 ($2.76) per square foot per month on average. Amenities include a state of the art 3,500 square foot fitness center, wellness spa, outdoor terrace and pool, integrated co-working spaces, and pet grooming facilities. There is also an on-site restaurant in the historic red-brick mansion house that serves as the property’s front door, and which was rebuilt as part of the development.