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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the Tricon Capital Group Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to turn the call over to our speaker today, Mr. Wojtek Nowak. Sir, please go ahead.
Thank you, Betty, good morning, everyone, and thank you for joining us to discuss Tricon's results for the 3 and 9 months ended September 30, 2019, which were shared in the news release 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 and our Company website. 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 the call, we'll 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, EVP and CFO of Tricon Capital Group.
Thank you, Wojtek, and good morning, everyone. Q3 was another solid quarter for Tricon, driven by strong operating metrics in our core rental businesses, as well as significant growth in FFO per share in third-party AUM. Let's begin with the business highlights on Slide 2. In our Tricon American Homes single-family rental business, NOI grew by 32% and FFO grew by 66% year-over-year. As the portfolio grew in size, achieved strong rent growth and continued to deliver operating efficiencies.On a similar note, NOI for the same home portfolio also grew by 10% year-over-year, mainly as a result of ongoing rent growth and margin improvements. While achieving these strong operating results, TAH maintained a very active pace of acquisitions, adding 918 homes during the quarter for the TAH joint venture. Based on the current acquisition pace that joint venture is expected to be fully invested in early 2021 tracking as per our business plan.In our multifamily rental business, the newly acquired U.S. multifamily portfolio delivered 6.8% same property NOI growth. As we focus on increasing occupancy and are now within our target range of 95%. Meanwhile, in Canada, our first multifamily development project in Toronto, The Selby, achieved 73% lease-up and our development pipeline increased of 3,600 units with the new acquisition of Block 10 and the planned expansion of West Don Lands community.And finally, contractual fees increased by 46% year-over-year. While third-party AUM grew by 28% driven by a $450 million joint venture formed this quarter with a new institutional investor, the Arizona State Retirement System. This exciting new venture will focus on developing single-family built to rent communities and master plan communities in the U.S. Sun Belt.Our financial performance this quarter is reflected in our strong growth in FFO per share, a key metric we introduced last quarter and have now formalized in our MD&A disclosure. As you can see on Slide 3, Tricon generated total FFO of $24 million in Q3, more than double the prior year's result of $11 million.The increase was largely driven by first, higher single-family rental core FFO of $19 million compared to $13 million in the first period last year, as the portfolio green size and delivered high rental income and continued expansion of the NOI margin.Second, incremental contribution of $7 million of core FFO from the U.S. multifamily portfolio in its first full quarter under Tricon's ownership.Third, lower investment income from residential developments of $3 million this quarter compared to $5 million in the same period last year, as a result of increased development cost and timing delays in our Tricon Housing Partners for sale business.Fourth, higher contractual fees of $10 million compared to $7 million in the prior year, mainly from higher performance fees on our legacy for sale housing investment as well as strong development fees from Johnson.And fifth, a measured increase in corporate overhead to $10 million compared to $9 million in prior year to accommodate our growing staffing needs. Overall, our FFO per share this quarter was $0.11, which translates to CAD 0.15 and represents a growth of 67% compared to last year.We will continue to focus on FFO per share as a key metric of our performance going forward.On Slide 4, we summarize our reported IFRS and non-IFRS results. You can see that Tricon generated IFRS diluted earnings per share of $0.15 this quarter as compared to $0.24 in the same period last year. These results closely track our adjusted EPS of $0.17 for the quarter and $0.27 for the prior year.The main difference between the IFRS and the adjusted figures related to the transaction costs and non-recurring items, derivative valuation changes and unrealized foreign exchange fluctuation.Digging deeper in the year-over-year variance, our adjusted EBITDA for the quarter was $83 million compared to $75 million in the same period last year, accounting for a 10% increase in addition to the drivers already discussed on slide 3. I would highlight that adjusted EBITDA included fair value gain of $18.7 million this quarter compared to $42 million in Q3 2018, a change of $24 million. Without this item, adjusted EBITDA would have increased by 96% year-over-year. I'll also note that this quarter's EBITDA does not include any fair value gains on the recently purchased U.S. multifamily portfolio as we remain holding at our cost per now. Below the EBITDA line, we saw higher adjusted interest expense related to our growing asset base. Included in the U.S. multifamily portfolio as well as higher deferred tax expense arising from the fair value gains on non-core assets. These factors led to overall lower adjusted net income and earnings per share year-over-year. In short, the negative variance on our EPS was largely driven by changes in fair value gains which mask the solid operating performance reflected in our FFO per share results.With that, I'll turn the call over to Gary to talk about the highlights of our business verticals and our priorities going forward.
Thank you, Sam. Let's turn to page 5 and talk about operational highlights for our single-family rental business, which we call Tricon American Homes. If you look at this, these metrics. You can see that this business is clearly firing on all cylinders and notwithstanding record low resale volumes in many of our markets are proprietary acquisition tool Triad is allowing us to consistently hit our acquisition targets in volumes. We bought 18 homes in the quarter one by one. All for the joint venture that increased our total homes managed to offer some minor dispositions to 19,962 homes, that's up 19% year-over-year, 15,500 homes are in our wholly-owned and the rest are in the joint venture. And subsequent to quarter end, we achieved very exciting milestone for us. We purchased our 20,000 homes in Atlanta. And now we're setting our sights on a new goal of reaching 30,000 homes. And we'd like to do that within 3 years through organic buying. If you look at the occupancy, it's down 50 basis points year-over-year. This is just because we've ramped up acquisition volume in Q3 2019 versus last year. Blended rent growth is 6.1% for the quarter, extremely strong and reflects the -- what we think is insatiable demand for our middle market product, it's only down year-over-year because we're self governing on renewals, as our intent to really capture rent increases over a longer period of time rather into maximize in any given quarter.All in all revenue up a very strong 26% year-over-year on a stronger higher lease portfolio 18,414 homes in service versus 15,472 homes last year and also coupled as I said strong rent growth and relatively stable occupancy. And then on the expense side. These are up 15%. But obviously not nearly as much as revenues. This is because of our continued internalization effort of repairs and maintenance, which I'll talk more about in the same-store portfolio. But all in all, NOI growth of 32% year-over-year to $49.7 million. And our NOI margin at 64.7%, up over 3% year-over-year. This is a record for us in the quarter and which is typically a tougher period because of elevated each repairs.Let's move on to slide 6 and talk about the single-family rental same home portfolio, which gives us a better indication of year-over-year performance. To remind you we've got 14,446 homes in the same home portfolio, it's roughly 72% of our total portfolio, occupancy here relatively stable, blended rent growth very strong again at 6.4%. The only reason for the slight reduction year-over-year again it's because we're self governing on renewals, all in total rental revenue of 5%, we're using our revenue maximization tools to basically find the right combination between occupancy and rent growth, you will probably notice there occupancy has dip and down slightly over the last year, but we're trying to really maximize revenues, so that's up 5% year-over-year.Ancillary fees, our income is up 26% and this is something we'd like to spend more time talking to you about our Investor Day in January, we're really early innings of driving ancillary income. The increase here is from increasing early lease termination fees, doing a better job of collecting pan fees and mandating renters insurance, but we believe that we can roll out a whole number of services or products, which will improve the living experience for our residents and allow us to capture more income. Total revenues all in with higher ancillary fees were up 6% year-over-year on the same-store portfolio. Onto expenses, our property taxes were up year-over-year 6%. Year-to-date they are up about 7.5%, they continue to be a drag on our margin.But really the big story on the expense side continues to be our ability to save on repairs and maintenance and turnover, and there are several factors driving this. First, we are performing more work orders in-house and increasingly using our maintenance team to attend to HVAC repairs. Total work orders performed in house were up 15% year-over-year. HVAC work orders performed internally are now up to 45% from a negligible amount last year.Second we become much better refining our scope of work, we've defined a standard product across the portfolio, set monthly budgets and are managing to those budgets, Third , our TriOPS operating technology is ensuring less leakage between budget and actuals. For instance, all national pricing is tied into TriOPS, so that our teams cannot spend more than the predefined prices and can only use approved suppliers or vendors with extended warranties. Also, all scope line items now roll into a 13 costs category, which shows the cost per square foot. This enables our managers and directors to make educated approval decisions, which is integrated with TAH's delegation of authority. Fourth, we're using our increased scale to drive procurement and obtain competitive pricing and warranties on larger items. And finally, our more diligent resident underwriting process results in higher quality residents, which in turn translates into less trashed homes on move out.So you can see all this together as a resulted in a significant reduction in R&M and turn over 19% year-over-year. And so, when you take it in total revenue up 6%, total operating expenses down 2%. That translates to same home NOI growth of 10%, which is an industry-leading metric and the same home NOI margin again a record for us in this quarter, up 256 basis points. If you look at the same home NOI growth over a full year, it's been anywhere from about 9% to 12%. Again, we're seeing insatiable demand for our middle market, Sun Belt product and we're continuing to be able to contain our costs.Let's move on to slide 7 and talk about the U.S. multifamily portfolio. Q3 2019 represents the first period, where we've had a full quarter results. We acquired this portfolio in June of this year. To remind everyone, this is a high-quality garden-style portfolio in the Sun Belt, our recent vintage property is very complementary to our single-family rental business in terms of geographic overlap. The story for us here is being able to drive occupancy, it's up 120 basis points year-over-year, touching very close to our target of 95%. We're doing that in some ways by sacrificing new lease growth. So overall blended growth is -- a blended rent growth is lower than where we like, it's a 1.6%, but we see this is a big opportunity, once we get through a past 95% or consistently hit 95% through the transition service agreement. We see an opportunity heading into 2020 to really drive rent growth.On the expense side, we have seen some good savings, we're benefiting from Starlight's asset management initiatives, which have allowed us to successfully renegotiate contracts at favorable rates including for valet trash and revenue management software. And we've also seen some property tax recoveries, as we successfully appealed assessment. So expenses, all in all, down 4%, which translates to a very strong NOI growth of 6.8% year-over-year and our margins are up 250 basis points to roughly 59%.Let's move on to slide 8 and talk about our Canadian build-to-core, multifamily development business and we'll start with The Selby which is a lease-up. Very strong period for us, we recorded about 110 leases, Selby lease-up is now 73% at the end of the quarter 70% occupied. If you recall, we underwrote rent of $2.90 per foot per month, while we now have in place rent of $3.75 and that's moving up, as we lease the upper floors. And now there are expenses or costs are fixed and we have a very good idea revenue. We believe that this project will generate a 6% development yield and we just locked in 10-year CMHC financing at 2.4%. So that's a 360 basis point spread. We believe that's going to translate into a 10-year IRR of about 20% and a margin on cost in excess of 50%.This is a home run for us and it bodes well for the rest of the portfolio. Let's talk about that on slide 9. So, let's go through the thumbnails here, we talked about the Selby. The number two is the Taylor, which is a King-Spadina in the entertainment district in Toronto and here we've also made a lot of progress, we've now tendered 75% of construction contracts, the form work is above grade, costs are largely locked in based on where rents are. We think the development yield here is going to be at or above the Selby.At the genes, which is our Scrivener Square project in very exclusive Rosedale Summerhill area of Toronto, we made significant progress subsequent to quarter end, we received zoning approval from LPAT, which is the Land Planning Appeals Tribunal, it took us roughly 3 years to get this done a little longer than what we like.But if you go back to previous developers, it actually took 25 years to zone the site. The counselor in the area refer this site as a graveyard for developers, we now have the zoned. We have an incredibly compelling product and we're expecting to start demolition and construction early next year.Our Gloucester project on young between Bloor and Wellesley has just started construction. So that's an exciting milestone for us. The Labatt Project in Corktown south of the Regent Park is still in the development design process we're getting ready to submit for site plan application. And I think last, but definitely not least, we made a lot of progress in the West Don Lands, we entered into an agreement with our joint venture partners Kilmer Dream to develop Block 10. This is a 3 acre block in between Blocks 3, 4, 7 and 20 if you're familiar with Toronto, this is where the old Canary building sits it used to be a greasy spoon and where they used to fill movies.But this is now going to be developed into a 300-unit apartment on a 130 year ground lease. The site is owned by the [indiscernible] peoples and so we're really excited about taking this forward. It increases our overall portfolio in the West Don Lands to 1800 units and the total Canadian multifamily development portfolio to 3,600 units and also within the West Don Lands, we locked in our financing from the Federal Government for the RCFI program. This is the largest loan ever made by the Federal Government for a project of this type of $357 million and it's going to allow us to start construction imminently.So a lot of progress over the quarter our Canadian multifamily development business.Let's move on to slide 10 and talk about our private funds and advisory business. Obviously, the big news in the quarter was the closing of the Arizona State joint venture. This has allowed us to grow our third-party AUM by 33% to $2.3 billion for the quarter. But I think more importantly, it allows us to achieve 2 key strategic priorities. The first one with the venture setup, we are now well positioned to syndicate or sell our wholly owned master plan communities to the venture, which allows us to repatriate cash and use that to pay down leverage and continue to transform THP off balance sheet.Second, and in a way, more importantly it allows us to become a leader in the build-to-rent business and then essentially transforms THP into build-to-rent business, which is in keeping with our rental housing strategy and it allows us to take full advantage of our platform. We can use land provision from Johnson for these communities, we can use our private equity expertise to form relationships with best-in-class local builders, and obviously we can manage the portfolio through TH.And on the right side of this page, you can see that we've had a very impressive quarter in terms of year-over-year growth and contractual fees up 46%. This is driven by our performance fees on our legacy THP funds and Johnson also had a very good quarter, lot sales up 33% year-over-year and lot prices up 7%. We set a long-term goal of warning our contractual fees to cover our corporate overhead, well actually we achieved that, and then some in this quarter alone, but I will note that both performance fees and Johnson revenues are higher than what we would consider to be run rate.Let's move on to slide 11. So, now that we've transformed Tricon into a rental housing company and really a cash flow store, we want to focus on FFO per share, as a key performance metric is with Sam mentioned earlier. You can see on the left-hand side, we're targeting a 3 year growth rate of 10% per annum for FFO per share. The target for 2019 is $0.37 to $0.40 in Canadian dollars, that's CAD 0.48 to CAD 0.52 or CAD 0.50 midpoint. That's our target for the year and from there, we want to grow our FFO per share by 10% per annum, with a 22 target of CAD 0.50 to CAD 0.55, or CAD 0.66 to CAD 0.72 in Canadian dollars.We wanted to give you some more insight into how we think we achieve that, obviously these are impressive numbers compared to where most real estate companies were out in terms of FFO per share growth. So we wanted to illuminate that. Starting with number one, these are the main drivers. So, with single-family rental, the way we've determined this, as we've annualized our Q3 AFFO and that $76 million and going forward over 3 years, we're assuming same home NOI growth of 4.5%. We think that's readily achievable in this environment. We're obviously doing a lot better. We're obviously not taking into account any unforeseen circumstances, a recession as soon as a stable economic environment, but obviously in this environment, we feel very confident about doing 4.5% that has $24 million of FFO and we're also going to continue to invest the TAH joint venture, roughly 800 homes a quarter, all the way through Q1, Q2, '21. Now we're going to assume 65% debt there at 4%, take our 1/3 share, that adds another $8 million and it gets us to about $108 million of total FFO or adds $0.15 per share assuming $215 million diluted weighted shares.Next key driver is U.S. multifamily portfolio. Here we're assuming 3% same property NOI growth that had $6 million and gets us to $33 million or a incremental $0.03 FFO per share. And on contractual fees, we're assuming that we're going to raise another $1 billion of fee-bearing capital and assuming 1%. So that adds $10 million of fees. We're not taking into account any ancillary fees such as development fees or property management fees and we're not assuming any performance fees.So we feel that that is a readily achievable. If you add all of that up, that's $0.23, CAD 0.30. If you add that to our 2019 target actually exceeds the '22 target, but we are building in some cushion for contingency and maybe some incremental overhead.So let's turn to Page 12 and get a sense of what that looks like in terms of our targeted asset mix. And before we do that, let's just talk about the key drivers that are going to impact the asset mix. As we talked about, we intend to complete the key joint venture by Q1, Q2 of '21. We are working with a broker to potentially syndicate a 50% interest in the U.S. multifamily portfolio if those terms makes sense. That would be 2020 goal or target. By 2022, we expect to have the majority of our Canadian multifamily development portfolio stabilized. Our goal in THP has continued to take this off balance sheet. Our balance sheet value today is about $320 million. We'd like to cut that in half within 3 years for asset sales and continue to run-off of the business.And then last -- our last development -- multifamily development asset in Texas to Maxwell is 95% stabilized, it's under contract and we expect to sell that by the end of the year. So these drivers, actually, many of them are kind of one to 2 years, not 3 years, but we are taking them into account in our three-year target and essentially all we're saying here is, we're just going to complete what we started. And that's how we're determining the asset mix. So you can see on FFO contribution, development already is a very small component as we transform to rental housing company, but it's really de minimis, by the time we get to '22 5%. If you look at the breakdown between product types 55% would be single-family rental 20% multifamily rental and 20% contractual fees. Again this is a story of rental housing plus managing third-party capital, which delivers very predictable income streams.On the balance sheet on today, we're 81% core rental, 19% development. Our long-term goal is to reduce development as a percentage of our balance sheet to 10% maybe even below that, so here you can see 10% to 15% with these drivers by 2022. On AUM, right now we're 70% principal 30% third-party, again with these drivers that mix changes to 55% principal and 45% third-party capital.Let's move on to slide 13, and conclude with our performance dashboard. This compares our actual performance in the quarter compared to our goals and we're going to repeat this over and over again, almost like a Broadway play. So, let's start with our first key priority growing FFO per share by 10%. Obviously, we had a very, very strong quarter, even if you strip out episodic performance fees we easily beat that target, but again you can see we're up 67% year-over-year.On third-party AUM, we set a goal last quarter of raising an incremental $1.5 billion of fee bearing capital with the closing of the Arizona State joint venture, we're now 27% through that target. So good progress in raising third-party AUM. Book value per share, this is really a key metric that ties into IFRS earnings. Our book value per share is now up to CAD 11.04, and we've been able to grow that by 19% and at per annum since getting into single-family rental in 2012.On the leverage side. No tangible progress in the quarter, but we did set ourselves up in many ways to achieve our long-term goal of reducing look through leverage to 50% to 55%. Obviously, with the announcement of the Arizona State joint venture, we're positioning ourselves to syndicate our wholly owned master plan communities and generate cash to pay down debt. We put the Maxwell under contract and expect to close that at the end of the year and we also hired a broker to consider selling a 50% interest in our U.S. multifamily portfolio. And if we can achieve all of those things, we believe we can lower the look through leverage to closer to 55% within about a year.And last but not least on the reporting side, our goal is to continue to improve reporting May Tricon simpler and easier to understand we formally adopted FFO per share this quarter, we're going to check that box. In Q1, we are hoping to roll out a comprehensive ESG roadmap and implementation plan. We think that's a key initiative to be more investor friendly. And last but not least, we continue to review our financial disclosure and determine whether we can come up with other policies or disclosure that makes us look more and more like our peers. As an example, we are exploring consolidated accounting and this is something that our auditors and our Board are reviewing and will probably determine whether we adopt this sometime next year. So that concludes the presentation.All in all a very good quarter, we made significant progress to achieving our key financial priorities. None of us would have been possible without the hard work and commitment of our team. I want to thank them all for everything that they do.And now I will turn the call back to Betty and take questions and we'll be joined by other members of senior management team, including John Ellenzweig, Andrew Carmody, and Kevin Baldridge.
[Operator Instructions] The first question comes from the line of Dean Wilkinson.
We've always wanted to see with Samsung and a Broadway Show, so there should be good. Gary -- on the let was say get over that. On the margin improvements within the multi-family, if you net out the sort of the property taxes that you got back from the prior period adjustments and I know it's early days, you've started to see some synergies there. Do you think you can get the same kind of margin expansion that you've got out of the single-family rental business or do you think structurally this probably tops out somewhere in that 60% range?
Yeah, no, I don't think we're going to get what we saw in single-family rental. I mean the single-family. Remember, we went from 58% when we acquired Silver Bay up to about 65% today. And part of that is just kind of learning the business and getting better added institutionalizing at. So we had to kind of start from scratch there, multifamily is obviously and garden style is much more established. So structurally I just don't think that's possible.But I do think we can drive the margin over time, particularly when we get through the transition services agreement, and ultimately I think when we take over -- takeover property management, we probably love to do that within a couple of years.
Great.
So when we do that, I think we have a better chance of driving margin. But I think it's fair to assume that even though we've got somewhat feels like and some one-time events. We do, as we said, look forward feel that we can grow the same-store NOI by 3% per annum and depending on the composition of that we should, we should be able to incrementally drive the margin.
All right. Now it makes sense. And then as Wissam mentioned there's -- there were no fair value gains in that segment now and obviously, you've just, it's been a quarter since you closed on them. At what point would you start looking at fair value in that portfolio and what would the process be or would it just track sort of the HPI index, similar to how you're doing it with the single family?
Yeah, I can take that Dean. We'll also move to a cap rate method just like what it would look like for any REIT. But in the interim, we're going to focus on going through, and wrapping up the transition services agreement and potentially consider partnering up with third-party investors at the time. We want to be conservative in booking all any fair value gains for now before we syndicate it and then would recommend not modeling any gains in the time being until we get to that stage in determining whether we are going to syndicate it or not.
So more like a 20 -- latter part of 2020?
Yeah, the latter part of 2020. After like I said, after we go the syndication route and if there is potentially interest in that then will -- that will determine what the real fair value should be.
Okay, that's good. Just turning to the build-to-rent structure, I'm assuming that that's going to be done sort of -- would that be in the existing Johnson masterplan communities like Meridian and Cross Creek or are you looking at other places to build those?
I mean, I'm going to hand it over to Andy. He can give an update on what we're thinking with build-to-rent. Andy?
Hi, Dean, on build-to-rent, great question. We were looking at it both ways. We have several pods in the Johnson master plans that we are working on carving out to surveys build-to-rent communities and we think there is some real potential in those sites given the quality of those locations and the sought after nature of those communities. But we also believe there is meaningful opportunity outside of those master plans particularly in closer in and smaller in town locations, which are also valuable to our residents. And so we're planning to pursue kind of both in parallel.
Okay, that makes sense. And then just in terms of the actual vehicle itself, is the joint venture for just the development side of it, or what -- does the pension plan, want to own the assets on the back end, sort of in conjunction with TAH or is there an exit around that and those assets which has vend into the TAH business?
Yes. So the joint venture, Dean, is just for development. We don't want to run any conflicts obviously with their existing TAH joint venture. So it's just for development of build-to-rent communities and Arizona states, our long-term intention is to hold these communities. They view this is long-term recurring income and they view it as a long-term hold.
Okay, makes sense. Last one for me. Wissam that the $2.1 million charge on the amendment and restatement of the term facility. Is that number netted out in the adjusted EPS number or if I were to look at that sort of on a comparable basis, I should back that out?
Yeah, we back it out, because it's the transaction costs, typically you would amortize over the life. But we just expense the --
You just expense the whole thing in the quarter?
That's correct.
Your next question comes from the line of Mark Rothschild.
Congrats a bunch of mine. But maybe regard to the joint venture for THP for the assets that would be similar to THP, to what extent do you expect to reduce your equity in that segment over the next year. And going forward, should we pretty much assume that you're not going to be investing substantial equity in projects like that and you'll do it more with joint ventures where you just manage the assets?
Yeah, that's correct. We're essentially we're deemphasizing THP. We've been very clear about that, we're moving into an off-balance sheet business. I said in the prepared remarks that our longer-term goal is to basically cut our balance sheet exposure to this business in half. So we're at about $320 million today. We'd like to cut that in half within 3 years. We'll probably get to a point soon where it will probably not even be reported segment in our disclosure. So we really, and in many ways are kind of winding this business down in terms as a balance sheet vehicle. It's a core competency, but if we're going to invest in for-sale housing, and particularly master plan communities we want to do it through the ASRS joint venture.So the ASRS joint venture will really become our exclusive vehicle offer expanding Johnson, but largely will be turned into a build-to-rent business. And again, we're trying to transform our THP into a build-to-rent business, which is in keeping with our core rental strategy.
Okay, great. And then in regards to development projects in Toronto, you obviously have some interesting site, have you given a target for how much you expect to spend over the next year or 2 on this project?
We haven't, we haven't provided a target, but what I would say is that if you look at -- there is a slide in our presentation on slide -- it's Page 9 and it basically shows our total development cost for the active projects, what we spent to date and what's remaining and essentially the vast majority of the remaining costs are going to be funded by construction debt.In other words, our equities essentially in the ground, I think from what I recall, we're going to spend something like maybe CAD 20 million next year, but largely all the equities in the ground.
Understood, okay. And then just lastly, in regards to TAH you bought I think a little over 900 homes in the quarter, is that the type of run rate that you think is achievable, are you seeing any portfolios and maybe just talk about how values have changed of late in homes you're buying in -- in regard to cap rates also?
No, it's not, I mean, I wouldn't it's run rate, I mean, we've been pretty clear that we're trying to buy 800 homes per quarter over the year, but it will [indiscernible] flow will be more acquisitive in Q2 and Q3 and that will drop off in Q4 and Q1 when there's less MLS -- less MLS listings. So you should assume a lower pace of acquisition onesie, twosies acquisitions in Q4 mark. And yes, we continue to look at portfolios, there are opportunities to buy homes from smaller players in some cases, our larger peers are looking to kind of reshuffle their portfolio. So there may be opportunities to buy from them.So there are -- there are multiple ways for us to grow, but we basically assume that we're just going to buy one home at a time in any portfolio acquisitions would be greedy.
Your next question comes from the line of Jonathan Kelcher.
Just sticking with the acquisitions, are you seeing much flow on the multi-res side?
Well, and I realize before I answer that. I realize it. I didn't fully answer Mark's question before on cap rates. So, let me start there and just say that we're buying to a very high 5% cap rate. It's a very prescribed by box that our joint venture partners want us to hit. And so we're buying everything basically to 59 our blended. But what I would say is that the quality of home is were buying at a 59 keeps on getting better. So that's what I would answer Mark's previous question.And then in terms of looking for multifamily opportunities, we're not actively in the market right now and looking for those opportunities, we're really more focused right now on integrating the former Starlight portfolio. And so really we'd like to -- really integrate that over the course of 2020, get through the transition service agreement. And once we -- once we've done that then we'll turn our attention to being more acquisitive.
Okay. And that transition service agreement that ends in January, correct?
Yeah, January 31.
Okay. And then on the joint venture with Arizona State, when would you expect to vending in Trinity Falls?
We think I would say very high probability of that happening in Q1.
Okay and then what's the breakdown between falls in price in the fair value, I think the total is what 107?
Yeah. So it's pretty much all Trinity Falls. Bryson would be roughly $10 million and so obviously that the other 110 or whatever it is, is Trinity Falls. And we're also going to consider whether we would sell 89% of it or where we sell less and retain. So that's something we're still reviewing internally.
Okay and then just switching gears to Tricon American Homes and looking at the CapEx that you guys are putting in there. If I back out what you say you're spending on the new homes in 19,000 per home and just divide the rest by the number of homes that amount seems to be trending up on a quarterly basis. Is there any color you can give on that?
Yeah, I don't think you can take the number right out the MD&A because remember some of the homes that we acquired including Silver Bay were already renovated. So if you look at that number I think that number right at the MD&A would be distorted number. But typically, if we're looking at acquisitions, today we're buying homes for roughly $165,000, $170,000 and then reporting in $20,000 to $25,000 of CapEx into those homes.And that number, I would say, has probably grown by inflation. John, but really not much more than that. And obviously, it's a blended number because every home is different and we're trying to bring each home to a common standard. So someone was we might only spent 10 grand and other homes we might spend 30 Grant, but on the whole, it's about 20 to 25.
Okay. So if you think about the homes that you've owned for a bit. If you're going to do FFO. We're going to start to think about AFFO, what do you think a fair number is for maintenance CapEx on a home on an annual basis?
While we're still, I mean we really do you want to beef up our disclosure around CapEx that's something we think is really important, whether we actually adopt AFFO. We're still reviewing that, but at the very minimum we'd like to provide all the disclosure around CapEx you can figure that out, but right now the way we view the business, our cost to maintain which includes repairs and maintenance turnover and recurring CapEx is about $3,000 per unit per year. And of that $3,000, I would say $1,200 to $1,400 is CapEx. John, is that correct? Johnny $1,200 to $1,400?
Yeah, correct. On the higher end of that carry more like $1,400 to $1,500
Your next question comes from the line of Mario Saric.
I just wanted to focus on the asset management part of the business. I think on the call, you mentioned that you expect to be fully deployed on THJV1 by early 2021. I don't have the numbers in front me, so I'm not quite sure what percentage of deployed today or by year-end, but at what point do you start having discussions about a successor fund and how are you thinking about the structure of a successor fund in terms of exclusivity with your existing partners versus perhaps opening it up to other potential partners going forward?
So we should be 50% of the way through the acquisitions are venture by the end of the year. And so if you just kind of fast forward to 800 homes a quarter we should be fully, fully deployed by Q2 of 21. So that's essentially the timing and then based on deployment. We're in a position to talk about a successor fund probably middle of next year. I would guess or maybe back half of next year to be a bit more conservative and obviously that initial conversation will evolve what will take place between our existing partners and then we would determine whether it makes sense to open it up. I will say, I will say this, this is a hard question to answer, Mario. But I would say this, our existing joint venture partners made the smallest possible investment, they could make at $250 million each.And I think that they would both field disappointed if they couldn't put a lot more money into the sector, so that's something worth noting. I will also say that we ultimately decided not to look further at Front Yard, but we did have a significant private capital lined up to look at that opportunity. And I would say in addition to that, there is more and more institutions that are taking a close look at the sector our existing investors are leaders, they are considered to be global leaders in real estate investment, and once they go into a new asset class like this it gets other people's attention. And so I think if we wanted to open this up, we could find probably significant more capital, but it will really just come down to whether our existing partners want to take that opportunity or not.
Got it, Okay. And then maybe just with that in mind, your target of 30,000 homes, within 3 years versus let's say 20 today. So that increases fairly comparable or touch a little bit lower than the expected increase in the homes from the current JV, which I think was 12,000 to 13,000 homes or something like that?
Yes.
So that would, I guess 2 part question is does -- that would imply that any next series of funds would be comparable in size to what you have today or perhaps maybe the timing is off in terms of the number of years, but is -- when you get that 30,000 target, what does that reflect in terms of the successor fund?
Yes, it basically assume status quo. And I think that assumptions is probably conservative, but as you know, we prefer to tend to be more conservative when we're making those -- setting those goals or broadcasting to the street what we're planning to do. But look, I think the existing joint venture is going extremely well. Our partners have told us that they're very happy and ultimately our hope is we're going to want to put a lot more capital into the sector. So maybe there is a possibility for us to go faster, but we'll see.
Got it. Okay. And then just in terms of structures, the JV with Arizona State co-investment was 11% and the co-invest in your SFR fund is 33%. Is there a kind of an ideal co-invest that you think about going forward as funds get bigger and as the product offering expense?
Yes, well, I mean, we debate this stuff internally, all the time. The way we think about it is if it's recurring income generating FFO, we want to have a higher co-investment, and that's why we were comfortable with the third for the single-family rental joint venture. But if it's more episodic development, we really want to take that off balance sheet. So we'd like to have a lower co-investment, and that's why the co-investment for the ASRS joint venture is only 11%. So that's really the way we think about it.
Got it. Okay. That makes sense. And then just maybe last question on the asset manager front on, come back to Slide 12 of your presentation and comparing current to '22 target. The third-party portion of the AUM is expected to increase nicely over the next several years. But the FFO contribution from the contractual fees is expected to come down to kind of basis points about 20%. I'm not sure if the current has any kind of one-time-ish type fees in it, but could you kind of explain --?
Yes, I think part of that is again because we're just assuming kind of a pretty conservative fee structure, right. So remember, if you look at the page before we're assuming a 1% asset management fee. We're assuming no ancillary fees that could be development fees or construction and acquisition of property management fees. We're also assuming no performance fees. So I think that's why if you look at the pie chart, it looks under weighted.
Got it, okay. My last question just shifting gears to TAH operations, you noted that lease termination fees were up and driver of 26% year-over-year growth in the year fees and other revenue category. Can you maybe expand on what the drivers behind the higher lease termination fees and how broad based and might be throughout the portfolio?
Kevin, do you want to, do you want to talk about that.
Sure. Yes, that's a good question, it's really the lease termination fees was one component of it. We're also, we have higher [Technical Difficulty] the drivers and it's, it's. Yes. Can you hear me?
Can you start over? We lost you for a few seconds to that answer.
Okay. Yes, sure. The termination fees like pet fees, late fee income, that were really the biggest drivers was a just a refined attention to this part of the business. So as we've increased our systems are embellished our systems we have better visibility. We have monthly reports that we're tracking and we're able to manage the process better. So it's not a change in behavior of our resident base. It's just us getting better at the business.
And your next question comes from the line of Johann Rodrigues.
First start it off, what are the kind of key drivers the outperformance of TAH versus some of the peers over the past few quarters is the kind of the high growth that you're getting on new move-ins, like the renewal rate seem to be kind of on roughly on par with invitation. But you're getting much better kind of new move in growth, what do you think is behind that. Is that something you guys are doing or is it just a function of the kind of the asset type, the quality of the assets or?.
I'm going to let Kevin answer that question.
Sure. So it's really, we're still harnessing a little bit as the loss-to-lease from the Silver Bay transaction people stay with us. We have resins that say with us for a year and some residents stay 4 to 5 years. So we still have turnover attributed to the properties that we bought from Silver Bay and so we are harnessing that loss-to-lease.We also, as Gary mentioned we self govern on our renewals and so those over time as people stay with us, they build a little bit bigger of a loss-to-lease and so when they move out we harness it when we put a new resident in there and then our proprietary system that we've developed for revenue management, it's pushing rents to where we think we're comfortable. And we've got it to where we're pricing every home, every week now and we're making adjustments. We just put in some automation where will -- well if a home isn't moving fast enough we might adjust it again 3 days later. So we're just getting more refined in our pricing and then we're harnessing the loss-to-lease.
And Johann, the thing I would add to that is I think also our middle market strategy is also driving some of that outperformance. Remember our average size boxes 1600 square feet and in some of our larger peers, they might be closer to 2000 square feet. So overall it's a more affordable product and maybe on the margin that allows us to drive a little bit more rent growth.
Okay, perfect. Then, switching to the build-to-rent strategy. You maybe just talk about what you guys are underwriting for maybe a cost-to-build per home. And then how the yields are IRRs would compare to homes that you're acquiring?
Sure. I'm going to turn that over to John to answer that question.
Sure. And great question Johann. So first on the cost side, really it's going to depend on the geographic location. The construction costs vary dramatically depending the West Coast or the Southeast or the Midwest. I would say we're looking at several opportunities in Texas right now. And from a direct costs of the homebuilding costs that's penciling in the $55 to $65 a foot range, which is very similar to market on building costs.And then turning to development yield, as Gary mentioned before, in our joint venture, we're buying in the high fives on a blended basis and we're looking at the development yield on new homes. It's really in similar markets is falling into the sixes. So we are seeing an opportunity to generate outsized returns by building those homes versus buying.
Okay, great. And then just on the Canadian multifamily side, you mentioned the yield for Taylor, you think will be at or above Selby, you maybe just fresh there as to what the final yields are the stabilized deal is expected to be on Selby. And then also what, what you underwriting for cost per suite or cost per square foot to build out the balance of the pipeline?
Okay. So the first questions fairly easy. We believe we're going to hit a 6% development yield for the Selby. Do you -- Andrew, do you want to talk about how we think about costs on a kind of go-forward basis?
Sure. Yes. I generally answer that Johann in terms of hard costs, we're trying to be inside of $300 a square foot. Obviously, that the markets moved somewhat over the last two, 3 years. But the combination of our in-house construction team and ability to leverage relationship pricing and really get best execution there as well as being very thoughtful about site selection, where we can minimize parking in transit-oriented locations and construction considerations things like that to build below. So the headline figures that people throw around in terms of hard cost.
Okay, perfect. Okay. And last question. Gary, can you maybe they put some figures behind with the largest drivers would be to reducing leverage that 50 to 55 level that you guys talk about?
Yes, I mean it's just, it's a combination of a number of things working together, which are really predicated around asset sales. So, think about it that way. Potential syndication of Trinity Falls and Bryson, the sale of Maxwell, our loss development project in Texas and the potential syndication of a 50% interest in the U.S. multifamily portfolio. All of those working together, have the ability to reduce our leverage by about 5%.And then the only other thing I didn't mention is we continue to obviously receive our ongoing cash flow from our legacy THP funds. So for example, THP1 U.S. is going to generate about a $75 million of cash over the next couple of years, so that obviously can be used to pay down leverage as well.
And your next question comes from the line of Stephen MacLeod.
So lots of great color so far in the Q&A. So lot of my questions have been answered, but I just wanted to circle in a really quickly on the NOI margin that you've seen at TAH as you mentioned. A record for Q3, just wondering how do you expect that to move going forward? I know you talked a lot about the R&M costs and you might still have room to bring those down. Can you just talk a little bit about any more legal room you have on the NOI margin from what are already very impressive levels?
Yes, sure. Well, I mean, I'm going to start by saying we're not going to guide about 65%. But why don't we look the various components and I can give you some color on it. So first of all, in terms of revenues. We are just seeing insatiable demand for our middle market Sun Belt product. So I think we are confident that we'll will continue to be able to drive rent above inflation and wage inflation for the foreseeable future.So maybe we're not going to drive rent growth at 6%. But I think we feel pretty confident about being able to drive it at 4% or 5% and as Kevin talked about we're self governing on renewals. So we're giving ourselves room to push rent over time. So that definitely gives us comfort. On the expense side, I would say the low hanging fruit in terms of R&M savings and internalization has been picked off. We have essentially caught up to our larger peers, if you look at our R&M as a percentage of revenue.So from now, it's really kind of incremental process improvements more economies of scale, they're going to drive or going to drive that line item. I think we -- I think Kevin would agree, we can continue to get better and better, but I think a lot of the big savings have already been achieved. And then I think the wildcard and this is really important is property tax. The property tax is the largest line item of our margin in our expenses. And it, it could range depending on what market we're in from 15% to 25%.So it's a major driver and we've seen really high property tax increases now for years. This year, it looks like it's, again it's going to be we've guided to a range of 6% to 8%. It looks like it's going to be in the top end of the range in next year. Our property tax consultants also saying it's going to be around 6% or 7%. So that's really hurting our margin, otherwise, we'd be doing a lot better, but it's not that can't go on forever, right, because if you look at our home price appreciation annualized only 2.4% this quarter coming down. I think property taxes is really kind of a lagging indicator and at some point in time those property taxes are going to come down, they're going to moderate. And that, in a sense, what really act as as a tailwind for us as opposed to a headwind. So that's the unknown at this point, but over time, hopefully we get some relief.
Your next question comes from the line of Gregory Kwan, excuse me, Jeffrey. I apologize. Geoffrey Kwan. Sorry about that.
All right. Just one question. You talked about just in general about your strategy about deleveraging and increasing the asset management part of the business and also with your TAHJV. Of the 15,000 homes that you guys have on your books, like ballpark, how much of that or what might fit into that underwriting box that they're looking for. And is that something as you think about maybe the next JV vending and some of those houses into a JV, and like you said, get the deleveraging, pick up the management fees, so kind of killing 2 birds of funds down?
yeah, so on the, -- so we have 15,500 homes are wholly owned and we haven't had any discussions with our JV partners about banning those homes into this vehicle or any successor vehicle and we'll see, but I think it's more likely that we just continue to hold those 100% our balance sheet and really when we refinance the securitizations. That's an opportunity to over time lower leverage. But that gives us more flexibility.The concern we have is, if we vend that portfolio to a JV partner, they're once higher leverage, we don't, we may not get the full benefit. So I think at this point, it's important that we control the wholly owned portfolio.
And your next question comes from the line, a follow-up question from Mario Saric.
Just 2 more really quick one, that's on the operational side for TAH for me. The first one just on the self regulation. How much, do you think or how much do you estimate that cost in terms of rent growth this quarter, i.e, like how much, how much mark to market. Are you banking within the portfolio as a result of the policy?
Hi, Kevin, do you want to try to answer that.
Yeah, sure. Hi, Mario. We're really -- we're picking up, we were able to pick it up with a turnover of the leases. So we have consistently over, gosh, I think the last 6 quarters outpaced. I think all of our competitors in blended rent growth and it's really being able to maintain an occupancy level where we want it to be and still get the rent growth, so it's 6% blended rent growth for a number of quarters.We think that we're maximizing revenue as opposed to rent growth. And also we're able to keep people longer our turnover year-to-date is 26.3%. I think part of that is the way we're pricing our homes and we're pricing on renewals.We also believe that over time we'll get it, over time as opposed to all at one time. And at the same time even out our rents. So and we think it's the right thing to do for our residents. I mean that's a type of company that we're trying to be both from a customer service standpoint and keeping people in our homes. So as far as a mark-to-market, it's hard to tell, because not all the homes are the same. That we're probably -- we're probably running up 4% loss-to-lease, 4% to 5% loss-to-lease, but that's not really based on data, it's my sense.
All right. Okay. Now would be across the overall portfolio as an average?
That would be across the Same Home portfolio.
Yeah, and Mario. Another way to look at it is if you look at our re-leasing spreads, our renewals over time. They have moderated right because we're self governing and I believe they've come down from about 6% to 5%.
Okay and then just lastly. There's no lot of regulatory discussion in the U.S. on the rental side. And the last little while, relative to what's kind of in the market or what's been in the market. Are there any kind of read into your portfolio, where you kind of flashing yellow in terms of increased regulatory risk going forward?
I mean the short answer to that is no. In general, the entire Sun Belt continues to be very landlord friendly. There is -- we don't see any prospect of rent control. The only exception obviously is in California. And they've set a pretty high limit on where you can raise rent. So we're not -- we don't think we're impacted by that at all. So we think in total it's got no impact on our business.
And there are no further questions at this time. And Mr. Berman. I'll turn the call back over to you.
Thank you, Betty. I would like to thank all of you on the call for your participation. We look forward to speaking to you next year, when we discuss our full year results for 2019.