Tricon Raises US$553 Million, Wants to Buy More Single-Family Homes to Rent Outadmin
Toronto Company Secures Financing at Record-Low Rate of 2.34%
Tricon Residential owns single-family homes in U.S. Sun Belt markets including Atlanta. (Tricon Residential)
Tricon Residential owns single-family homes in U.S. Sun Belt markets including Atlanta. (Tricon Residential)Tricon Residential seems to be proving in the age of the coronavirus that renters would prefer to come home through the front door of a house rather than a tightly packed high-rise apartment building accessed via elevators and narrow hallways.
Toronto-based Tricon, which owns more than 21,000 single-family rental houses in the U.S. Sun Belt, has tapped into the cheapest financing in the history of the sector as homeownership has steadily declined for more than a decade.
The company raised 553 million U.S. dollars with a weighted average interest rate of 2.3% for six years. The financing was also done with a high debt-to-equity ratio. The transaction proceeds represent 72.5% of the value of the securitized portfolio of 3,540 single-family rental properties held in a joint venture with two sovereign wealth funds.
CEO Gary Berman told CoStar it’s a record rate for the asset class borne out of the Great Recession, when housing prices plummeted. He said the sector is winning now during the pandemic because vacancy rates are not dropping and rents are nudging up, creating higher net operating income.
“It is an incredible rate. I think, all in, it’s the lowest rate by far. There is nothing close to it,” said Berman.
He said the financing was placed with 40 investors, including 21 new investors to Tricon, and was about five times oversubscribed with significant interest across all tranches of debt.
“It’s a function of the underlying base rate coming way down,” said Berman about the overall interest rate environment, which benefits companies looking to refinance. “But there is so much confidence in the sector right now. We’ve always thought this asset class needed to get tested in a downturn. If it reacted positively, the industry could potentially re-rate its popularity with investors, and that’s what is happening. We are in the early days of re-urbanization and de-densification.”
Tricon, which rebranded from Tricon Capital Group in May, was founded in 1998 but entered the single-family rental business in 2012 as lower asset prices created higher returns. That offset some of the costs of managing a more spaced-out portfolio of housing compared to high-rises. It formed a US$2 billion joint venture to acquire 10,000 single-family homes in 2018.
The firm is still heavily involved with multifamily rental apartments, with 7,789 among its holdings and another 2,785 in development, but single-family home investments are separating it from the pack.
“There is definitely a COVID factor. I can’t tell you people are leaving apartment buildings to come into our single-family homes, but people are seeking out the safety of a single-family home,” said Berman.
He said his leases per available home were up 10% in the second quarter, and that’s coming off a strong 2019. “To be up that much in this environment is indicative of how people are seeking out this type of shelter,” said Berman. “They want to be in a less dense environment. They prefer not to have elevators.”
Berman expects his company’s U.S. multifamily portfolio to see a small decline in net operating income in the second quarter, but single family should go up.
“That’s the difference, and that’s why investors want to be in it,” said Berman, noting Tricon’s single-family division is collecting about 99% of its historical rent. “On every metric, single family is performing a little better,” he said.
Matt Logan, an analyst with RBC Capital Markets, noted the deal significantly reduces the financing costs of Tricon.
“We believe this reflects accelerating demand for the broader single-family rental sector, as well as Tricon’s middle-market strategy (and its capabilities as an asset manager) in particular,” said Logan in a note to investors.
Berman doesn’t want to brag or look as if he’s rooting for a downturn on anyone, but he’s aware how COVID-19 has played into the cards he’s holding.
“I would say this is almost the perfect crisis or downturn for this business,” said Berman. “It will show investors how defensive this asset class is, and as a result, you will see a lot more demand.”
Tricon had paused on buying more single-family homes during the pandemic, but Berman said his company will be back in the market in the third quarter.
The debt transaction is expected to result in about US$55 million to US$60 million of net proceeds to the joint venture, which will be used to make more transactions. That should mean capacity for buying 850 more homes.
“We’ve run out of homes to lease, so we need to go out and make acquisitions,” said Berman, adding Tricon is still looking at multifamily deals.