Stock Pitch: How to Profit from “Big Real Estate,” Tricon Residential (TCN)

Introduction

Welcome back to another stock pitch by yours truly. In this post, I’ll be diving deep in to Tricon Residential (TCN) — sharing with you why I’m cautiously optimistic about the company’s future.

In this post, I’m going to explain:

• Who Tricon Residential (TCN) is and how they make their money

• How they’ve grown, specifically with Blackstone’s help

• What their future could look like

• Why I’m adding them to my portfolio

If you enjoy these deep dives, be sure to let me know in the comments below.

Who is Tricon Residential (TCN)?

In the company’s own words..

Think of this company as a massive multi-billion dollar enterprise that rents affordable housing out to folks in North America, specifically the Sun Belt states in the USA. The company has over $13.7 billion in total assets under management, with more than $12 billion of those assets being invested into the Sun Belt region (below).

• 29,149 single-family rental homes

• 7,789 stabilized multi-family rental apartments

• 4,000 multi-family rental apartments under development

2021 was a massive year for the company as, despite being a 30+ year old entity, they were able to finally begin to trade on the US public markets.

As you would imagine, the company makes money in a very straightforward way — collecting rent payments from their tenants on a monthly basis. The average monthly rent collected is $1,529 across their 21 markets.

During 2021, Tricon Residential collected $441.7 million in rental income across their 29,149 single-family rental homes.

There’s a few main reasons why Tricon Residential is an exciting company in my eyes, but for us to explore those topics we must first rewind a few years.

How They’ve Grown, Specifically with Blackstone’s Help

I’m not sure if you all remember this, but Blackstone moving swiftly into single-family real estate during the pandemic was a headline I saw everywhere — specifically the one below from Bloomberg.

That specific article is for subscribers only, but this Forbes article should be open to the public.

How I understand it is that this isn’t Blackstone’s first single-family rental rodeo, but instead their second. Back about 12 years ago, Blackstone spent $7.5 billion acquiring more than 40,000 single-family houses across the US. The company ended up spinning off this operation into its own publicly-traded entity — Invitation Homes (INVH) — in 2017 for about $13.5 billion.

Blackstone exited their remaining $1.7 billion stake in Invitation Homes early-2020, then mid-2020 deployed this $300 million toward growing Tricon Residential’s balance sheet.

Here’s the interesting part — $300 million isn’t exactly going to move the needle for Tricon Residential, nor did it. But the name of “Blackstone” certainly opened doors for them.

Announced about a year after the Blackstone deal was a $5 billion joint venture (JV) between Tricon Residential, the Teacher Retirement System of Texas, Pacific Life Insurance Company, and another massive global investor.

The goal of this JV was to acquire another +18,000 single-family homes.

This was just one JV the company announced last year. Others included were..

• $1.5 billion JV to acquire +4,250 single-family rentals

• $1.3 billion JV to re-capitalize multi-family rental portfolio

• $1.1 billion JV to acquire multi-family development in Toronto

See what I’m saying here? Blackstone’s $300 million wasn’t the meat and potatoes, but instead the fancy silverware that encourages people to eat at the establishment in the first place. Without Blackstone’s “co-sign” I’m not sure Tricon Residential would have been able to pull off these four other JVs cumulatively worth $8.9 billion.

Tricon Residential now has a seat at the table — so what are they going to do about it?

What Their (Interesting) Future Could Look Like

If you’d like to follow along, here’s a link to their most recent April 2022 Investor Presentation.

Now that you all have a deep understanding of why Tricon has been able to experience so much momentum over the last few years (Blackstone), let’s take some time to understand what this momentum could begin to materialize as.

Growth Profile —

The company has runway, period.

Every company we want to invest toward should have a clear runway of growth ahead of them, and I think Tricon Residential is no exception. The company has shown their ability to expand their single-family rental portfolio by +39% compounded annually since 2012, with only ~2% of the ~16 million single-family homes in the US currently owned by institutions.

Without going too deep into the details (the presentation linked above does that for me), Tricon Residential’s secret sauce are the ~25 million households in America that bring home between $70K and $110K annually. Through their experience, this cohort has very favorable characteristics:

• Long-term renters

• Lower turnover

• Stable cash flow

As we flip to now understand Tricon Residential’s current resident profile, they align perfectly for this “best in breed” renter spoken of above. Average household income is $83K, adult age of 40, FICO score above 650, and rent-to-income ratio of only 23%.

By targeting properties that fit the bill for the above-described renters in the Sun Belt states, Tricon Residential is setting themselves up for success — especially as more Americans migrate to these regions. According to John Burns Real Estate Consulting Analysis, the Sun Belt region is slated to experience a population increase of +10% on average, with some regions to experience up to +20% growth.

The image above illustrates both the population and job growth experienced in Tricon Residential’s top 10 markets by total number of single-family homes.

Scalability —

It’s one thing to buy these homes, it’s another to profitably run the business on the backend. Tricon Residential credits six major drivers of optimization as they scale their business.

• Asset Management — balancing rent vs. occupancy vs. time on market

• Call Center — streamline resident inquiries from new leases to maintenance

• Repair & Maintenance — real-time data sharing & inventory management

• Acquisitions — their TriAD acquisition platform filters millions of listings per year and can convert a new listing into an offer in minutes

• Residential Underwriting — millions of data points to drive retention and reduce turnover costs

• Leasing — 360-degree online tours, self-showing technology, and virtual move-ins add convenience to prospective renters

Acquisition Channels —

The company has made it clear that they plan to own ~50,000 single-family rentals by 2024 — which represents a whopping +21,000 more to acquired in a very short period of time. Here’s their plan to do it, broken down between Existing Homes and New Homes.

Existing Homes:

• MLS — traditional resale home channel

• Off Market — specifically their iBuyer direct sales channel

• Portfolios — leverage their industrywide relationships and strong operating platform to buy stabilized homes in bulk

New Homes:

• Develop New Home Communities — pretty straightforward

• Acquisition of New Home Communities — also straightforward

• Scattered New Homes — acquisition of newly-built homes

Why I’m Adding Them to My Portfolio

Now you’re probably thinking to yourself “Alright, they have the ability to grow. But, a lot of that potential growth is leaning into their ability to leverage relationships across the industry to purchase large developments. Is that possible?”

Yes.

Tricon Residential has a stellar board of directors packed full of industry veterans. Outside of the co-founders, you have folks like Frank Cohen (mentioned above) who is the Global Head of Core Real Estate and Chairman of Blackstone REIT — the guy who turned Invitation Homes into the successful company it is today.

Camille Douglas, a Senior MD at Lefrak but more importantly sits on the board at Starwood Property Trust — a real estate lender who has deployed $83 billion since inception.

Renee Lewis Glover, the former President and CEO of Atlanta Housing Authority and also sits on the board of Fannie Mae. No wonder Tricon Residential has such a strong concentration in Atlanta?

This is just the tip of the iceberg. Tricon Residential has a strong board and many incredible folks in their ecosystem.

Here’s the deal — Blackstone knows what they’re doing. They took billions and turned it into billions more through real estate with Invitation Homes. They grew that operation into something so big they listed it publicly on the stock market — and since listing, it’s grown in size by 2X.

Now that Blackstone has completely exited their position in Invitation Homes it seems like they’re looking for their next horse to bet on — and if a $300M investment means anything, they’ve chosen Tricon Residential.

Tricon Residential is operating within the most successful asset classes, especially as we head into a macroeconomic backdrop similar to the 1970s — single-family homes. Their single-family home locations all align very well with the top 10 “hottest markets in 2022” according to experts like Zillow and Redfin.

The Game Plan:

They’re trading around ~$4.3 billion right now, which is ~5X 2024 revenue expectations. I’m using 2024 as the comparable here because that’s when the company is guiding toward hitting critical mass and getting to their 50K house mark. This ~5X multiple makes me excited knowing that Invitation Homes (INVH) with similar margins and free cash flow profiles is trading at ~10X 2024 revenue.

I’ll be dollar cost averaging into a position on the “red days” until the company’s stock makes up 2-3% of my portfolio.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.