Tricon Residential Inc. (NYSE:TCN) Q3 2022 Results Conference Call November 9, 2022 11:00 AM ET
Company Participants
Wojtek Nowak – MD, Capital Markets
Gary Berman – President, CEO
Wissam Francis – CFO
Jonathan Ellenzweig – CIO
Kevin Baldridge – COO
Andrew Joyner – ND, Investments
Conference Call Participants
Adam Kramer – Morgan Stanley
Brad Sturges – Raymond James
Brad Heffern – RBC Capital Markets
Chandni Luthra – Goldman Sachs
Jade Rahmani – KBW
Mario Saric – Scotiabank
Nicholas Joseph – Citi
Stephen MacLeod – BMO Capital Markets
Tal Woolley – National Bank Financial.
Operator
Good morning. My name is Colby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tricon Residential’s Third Quarter 2022 Analyst Conference Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Wojtek Nowak, Managing Director of Capital Markets. Thank you. Please go ahead.
Wojtek Nowak
Thank you, Colby. Good morning, everyone, and thank you for joining us to discuss Tricon’s third quarter results for the 3 and 9 months ended September 30, 2022, which were shared in the news release distributed yesterday.
I’d 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, EDGAR and our company website as well as the supplementary package on our 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 on our website, and a replay will be accessible there following the call. Lastly, please note that during this call, we will be referring to a slide presentation that you can follow along by joining our webcast or you can access directly through our website. You can find both the webcast registration and the presentation in the Investors section of triconresidential.com under News & Events.
With that, I will turn the call over to Gary Berman, President and CEO of Tricon.
Gary Berman
Thank you, Wojtek. Good morning, and welcome, everyone. I hope you’re all doing well. Let me start by saying that we are living through some unprecedented times with geopolitical and financial experiments that have yet to run their course. But from where we sit today, this looks a lot more like a Wall Street recession than a Main Street recession. I would never suggest that we are a mean to macro-economic trends. But as we’ve seen in the past and continue to see, the demand for our high-quality professionally managed rental homes remains incredibly strong. Our business continues to be resilient and defensive, and I’m pleased to report that we delivered another solid quarter.
Let me share with you some of our highlights on Slide 2. We continue to see exceptional demand for our homes. And in today’s high mortgage rate environment is more compelling than ever to rent versus own a home. This is evident in our results as we delivered another operational quarter with single-family rental same home NOI growth of 10.2%, record high NOI margin of 68.5%, occupancy remaining close to 98%, turnover remaining at a low of 18.6% and blended rent growth consistently strong at 8.4%. And after quarter end, in an environment where deal flow is ground to a halt, we sold the remaining interest in our U.S. multifamily portfolio in a transaction that some have compared to the landing on the Hudson. With this landmark transaction, we’ve taken an important step towards simplifying our business and substantiating the value of our assets, while generating a significant amount of cash to reduce leverage and position our balance sheet for future growth.
On that note, we grew our portfolio by almost 2,000 homes during the quarter. We plan to decelerate our acquisition piece to 850 homes in Q4 and 7,300 homes for the full year, which is still a record for Tricon. While this falls short of our previous guidance of 8,000 homes, we feel this is prudent given today’s capital markets environment, where financing rates have climbed much faster than acquisition cap rates and where the securitization market is going through a period of price discovery.
We remain committed to growing our business over the long term in a strategic and responsible way. At this time, that means slowing the pace of our acquisitions until it makes sense to accelerate once more. To be clear, we are slowing down today so we can buy new and existing homes at higher cap rates in the future and to position ourselves to buy larger portfolios at discounted prices, and we do foresee such opportunities becoming available. The great part about our model is that we can scale our acquisition program up or down very quickly depending on market conditions, and we now have nearly $3 billion of dry powder, including liquidity on our own balance sheet and third-party unfunded equity commitments. We will lean in and deploy that capital when the time is right.
Moving to Slide 3. You can see some more detail regarding our U.S. multifamily portfolio sale, which we completed in October. This was a complex multiparty transaction that would have been difficult to execute in the best of times, and I want to thank our team for their hard work and persistence in getting the sale over the finish line. We’re also grateful to our U.S. multifamily team for their dedication and service to our residents and wish them well as they partner with the new ownership. With this sale, we have fully divested our U.S. multifamily portfolio and expect to complete the property management transition to the new owner by the end of this month.
The transaction was an incredible round trip for Tricon, which started with us acquiring the portfolio at $1.3 billion back in 2019, syndicating 80% in 2021 and exiting the portfolio at a valuation close to $1.9 billion 3 years later. The transaction represents an IRR of 20% plus for Tricon and over 50% for our JV partners and is one of the most successful deals in our 35-year history. Our gross proceeds of $315 million included $215 million for the equity value of the portfolio, plus $100 million of performance fees, of which half goes into our management LTIP pool.
And so with the net proceeds of $260 million after transaction costs, we were able to pay the $180 million outstanding on our corporate credit facility with cash left over in the bank to buy back some of our own stock and to continue growing our single-family rental portfolio. Overall, our liquidity now stands at $700 million. And again, when including unfunded equity capital commitments from our various JVs, we have nearly $3 billion of dry powder to deploy as we enter a new cycle. This transaction clearly demonstrates the massive divide between private and public market valuations that exist today.
Let’s turn to Slide 4. We sold the portfolio at a 4.4% implied cap rate based on Q3 NOI and an evaluation in line with our IFRS book value. This comes on the heels of a steady steam of dispositions of noncore SFR homes that were completed throughout the year at an average 12% premium per reported fair value. In addition, our U.S. residential developments continue to generate cash, while our Canadian multifamily portfolio is being rapidly derisked as it progresses through construction. All of this to say that we have a lot of faith and a reported net asset value of $13.74 per share or CAD18.83 and believe the pullback in our stock is far over done.
Let’s move on to Slide 5 to talk about what we’re seeing out there in the rental housing market. So far this year, market rents are up 6% nationally compared to last year, but with mortgage rates breaching 7%. It has never been more affordable to rent versus own a home. In fact, when we look at the national data, it costs about $700 more per month to own an entry-level home versus renting one. Housing affordability in the U.S. is a significant problem, and that has been amplified by higher mortgage rates and chronic underbuilding with no end to sight to the supply shortage. We take pride in knowing that providing quality rental homes at accessible price points and adding new construction to our build-to-rent program, we’re helping to be part of the solution.
It’s no surprise then, as we turn to Slide 6, the demand for our rental homes remains exceptionally strong. A combination of healthy leasing traffic and relatively few homes available for rent is driving our occupancy and rent growth even as we enter a seasonally slower leasing period at year end. July and August tend to be very strong months in terms of rent growth as families settling for the school year, followed by a dip in September and Q4 as we take more of an occupancy bias. As you can see in the chart, heading into October, we pushed occupancy back up over 98%, but rent growth decelerated slightly to 13%, reflecting some seasonality and our occupancy bias.
On Slide 7, we wanted to frame for you where the demand-supply balance is from historical context. The demand for our homes as measured in leads per marketed home is down from pandemic levels, but still double what we experienced in 2019. With that being said, we are starting to see a return to normal seasonality in new lease trade-outs in Q4 and a moderation in the overall level of rent growth. One of the factors at play could be a higher supply of rental homes that we’re seeing in our markets, which might be caused by would-be home sellers opting to rent at their homes in light of the challenging mortgage environment. Supply rental homes in our Sunbelt markets appears to be back to where it was prior to the pandemic and rents have softened about 3% to 5% from the peak. We wanted to flag these dynamics because COVID-19 brought about a very unique set of circumstances where single-family homes were in exceptionally high demand given the acceleration of suburban migration and work-from-home trends. With a gradual return to the office or hybrid work, we should also expect to return to more typical seasonality and rent growth, even though the numbers are still great by any standard.
Turning to Slide 8, let’s talk about acquisitions. We successfully shifted our acquisition criteria and are now buying a cap rate of 5.75% and higher. However, the cost of debt financing has moved up much faster. When we look back to March of this year, we’re financing at rates just over 4% and buying homes at an implied price to FFO multiple of 11x, which is very accretive. Fast forward to today, the cost of borrowing has moved up to nearly 6.5% with the CMBS or securitization market experiencing significant dislocation. In essence, we are now buying homes at closer to a 14x price to FFO multiple, which is at or above where our stock is trading and is an amber signal for us, meaning that it makes sense to slow acquisitions until we see better alignment between cap rates and financing rates.
As you can see on Slide 9, we are temporarily shifting our capital allocation strategy, while we wait for better investment opportunities to emerge. We plan to allocate less capital to acquisitions over the near term and instead prioritize debt repayment as we’ve done with the proceeds from our U.S. multifamily portfolio sale and in the interim also buy back some stock. During the quarter, we announced the normal course issuer bid to buy back up to 2.5 million shares over the course of 12 months. I want to emphasize that we are not adverse to shutting off the acquisition spigots completely as we did during the beginning of the pandemic and are under no pressure to grow from our JV partners. Likewise, we can turn the taps on very quickly when we feel the time is right. We will be prudent with our capital allocation and are focused on maximum long-term value creation for our shareholders and private investors.
Speaking of fiscal conservatism, I would now like to pass the presentation over to Wissam, who is appropriately dawning a 3 Ps to discuss our financial results.
Wissam Francis
Thank you, Gary, and good morning, everyone. We delivered another strong quarter of financial results. I want to thank our exceptional team for their hard work and dedication as we continue to get better at everything we do.
On Slide 10, we summarize our key metrics for the quarter. Net income from continued operation was up 2.5% to $179 million, which includes $107 million of fair value gains on rental properties. Core FFO was up 22% year-over-year to $46 million. Core FFO per share was $0.15, an increase of 7% year-over-year. AFFO per share was $0.11, down 8.3% year-over-year, but still providing us with ample cushion to support our quarterly dividend with an AFFO payout ratio of 45%. Lastly, our IFRS book value stands at USD13.74 or CAD18.83, up almost 30% year-over-year.
Let’s move to Slide 11 and talk about the drivers of core FFO per share. Our single-family rental portfolio delivered 26% year-over-year growth in Tricon’s proportion NOI. This was driven by a 10.2% increase in same-home NOI and 10% increase in proportionate rental home count. Our FFO contribution from fees increased by 13% compared to last year. This was driven by higher asset and property management fees from newly created SFR and multifamily joint ventures in the past year, while there was a decrease in development fees related to higher onetime commercial land sales in prior year in Johnson. In our adjacent residential businesses, the slight year-over-year decrease in FFO reflects lower results from U.S. residential development versus a very strong comp in the prior year.
On the corporate side, interest expense was up as we have a higher debt balance to support the growth of our single-family rental portfolio, along with higher average interest rates. Meanwhile, corporate overhead expenses increased from last year as we staffed up for growth and started to travel more often. This also included costs associated with our U.S. listings and our favorite SOX compliance program. Of note, we accrued $4.7 million of LTIP expenses related to future expected performance fees. And without this expense, our overhead costs would be in line with Q2 and generally holding flat for the year. Lastly, the diluted share count this quarter was 18% higher than last year as a result of equity offerings and the U.S. IPO we completed in 2021 to fund growth and reduce leverage.
Let’s turn to proportionate debt profile on Slide 12. I am pleased to report that we ended the quarter at 8.3x net debt-to-EBITDA, which is on the low end of the near-term target of 8.8 to 9x. We have minimal near-term maturities, and we aim to limit our exposure to rising interest rates by having most of our debt at fixed rates. Nonetheless, we do have 31% of our debt at floating rates. And note that more than 60% of this floating rate debt is subject to caps on 1-month SOFR. This floating rate debt is primarily in warehouse lines used to acquire homes. This is not a permanent part of our capital structure, and it is an exposure we actively seek to term out and roll into fixed rate instruments when we have a large enough pool of acquired homes to do so.
Our debt profile remains a top priority, and we have been proactive with terming out any near-term maturities. So on Slide 13, we wanted to highlight where we currently stand. You can see here that we have little to no debt maturing until 2024. The 2024 debt includes subscription lines and warehouse facilities used to fund acquisitions temporarily until they are refinanced with long-term debt. We did exactly that in October, where we rolled some of the debt into a term loan maturing in 2027 at a floating rate plus a cap, which gives us optionality on refinancing if fixed rates become more attractive. And we’ve mentioned before, we repaid our $182 million floating rate credit facility upon the sale of U.S. multifamily portfolio.
On Slide 14, I am pleased to present our updated guidance for 2022. This includes an increase in core FFO per share by $0.14 at the midpoint due to the inclusion of net performance fees earned from U.S. multifamily portfolio. These performance fees of approximately $0.15 roughly $46 million after taxes are included in the full year guidance. Aside from that, we essentially moved our guidance at beginning of the year of $0.60 to $0.64 to now $0.60 to $0.62, driven by higher interest rate expense and slight impact of removing U.S. multifamily portfolio.
We basically had a very strong year, including the negative impact of rates by very strong same-home NOI growth. This was offset by tightening up our same-home revenue growth to 8% to 9% for the full year. We also lowered our same-home expense growth to 4.5% to 5.5%, down 275 basis points from the prior midpoint, mainly due to lower-than-expected repairs, maintenance and turnover expenses and potentially for lower-than-expected property taxes. We’ve seen the bulk of our taxes come through in the fourth quarter, and so far, it looks like our tax accrual may have been on the conservative side. We’re coming in lower than expected in Georgia, our biggest market, although we’re still waiting to see what Florida and Texas look like. Lastly, we increased our same-home NOI growth projections to 10% to 11%, driven by the lower expense growth.
As Gary mentioned earlier, we’ve also decided to reduce our pace of acquisitions in order to preserve capital for more attractive opportunities in the future. As a result, our acquisition guidance moves from 8,000 homes down to 7,300 homes for the year. As we look ahead to the current year and beyond, we know that we have excluded our 2024 targets from this deck. We opted to withdraw these targets in light of the uncertain interest rate environment and economic outlook as well as our intent to be flexible with acquisitions. We aim to stay within our target leverage range of 8 to 9x debt to EBITDA and could potentially get an AFFO per share of $0.83 to $0.88 in 2024. But this is much more contingent on strong acquisition volumes, lower rate environment and launching a follow-on SFR joint venture.
We will provide formal guidance for 2023 next quarter. Generally, we feel good about the direction of same-home NOI growth. Like I see some headwinds or FFO from lower acquisition volumes, higher interest rates and a softer for-sale housing market in the near term, we will continue to monitor these factors very closely. Conversely, as we accelerate growth into a more favorable environment, we could see an upside torque to our FFO per share.
And now to give more insight into the drivers of NOI growth, I’ll turn the call over to our very own ray of sunshine in these turbulent times, our Chief Operating Officer, Kevin Baldridge.
Kevin Baldridge
Thank you very much, Wissam, as always, and good morning, everyone. I want to start out by recognizing the incredible efforts of our frontline employees. Our team did a remarkable job this quarter as they continue to deliver a superior resident experience and navigate extreme weather challenges, all without missing a beat. I’m encouraged by the operating metrics we’ve been able to achieve, and we remain vigilant as we monitor the ever-evolving macro backdrop.
Let’s turn to Slide 15 to talk about the drivers of our double-digit same-home NOI growth of 10.2% for the quarter. On the top line, revenue growth was driven by a 7.9% increase in average rents and 30 basis points in occupancy gains. Our rent growth remains healthy with blended rents increasing by 8.4% during the quarter, including a 16.3% increase on new move-ins and a 6.6% increase on renewals. We continue to self-govern on renewals by keeping rent growth below market levels for existing residents. This strategic and responsible approach to rent increases helps maintain our industry-leading resident satisfaction scores, while keeping our turnover low.
As Gary mentioned, rent growth remained strong going into October as we continue to harvest the loss to lease of 15% to 20% that we’ve built up in the portfolio. We think this provides a good basis for continued rent growth going forward. Our bad debt expense, which is embedded in these revenue numbers has been tracking around 1.5% over the past few months, and we see it reverting to pre-pandemic levels of 1% or lower later into next year. Finally, other revenue grew by almost 7% from last year. We see a path to increasing other revenue by about 14% per home over the next couple of years as we continue to roll out current programs such as Smart Home technology and renters insurance and introduce new services to enhance the resident experience like telecom partnerships, solar panels or discounted house cleaning services.
Let’s turn to Slide 16 to discuss our same-home expense growth of 2.9%. The rise in expenses was mainly driven by property taxes, which were up 15.8% from last year, reflecting significant home price appreciation in our markets. As Wissam mentioned, it looks like we’ve been maybe a tad conservative on our tax accruals in key markets like Atlanta. As bills continue to roll in through the next month, we’ll have a better sense of where we will land for the year. On the other hand, repairs and maintenance expenses were down this quarter, although the portfolio experienced higher work order activity as well as cost inflation post pandemic. We had a greater proportion of work orders that qualified to be capitalized instead of expense. Turnover expense was also down significantly as our turnover rate decreased by over 220 basis points from last year to 18.6%, thanks to our focus on customer service and our occupancy bias. We also capitalized a higher proportion of turn costs given the more extensive work being done on homes with longer resident tenures and people spending more time in their homes during COVID-19. And lastly, property management expenses, we’re seeing inflationary pressures and labor costs offsetting some of the efficiencies of scale that we’ve achieved as our portfolio has grown.
Let’s move to Slide 17 to update you on our hurricane response and impact. To say I’m impressed with how our team came together would be an understatement. As soon as the hurricane hit without question and without hesitation, team members from neighboring markets stepped in to help right away. All in all, we had 15 teammates from surrounding markets travel to Florida work day and night to make sure our residents were looked after. Our SVP of Eastern Operations, Brian Edge, said it best, and that he was overwhelmed with the teamwork, the response of wanting to help from multiple departments and, of course, the can-do attitude of the entire team. Indeed, Brian, the way this team rises to every occasion to go above and beyond for our residents continues to amaze me. I’m pleased to report that our people and residents remain safe throughout the hurricane with minimal financial impact to Tricon. In total, we expect a repair bill of around $3 million, with 1/3 covered by insurance and minimal impact to FFO.
And finally, turning to Slide 18, I’m happy to share with you our recently launched resident bill of rights, which outlines our strong commitment to providing quality move-in ready homes with caring and reliable service. This includes some key elements of our Tricon Vantage programs, such as moderating rent growth on renewals, giving our residents the opportunity to buy their rental home if we decide to sell it. And our newest program that is getting rolled out this month, offering down payment assistance to residents who wish to buy the home of their choosing. Of course, we’ve been doing many of these things all along, but it was important to take formal and public accountability and put pen to paper to ensure our residents were aware of how much we truly care. We don’t just talk to talk, but we walk to walk. This bill of rights is the first of its kind for our industry. And I hope that we have led the way and open the door for others to do the same.
Now I’ll turn the call back to Gary for closing remarks.
Gary Berman
Thank you, Kevin. Our resident-centric approach continues to make us a leader in the SFR industry and is a source of inspiration for our team. To wrap up, we want to leave you with a few key takeaways on Slide 19. First, the value of our company is underpinned by our SFR portfolio, which continues to perform extremely well. Next, I want to emphasize that we believe in responsible growth. We are prudent in our capital allocation and continually elevate all available options to foster long-term value creation. And finally, we have the platform, people, technology and dry powder in place to grow when the time is right, and that growth can add significant torque to our FFO per share profile. And as I said at the beginning of this call, although we’re not immune to macroeconomic pressures, we believe our business is resilient and defensive and it was designed to perform well in good and bad times. As we look ahead, we are perfectly positioned with an inflation-protected portfolio, a strong balance sheet and ample third-party capital ready to deploy when we move back into a risk-on environment.
I will conclude my prepared remarks by saying that I’m truly privileged to work alongside such a world-class team, their hard work, dedication, resilience and willingness to go above and beyond for our residents is unmatched and their can-do attitude enabled us to produce another strong quarter in the face of a difficult macroeconomic environment.
I will now pass the call back to Colby to take questions. Wissam, Kevin and I will also be joined by Jon Ellenzweig, Andy Carmody and Andrew Joyner to answer questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Chandni Luthra from Goldman Sachs.
Chandni Luthra
I’d like to start with the flip that you guys saw between OpEx and CapEx, so if your expenses moved away as the scope of the order increased and moved into capitalizing those expenses. So by when should we expect that relationship to normalize? Like how should we think about these line items going forward? And until then should we expect CapEx to be elevated? When will OpEx look more like normally — like it normally should?
Gary Berman
Chandni, that’s a great question. I’m going to pass that on to Kevin to elaborate.
Kevin Baldridge
Thank you, Gary. Yes, I think that we’ll see things normalize again into probably the middle of next year, what’s happened, and I think you’ve seen it as we’ve spoken. As we just had people living in our homes longer, not only longer tenures, but they’ve also been living in a home 24 hours a day before they were living at home 8 hours a day, for instance. And so the turns that we’re getting take our larger scopes and even the work orders that we get on R&M are more involved. We had a — we are still getting people that had not been calling us for 2 years. They were afraid to have people in their homes on the property. Now we’re getting those waves of calls and the workovers are just more extensive. So I think that’s going to continue, definitely through the rest of this year. I would say in — for sure, the first quarter next year, probably part of the second quarter. It’s hard to totally gauge it. But I would say by mid next year, we’ll be back to where our expenses will be tracking pretty much with inflation.
Chandni Luthra
Got it. And for my follow-up, I’d like to sort of focus on the long-term outlook that you’ve obviously removed from the deck. But you mentioned during the call that you can still get to that range of core FFO $0.80 to $0.88, pardon me if I’m misrepresenting the numbers given in the past. But what would it take for you to get there? Like how much of a normalization in lending markets would we need and basically transaction markets to come back versus something else that we might be missing? Like help us understand how should we think about just beyond 2023 from here?
Gary Berman
Yes. I’ll take that. So look, I think — and just to clarify, you’re talking about our soft guidance for 2024, which was $0.83 to $0.88. And we’re moving that because we think it’s at risk. We’re definitely in a very difficult and unpredictable macroeconomic environment. Nobody is really clear on the trajectory of the Fed. The market is reflecting that. And so we think it’s just prudent to remove it at this time. It doesn’t mean we can’t achieve it. And I think that to answer your question specifically, what it would take is we’d have to go back to buying 2,000 homes a quarter, so 8,000 homes a year.
We would have to see a slightly positive relationship or spread between acquisition cap rates and financing rates. Now that doesn’t necessarily take a lot to happen. So for example, if you’re buying at a 6 cap and home prices were to decline by 5%, that’s a 30 basis points increase in your acquisition cap rate or if rents or NOI went up by 5%, that’s another 30 basis points or if the Fed pauses or slows down, again, financing rates maybe come in a little bit. So it doesn’t take a lot, but in order to hit that level of acquisitions, 8,000 a year, we want to see a slightly positive spread between acquisition cap rates and financing rates, we think that makes sense.
The next thing we need to see is strong same-home NOI growth. I think we’ll probably see that decelerate a little bit next year. But I think if we could hit high single digits, 7% or 8%, I think that helps us get there. And obviously, we want to get to JV-3. That’s a big catalyst for fee income. And we’re close to that, but we’d like to get to that, hopefully, by the end of ’23 or into ’24. And that gives us a chance to line up for, let’s say, $0.83. But what I would say this, Chandni, is that if we don’t get it in ’24, maybe we get it in ’25. All we’re looking at here is a period of deferral as we slow down and just wait for better opportunities to invest our capital. But once we do, there’s significant toric in our FFO per share profile.
Operator
Your next question comes from the line of Mario Saric from Scotiabank.
Mario Saric
Just coming back to the ’24 guidance question, Gary, what was the original acquisition spread that the team built into the $0.83 to $0.88?
Gary Berman
Yes. So the last time we updated it, we were actually pretty neutral. So we were looking to buy homes at a 5.5% cap and we were looking to finance that at just under 5.5%. So maybe 5.25%, and that would have got us there. But since then, financing rates have kind of blown out to about 6.5%. So that just doesn’t work. right? So we have to get back into more of a positive spread scenario. It’s actually interesting even with a little bit of negative leverage, which we don’t like, you can still generate very strong IRRs, right?
So it’s something — it is interesting to kind of think about it from a private market perspective because if we could buy homes, let’s say, the 6 cap and we can grow that NOI at 5% or 6%, we’ve been doing that over the long term, obviously, much higher now. But if you can grow that at 5% or 6%, you can lever to 60% to 65% and have neutral, even slightly negative leverage. And you see and let’s say home prices grow by 3% a year, you can still probably generate about a 15% gross IRR. So that’s the math that’s happening in the background for our private investors and kind of why they want to go faster, but we just think right now, Mario, it makes sense for us to slow down and wait for better opportunities ahead.
Mario Saric
Got it. Okay. So if it’s — I think a longer-term positive acquisition spread seems reasonable in terms of an expectation in the broader market once things settle out. There’s an abundance of opportunities to buy homes when that happens. So presumably kind of 8,000 homes per year that you need is really kind of up to you once those parameters are identified. So when you sit back and think about kind of the factors that you identified, what are you most concerned about in terms of assumption violation? Like is it the same-store NOI growth at 70%? Is it uncertainty about getting SFR JV-3 off the ground, given changes in appetite on the institutional side that the biggest risk?
Gary Berman
Yes. No, we feel great. I mean we feel great about the underlying fundamentals of the portfolio in our operations. Just really there’s really no concern about same-home NOI growth. I mean we’re not anticipating a significant or difficult recession. If we did, that might change things. But kind of from where we sit today, again, as we said in our prepared remarks, we think this is really more of a Wall Street recession. The real only level of uncertainty or concern is around the trajectory of interest rates, right? That’s what’s really holding us back, and that’s holding the debt capital markets back, and that’s why we’re seeing dislocation. But once that dislocation goes away, and it will, I mean, this is not permanent.
Sometimes when we’re in the public markets, we have us feeling like things are permanent, but they’re not, right? We will find equilibrium again. We’ll find a point where acquisition cap rates or exceed your financing rates, and that’s a signal for us. That’s the green light to go much faster. And we do think that we’re setting ourselves up for a significant opportunity because homebuilders at some point, we think, are going to want to transact. Right now, there’s a bit of price discovery going on. We bought some homes, discounted homes from builders, but we think there’ll be more of that. We also think that a lot of the start-ups in single-family rental may have trouble getting financing and so maybe some portfolio shake loose. And we want to make sure that we’re ready for that because we think we can get those at discounted prices.
Mario Saric
Got it. Okay. And then in terms of the organic growth, like the 7% to 8% you’re talking about, still very strong. A key element of that I suspect would be your renewal spreads given the turnover is where it is today. Like during the onset of pandemic, it kind of froze those renewal spreads in response to a generational event. How should we think about those renewal spreads in the event of a slowing economy, not necessarily a hugely deep recession in relation to the mark-to-market you have in the portfolio today? Like how confident are you that you can see kind of the mid-single-digit renewal spreads in ’23?
Gary Berman
Pretty — and we’re confident. And I think the main reason we’re confident is, one, we still think we’re going to see some level of inflation. It’s going to be moderated inflation, but we’re still — we think we’re going to be in an inflationary environment. Therefore, it makes sense to have higher renewals. We moved that up, as you said, from about 0% in the heart of the pandemic to nearly 7% today. So that has moved up. And I think we’re comfortable with where we are today. We think it makes sense. And it makes sense, in particular, given the loss to lease, right? The loss to lease in our portfolio maybe came down a touch when we comped it against Zillow, maybe last quarter was 20%. This quarter is 18%. But we still have a lot of room there. And so we think for passing on renewals in the 6% range, it’s still a very good deal for our residents.
Mario Saric
Got it. Okay. And the last question, just on — coming back to the capitalization versus expense discussion this quarter. In terms of the 2.9% growth in expenses year-over-year, what would that have been roughly without changes to the capitalization versus expensing mix?
Gary Berman
Yes, the way we would think about it is if you look at the cost to maintain, which includes everything that we’re expensing and capitalizing, that’s up about 21% and about 40% of that is related to inflation, whether it’s labor or materials. So that’s up about 8%. That’s the way I would think about it. I think into next year, again, I’m sticking my neck out here, my best guess is that’s probably — that again, moderates maybe to about 5%, right, from what we’re seeing. So that — hopefully, that gives you some better indication into the expense items.
Operator
Your next question comes from the line of Brad Heffern from RBC Capital Markets.
Brad Heffern
You mentioned a potential further selling acquisitions in the MD&A. So I’m curious if you’re still putting a significant number of homes under contract today and maybe what the current quarterly run rate is?
Gary Berman
Yes. So the homes that are under contract today are going to hit Q4 and some of the 850 homes that we’re guiding to a significant amount of those are already under contract. We are slowing down at this point into Q1, right? So I kind of — I think if we think, let’s say, 850 for Q4, I think it’s probably a reasonable assumption for where we end up in Q1. We want to go slower. We want to conserve capital. But as we said in our prepared remarks, if we see a change in the environment, we might go much faster, and we can turn on the dime. So I would expect slower into Q4, slower into Q1. But then maybe by the time we get to Q2, maybe it’s fast. We’ll see.
Brad Heffern
Okay. Got it. And then can you talk about that from the standpoint of your partners? Obviously, the flexibility makes sense from your standpoint, but you sort of walked through the math on how you could still generate a solid IRR for your partners. So how long are they willing to sort of be flexible? And how does waiting longer impact the decision on JV-3?
Gary Berman
Well, it’s unusual for them. They’re not used to managers or GP saying, hey, we want to slow down because typically, private managers want to put the capital out and they’re incentivized to do that from a fee perspective. So I think they were maybe a little bit surprised, but I think they would agree that with us that it makes sense and they’re very supportive and patient. We’ve got no issue getting the capital out, I think, for both funds, homebuilder direct and JV-2, the investment period in 2024. So we’ve got lots of time to put that capital out, and they’re ready for us when we complete the investment period for the next month. They’ve all expressed an indication to us that they’re very happy with the program. They really like SFR and they’re supportive of us re-upping and raising new funds. So this is a Tricon decision. It’s not a partner decision. We want to go a little slower. We have discretion to do that. They’re supportive, and we know they’ll support us when we want to go a lot faster.
Operator
Your next question comes from the line of Nicholas Joseph from Citibank.
Nicholas Joseph
Maybe just on further to capital allocation. How are you thinking about the share repurchase program and balancing that against kind of current leverage, which I recognize is within your target range, but a bit higher than what we see with many of your single-family peers?
Gary Berman
Yes. So the capital we receive or the proceeds we received from selling the U.S. multifamily portfolio has been really largely allocated to debt repayment. So that’s the first thing we did. We think that makes a lot of sense. It obviously improves our leverage metrics subsequent to quarter end. And then we have a little bit of capital left over and some of that capital will be left — will be for buying back our stock. We started to do that. We think it’s more of a signaling effect, Nick, than anything else, the buyback. We think it makes sense. I mean, to be clear from an economic perspective, it’s probably neutral. We’re probably neutral between buying back our stock and acquiring homes given the fees we earn. But again, right now, it’s we pay down the debt, we’re waiting. We’re going to use some money to buy back stock, and then we’re going to wait for better opportunities to grow faster again.
Nicholas Joseph
Is there additional debt that could be easily paid down? Or are there prepayment penalties associated with them? Just trying to get a sense of kind of the — saying that — yes?
Gary Berman
Yes, I’ll hand that over to Wissam to talk about kind of the near-term maturity schedule and what is?
Wissam Francis
Nick, as you could see, there’s nothing maturing in 2022 or 2023. We paid back most of that. In addition to that, 8.3x net debt to adjusted EBITDA was as of Q3. After we sold the portfolio and used the proceeds to repay back debt, our new number is 6.8x. So I think that’s the number to kind of look at as well. We do have the ability to pay back some of our debt that’s maturing in ’25 and ’26, but we really think it’s more prudent to save our capital, as Gary mentioned, for acquisitions and growth potential and some potential deals coming down the pipeline. And we also have — we just mentioned, as of October, we did refinance one of the deals to be a floating rate debt that matures in 2027. We have the ability to refinance that also with no defeasance cost, but we put a cap in place to also hinder the upside. So we think we’re in a good position on that metric as well as our net debt to adjusted EBITDA, remember, our goal that we set short term was 8 to 9x, and we’re going to stay within that range.
Nicholas Joseph
That’s helpful. And then just in terms of retaining cash flow, right, you have a lower payout ratio relative to peers, obviously not a U.S. REIT. Would that incremental generated free cash flow will also be used for buybacks?
Gary Berman
I don’t think so. I mean I think we’ve got enough cash left over now to implement the NCIB, which was to buy 2.5 million shares. So we’ll get through that 2.5 million shares, and then we’ll reevaluate. I think the cash that the business is throwing off probably will be used for acquisitions, right, Just at a more moderate pace.
Operator
Your next question comes from the line of Adam Kramer from Morgan Stanley.
Adam Kramer
Look, I just wanted to ask about kind of the JV, just kind of their share versus your share, right? I think it’s held in fairly consistent. Your guys’ kind of share of acquisitions about 30%. Another way to kind of continue with external growth, right, just to kind of scale down kind of your proportionate share of future acquisitions. Wondering what kind of your appetite is for that? And if there’s any kind of change in your thought process around that?
Gary Berman
Yes, it’s a great question, Adam. We go back and forth on this a lot. I mean we arrived at the kind of 30% or 1/3 ratio because it generates significant NOI, and we want our shareholders to get the benefit of that NOI. And if you then look at the mix of revenue, it’s about 80% NOI and 20% fees. And we kind of like keeping it in that kind of ratio. But look, if we were in an environment where the stock price is at, and it’s very difficult to raise money, we might look at going with a slightly lower co-investment.
I could tell you that our partners would have no issue with it. We’re the ones who want the 1/3 co-investment. They’re not used to seeing that. They’re used to see much lower co-investment ratios. So it’s not an issue from a capital-raising perspective within the private markets. It’s more of a Tricon request. So we do have flexibility to go lower there, but it probably wouldn’t be our preference. There’s other options, for example, we could also think about contributing some of our homes in our wholly owned portfolio in lieu of cash. So that’s another way to get the JV-3 quicker. We do have some flexibility if the markets aren’t there, but it’s something we’ll continue to think about.
Adam Kramer
Got it. That’s really helpful. And then just looking at kind of the October leasing metrics. Look, understandably, you’re right, kind of some seasonality here in kind of the new number. I’m just wondering kind of what you’re seeing on the ground in terms of kind of further deceleration in the new lease growth as we get into the holidays, recognize occupancy stabilization is important. I think you mentioned in your remarks, Gary, but I’d love to just kind of hear what you’re seeing in the new lease metric as we kind of get into November and towards year end here.
Gary Berman
Okay. I’m going to pass it on to Kevin to give a little more detail.
Kevin Baldridge
Okay. Thanks, Gary. Yes, I mean, really what we’re seeing right now is really back to seasonality. It’s something that we hadn’t experienced for the last 2 years in the pandemic, and we’re just going back to normalx. In pre-pandemic times, we would experience new lease rent growth decelerate sometimes up to 300 basis points from what it was in July and August into September, October, November. So that’s what happened. We got occupancy protective in late August, September to try to push our occupancies up so that homes wouldn’t be vacant throughout the winter. And so we took our foot off the gas, and we accomplished what we needed to. We were 98.2% in October for the month, we’re 97.9% today, so we can be aggressive as aggressive as we can be in the winter. So I think we follow past patterns. We will see a deceleration, still a little bit more in the coming months, and it will pick up again in the spring time. So it’ll just follow more cyclical patterns that we’ve had before.
We’re fortunate still to have that 15% to 20% loss to lease to fall back on. We’ve been able to — our renewal growth, we’ve been able to hit that to the very top of our upper limit of our self-governance. And a thing to remember is, I mean, we’re still — the demand side is still super strong. We have more demand than we had pre-pandemic, say, 2019 by almost twice. There’s still 4 million housing units short. And if you think about our industry, our average age cohort is 38 to 39 years old. That’s the leading edge of the millennial generation. The bulge of that millennial generation is turning 30 to 31. So that leaves like 8 to 10 years of massive demographic strength that’s coming our way. So I feel really confident with where we’re going, our business, just it’s is going to be back to some of the cyclicality, but it’s staying strong. And it’s a really great asset class.
Operator
Your next question comes from the line of Jade Rahmani.
Jade Rahmani
Projection for HPA for 2023 full year for the overall market, not necessarily take on the portfolio?
Gary Berman
Jade, thanks for the question. I got to tell you, I’ll do my best, but I think if I could truly predict HPA and interest rates probably wouldn’t be sitting here, although I think we’re doing okay. I’ll try my best. Look, what I’d tell you is that it’s really surprising that with mortgage rates moving up from the 2s to over 7% in a matter of months that home prices have been so stable. It truly is. And I think Kevin just talked about it, it’s an indication of how tight the supply is in the market. There’s just no supply. And in this type of environment, when mortgage rates move that fast, the market gets shocked and people stay in place. They’re not going to sell their homes, right? Because why would they sell their home if they’ve got a 2% or 3% mortgage. They’re not going to take on a 7% mortgage that just doesn’t make any sense. So you end up getting a lot less listings and less supply and that keeps prices steady. And so we’ve probably only seen home prices drop 3%, maybe 5% from the peak in our 21 markets. That’s it.
And by the way, we have more — we have better data than almost anyone. I mean, virtually, no one’s buying as many homes as we are in the country. So we’ve got very good data on home prices. But again, they barely come off the peak. And into next year, our team thinks maybe a little bit more softening, maybe they come down another 5%, maybe, but we’re not anticipating anything significant, right? And if they do come down 5%, by the way, that’s an opportunity for us because it means like on a 6% cap rate, again, we get another 30 basis points positive on the spread, which is good. But we’re not — we’re expecting things to be fairly steady, maybe down a little bit next year.
Jade Rahmani
On the CapEx side, Tricon seems to have bucked the trend of what peers have seen with much higher R&M, much more inflation pressure and also the accrual issue on property taxes. But yes, the CapEx even on a same-store basis was up dramatically. So some might interpret that as just moving things around capitalizing versus expensing. But are there any specific items that really triggered that shift? Can you just give a little more color on that? Have gotten some –
Gary Berman
Yes. I mean I think for sure – and I’ll let Kevin answer the question on CapEx. And Jon, maybe you want to weigh on kind of what we’re seeing with property taxes. We haven’t talked about that yet. But I think, yes, there’s definitely some of this is geography, right? Because, again, if you look at the cost to maintain, it is up 21% year-over-year, and that did impact our AFFO.
Kevin, maybe you want to kind of dive in a little bit and break that down for Jade. And then, Jon, over to you on property tax.
Kevin Baldridge
Sure. Thank you, Gary. Yes. So as Gary was saying, our cost to maintain, which is really more of a holistic look of what we’re spending is up 21%. 40% of that roughly is due to inflation on trades and materials. About 25% or ¼ of it is due to the higher volume of work orders. And again, I talked about it a little bit earlier in that we had a lot more people calling and allowing us into their homes, allowing us on their properties now that the pandemic is in the rearview mirror. So we had a lot more work orders than we did in the previous period. And then it was the nature of the work orders because we hadn’t been in the homes, kind of a backlog and people not calling us when we got into the homes, the nature of the work orders were just more expensive, which hit capitalization ratios.
Our total cost to maintain, I would say, is going to be $3,200 to $3,300 in the near term. And then once we get through this, it should then drift back down again, maybe mid-next year into the $3,000 to $3,100 cost to maintain. In that way, that encapsulates regardless of the buckets or the geography, our total cost will drift back down as we get through some of these harder turns and some of the work orders. But things like HVAC, plumbing, deck repairs, they are all just more expensive. And on the turns it was flooring, landscaping, interior paint, we just did a lot more of it due to people having lived in their homes 24 hours a day and staying in their homes longer. Hopefully, that’s a little bit more color for you.
Jade Rahmani
On the work order side, was it more on – more work orders generated by existing tenants than on homes that were turning because the turnover ratio declined year-on-year?
Kevin Baldridge
Yes. It’s definitely on occupied homes for the recurring CapEx, the occupied homes really contribute almost 2/3 of the recurring CapEx. So it’s people that are there, that are calling us in to do work in their homes.
Gary Berman
Jon, do you want to talk about property taxes?
Jonathan Ellenzweig
Yes, sure. And I think we touched on this a little bit during the call, but we tend to take a very conservative approach to property tax accruals, especially in times where we’ve seen rapid home price appreciation. Thus far in our portfolio, we’ve seen essentially all of the property tax bills come in, in Georgia, Arizona, Nevada, California and about 60% of Florida. We’re still waiting for the rest of Florida and most of Texas. But I would say for the bills that have come in so far in aggregate, we’re probably a little bit on the better side of our accrual due to that conservative approach that we took at the beginning of the year. So going into Q4, we’re feeling good to very good about where we stand on property taxes and again, that’s just because of our approach.
Operator
Your next question comes from the line of Stephen MacLeod from BMO Capital Markets.
Stephen MacLeod
Just with respect to the securitization market, Gary, you talked about just sort of — it’s frozen up a little bit. So just curious how reliant are you on securitizations to create room on your facilities to fund future same single-family rental acquisitions?
Gary Berman
Yes. Great question. I’m going to have Wissam answer that.
Wissam Francis
Steve, look, the debt markets are very volatile today. I know the last securitization deal that we did was in July was up 5.41%. That same deal today will be closer to 6.5%. The AAA spreads are close to 200 to 225. So that’s why we’re saying we’re taking a pause of securitization. However, during this time where securitization market is not available, we’ve seen a lot of new entrants of floating-rate balance sheet loans that are available for SFR, which provide short-term bridge until less volatile markets. You saw us do that in October when we did a term loan. It was a 5-year term loan, extended — cleared out our warehouse facilities, moved some of that debt even though variable to mature in 5 years from now, remain kept the flexibility to refinance at any time we want and put a cap in place. So I know it’s not fixed, but it’s quasi fixed in the sense that we have an upper limit. So that basically freed up some of our stuff. And we’re seeing a lot more entrants on floating rate balance sheet loan available to us now.
Gary Berman
Yes. And what — I’ll just expand on that to say that I have every crisis comes an opportunity in the past in really good times, we were just going directly to the CMBS or securitization market. And now we’ve really done a great job, I think, diversifying those financing sources and now have lifecos that want to lend to us. And the last deal that Wissam talked about is from Nomura, which is an Asian bank. So we’re seeing a proliferation of lending sources, which just over time makes the industry better and helps it mature.
Stephen MacLeod
Okay. Great. And then just with respect to the SFR JV-3, are there any limiting factors on the horizon that you could see — that you see that could potentially limit the funds we raised for this fund?
Gary Berman
I mean really the only thing is we got to get through JV-2. So it’s just really that — it depends on the pace of our acquisitions. How fast do we go in 2023? We talked about going a little slower in the first half and maybe a lot faster in the second half. So it really depends on that pace. You have to invest the capital and complete the investment period really before we can raise the next bond. Those are the limitations. But we’re confident that whether we go slower or faster, this is likely going to be a later ’23 or ’24 event. And as I said before, our partners have expressed willingness and support to raise another fund.
Operator
Your next question comes from the line of Tal Woolley from National Bank Financial.
Tal Woolley
Just wanted to ask quickly about performance fees. I think if you had sort of been continuing at the same clip in terms of purchasing, you probably would have finished out JV-2 early in 2023. Would there have been any performance fees recognized at that point and do you give a rough idea of what the quantum that would be?
Gary Berman
No. Because — yes, we do have a schedule in our supplemental, which goes through the performance fees. And I think that number is what, about $280 million. Is that right, Wissam? Yes that’s about $280 million. So that number is — that does include the sale of the U.S. multifamily portfolio. So the $100 million is in that $280 million, but you could take a look at that in the supplemental, Tal. But no, I would say that the U.S. multifamily sale was unusual, because typically, what happens is we have to wait till the end of the turn in order to generate the performance fees if we’re in the money and the terms on the funds are typically 8 to 10 years. That was the case of the U.S. multifamily portfolio as well. We just made a decision with our partners to exit earlier, and that’s what triggered the performance fees. It was the actual sale or disposition. So we don’t really — in terms of JV-1, we don’t expect any performance fees until 2026 and JV-2 would be 2028.
Operator
Your next question comes from the line of Brad Sturges from Raymond James.
Brad Sturges
Just on the Toronto development pipeline, obviously, leasing demand in Toronto has been quite robust and market rent there has been really accelerating. Can you just talk about how you’re expecting returns to look like relative to initial underwriting expectations, just given some of the cost inflation you’re seeing relative to the market rent growth that’s currently happening in the market?
Gary Berman
Yes. Good question. I’m going to have Andrew Joyner break that down for you.
Andrew Joyner
Brad, we’ve got a very real-time test tube. We just launched the Taylor project at King & Spadina last month. And just to share how leasing is going, we’re about 1/3 leased already. We’re already at our March 2023 absorption target. So demand is incredibly strong. And I think that’s going to continue just given the favorable rent versus own dynamics in this higher rate environment and Canada ramping up its integration now to $500,000 a year, each year through 2025. So we’re seeing really robust growth.
Gary Berman
And returns? Are you talking about yields?
Andrew Joyner
Yes. We’re going to deliver the Taylor north of 5.5% in terms of development yields. And I think we’re going to continue to have 5 handles on our projects that continue to deliver, in particular, 2023 as Canary Landing comes online as well as the IV. We’re well ahead of underwriting in terms of rental growth. And clearly, absorption demand has exceeded our expectations.
Gary Berman
Yes, I would just add, I would say that projects are taking a little bit longer than we think based on underwriting, costs are definitely up, although we do a great job in locking in a lot of those costs upfront. But revenues are also rents are above what we underwrite. So all in all, I mean, we’re looking to be in really good shape, and I think we’re going to have some really tremendous value creation from this portfolio. So we feel great about it.
Brad Sturges
Okay. That’s great. And just to go back on the acquisition program for SFR. You walked through the dynamics of moving from old, perhaps a green light on the flip side, what would it take or what’s the trigger to go to red and maybe more prudently paused the program?
Gary Berman
Yes. I mean red would just be the Fed going harder.
Operator
There are no further questions at this time. I’ll turn the call back over to Gary Berman, President and CEO of Tricon Residential.
Gary Berman
Thank you, Colby. I would like to thank all of you on this call for your participation. We look forward to speaking with you again in the new year to discuss our Q4 and year-end results.
Operator
This concludes today’s conference call. You may now disconnect.
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