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Streetwise Former real estate darling Tricon Capital revamps strategy, eyes U.S. acquisitions

Coming up on a decade as a public company, one-time real estate darling Tricon Capital Group Inc. is re-inventing itself – again. The latest iteration should make the firm look more like its former self.

The new strategy, dubbed Tricon 3.0, comes after the Toronto-based company saw its shares stall following an incredible five-year run. From 2010 to 2015, Tricon’s assets under management more than tripled to $3.7-billion and its stock price doubled.

The past three years, however, have been more challenging. Management spent much of 2017 simplifying the company’s complicated structure and inking a pivotal acquisition to juice its growth in the United States.

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Now, Tricon has teamed up with an American state pension fund and a sovereign wealth fund on a joint venture that will acquire up to $2-billion real estate, mostly in the U.S. Sun Belt. All three partners will commit $250-million in equity for a total of $750-million.

The move signals a shift away from Tricon’s recent interest in self-funded development, and back to its roots as an asset manager – one that raises money from institutional investors and collects ongoing fees in return for managing a portfolio of real estate loans and physical real estate. In the latest deal, Tricon will manage the properties acquired and collect 1-per-cent annual fees on the partners’ contributed capital.

The joint venture also coincides with a goal to double assets under management to $10-billion within five years.

In the wake of the financial crisis, Tricon saw an opportunity in 2010 to go public by providing investors a macro-play on the United States housing recovery. Riding high after five years, Tricon launched a new luxury-rental division in 2015 focused on development, and raised $150-million to help fund the new venture.

That turned out to be the peak. Development is an inherently riskier business, and the company was putting up a lot of its own capital. At the same time, the U.S. housing market had largely recovered, so it was harder to ride the rising wave. Shareholders hit pause.

In 2018, Tricon has a new strategy. The development arm lives on, yet the company is emphasizing a commitment to its asset management roots and it wants to focus on ‘mid-market’ housing – that is, the likes of single-family rental homes in the United States.

The revamp comes as this segment of the U.S. market is starting to draw attention from large investors. “We believe single-family rental as an asset class is not yet fully institutionalized (Blackstone’s participation in Invitation Homes remains the biggest example we know of to date), and we would expect increased institutional interest to benefit liquidity and pricing over time,” National Bank Financial analyst Tal Woolley wrote in a recent note to clients.

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However, it is unclear whether Tricon can execute such rapid growth.

“A valid concern given the materially increased acquisition activity is the capacity of Tricon to close such an amount of transactions,” CIBC World Markets analyst Dean Wilkinson wrote to clients after the joint venture was announced.

“However, we highlight the sheer volume of potential opportunities the company reviews in its regular course of business and while the acquisition of 3,000 to 4,000 homes per year seems a daunting task, we believe the company is well suited to achieve these goals.”

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