Tricon Residential (TCN), one of America’s leading single-family residential real estate investors, reported Q3 2022 results on Nov. 8. There was a fair bit of good news. Unfortunately, despite its future growth potential, Tricon stock is down more than 40% year-to-date.

If you’re an aggressive investor and don’t mind a little volatility, TCN stock hasn’t traded below $9 for this length of time since 2020. In 2023, I could see it revisiting its all-time high of $17.23. 

Here’s why. 

It’s Got Plenty of Ammunition

Tricon’s third-quarter press release stated that it has approximately $3 billion to invest -- $700 million in liquidity plus $2.2 billion of third-party unfunded equity commitments -- in single-family home rental properties in the future. 

In the third quarter, it added 1,988 homes at an average price of $352,000, including the closing and up-front renovation costs. Tricon’s portion of the $700 million outlay is $213 million, with the rest held by institutional investors. It finished the quarter managing 35,545 single-family homes, up from $27,248 a year earlier. 

With the housing market in flux due to rising interest rates, it will only buy around 850 homes in the fourth quarter. That would mean it acquired approximately 7,300 homes in 2022, a record for the company, but below the 8,000 it projected it would buy in August.

Sellers remain stubbornly resistant to lowering sale prices while borrowing costs keep increasing. Until Tricon and its two most prominent peers in single-family home rentals -- Invitation Homes (INVH) and American Homes 4 Rent (AMH) -- see interest rate hikes slow, and house prices fall, they’re likely to sit on their dry powder. 

“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,” CEO Gary Berman stated during its Q3 2022 conference call. 

“The great part about our model is that we can scale our acquisition program up or down very quickly depending on market conditions…”

The company’s Q3 2022 presentation points out that the acquisition cap rate -- defined as net operating income (NOI) divided by the home value -- in March 2022 was between 5-5.25%. By October, the cap rate had increased to 5.75%. 

While the NOI per property has gone up, so has the interest cost. For example, a $360,000 home in March was 11x funds from operations (FFO). By October, it had increased to 14x FFO.

The Business Remains Healthy

Although Tricon has been forced to slow its house buying, it’s not because the underlying business has weakened. On the contrary. It remains exceptionally healthy. 

In Q3, its occupancy rate was 98.1%, 60 basis points higher than a year earlier. The annualized turnover rate for the nine months ended Sept. 30 fell 600 basis points to 16.2% while the average rent growth -- new tenants and renewals -- increased by 8.4%, 40 basis points higher than a year earlier. 

As for average monthly rent, it was 7.9% higher to $1,656 from $1,535 as of Sept. 30, 2021.

As a result, its NOI in the quarter was $54.61 million, 10.2% higher than a year earlier. Its NOI margin was 68.5% on $79.67 million in rental revenue, up from 67.0% and $73.88 million in rental revenue a year earlier. 

For all of 2022, Tricon expects same-home NOI growth of 10.5% at the midpoint of its guidance, up 75 basis points from its Q2 2022 outlook. That’s up despite a 25 basis point reduction in its same home revenue growth outlook for the entire year to 8.5%. A big reason for this is its 275 basis point reduction in expense growth to 5.0% at the midpoint. 

Due to the slowing acquisition of single-family homes, the company’s capital allocation strategy has changed in the near term. It is now allocating excess cash to debt repayment and share buybacks. 

For example, in October, Tricon sold its remaining 20% interest in its U.S. multi-family rental portfolio for $315 million in gross proceeds. It will take $180 million of those gross proceeds to pay down the company’s $500 million credit facility. It will also buy back 2.5 million of its shares.  

It's Popular With Analysts

There are currently 12 analysts covering TCN stock, with 11 giving it a Buy rating and a $12.47 target price, 36% higher than where it’s currently trading.

Further, the company finished the third quarter with a net asset value of $13.74, 30% higher than a year earlier and 4% higher than at the end of June. Of the $13.74, 88% is attributed to its single-family rental business. 

The company’s Canadian multi-family rental business has two properties in Toronto with 786 rental units and eight projects under construction or pre-construction. It also has a U.S. residential development business. It received $32 million in cash distributions through the year's first nine months.

So, even if you valued both of these businesses at zero -- you wouldn’t – their shares are still trading 24% below their net asset value.  

Tricon doesn’t get as much press as its two bigger peers -- maybe because it’s Canadian -- but it’s got a reasonable plan to accelerate growth once interest rates and the economy stabilize. 

If you’re a value investor, Tricon’s long growth runway is currently underpriced by the markets. The mispricing should disappear in 2023 and beyond.  

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