Andrew (Andy) Carmody, Managing Director at Tricon Residential (TSX:TCN), joined the Real Estate Daily Beat for an interview. We discussed the firm's new $5 billion single-family-rental venture, build-to-rent strategies, the bull thesis for the housing market, and where the growing institutional category goes from here.
Daily Beat: In the past year, the SFR space has continued to solidify itself as an institutional class. With lots of new competition in the space, how does Tricon differentiate itself from the Blackstone and KKR’s of the world? What was the pitch?
Andy Carmody: There are three big things ingrained in our strategy and it’s a big reason why we've been successful in growing our SFR business and raising third-party capital.
Number one is our focus on the middle market. We're targeting homes for residents that earn between $60,000 to $100,000 a year. They tend to be residents that are seeking single family housing, not apartments or condos. Our tenants tend to be hardworking American families. I found that to be a good niche. We're not going for the lower level of the market or the ultra luxury space – it's the middle that's been very good to us.
The second thing is that we run a technology enabled platform. We've essentially been able to build and scale the business by using technology to better manage home maintenance, leasing, and operations. It's not easy to manage a lot of individual scattered homes.
The last thing is our focus on being an excellent landlord or manager for our residents. Customer service is something that we've put at the forefront.
Daily Beat: When it comes to the build-to-rent (BTR) space, GTIS partners and Walton Global Holdings come to mind as firms that recently did large deals. The thesis is basically if we build to rent, the margins are better and properties are easier to manage. It sounds like Tricon’s vehicle is more focused on acquiring homes, not developing. Why did you choose this approach instead of BTR?
Andy Carmody: We also have an active build to rent strategy, but it looks a little smaller on the page from today because the resale business is larger for us. Supply is a meaningful issue across the country. We haven't built enough houses for Americans’ most preferred product type, which is a single family home. And in particular, on the rental side, we have fewer units today available for rent than we did a few years ago. We are also working on solving the supply problem as much as we can. It's a longer lead and longer process to do so, but we are building that business similar to GTIS and others. We ultimately think that bringing more supply to the market as a whole will be very well received, but we're also continuing to acquire, renovate, and lease existing homes in the business.
Daily Beat: What’s the average hold period for houses Tricon acquires?
Andy Carmody: We have no set schedule on holding homes and intend to own any home that we buy in perpetuity. So we're in this for the long haul. We do thin the portfolio occasionally by a few hundred units a year because either they're in poor locations, hard to service or have been underperformers, but it's a very small fraction of the total.
Daily Beat: Why specifically the Sunbelt over other parts of the country?
Andy Carmody: We believe that demographics is destiny and the Sunbelt is growing at about twice the national average, which is really favorable for demand. And these are the markets that American families want to live in. The high quality of life, warmer weather, and more affordable lifestyle is a real draw. You see that in Texas, Arizona, the Carolinas, and Florida as companies continue to relocate there, which bodes well for housing demand.
Daily Beat: There was recently a report that institutional investors only own 300,000 U.S. homes, which is only 2% of rental homes, with 85% being owned by investors of 10 or fewer properties. What does this number look like in a few years?
Andy Carmody: I think there is a meaningful growth opportunity for institutional owners, but I believe that will grow slowly over time. It is hard to buy 5,000 to 10,000 homes, which doesn't move the needle in terms of the whole housing market. We really just own a tiny sliver of the entire market. And the vast majority of rental homes today are managed by what we call mom and pops. That's the vast majority of the single family housing stock.
Institutional owners are adding slowly to that in aggregate. Maybe we add 10,000 to 20,000 homes per year to the 300,000, perhaps a little more than that, but I think it's a slow process relative to the entire housing market in the US.
Daily Beat: What’s your bull and bear cases for the housing market in the next couple of years?
Andy Carmody: The SFR market is the most preferred housing type for Americans. In fact, most economists and forecasters believe we are still undersupplied. So we expect that that demand – some would say elevated levels – to hold and stabilize. Some argue that there's some risk in the housing market, but today we think there is more demand than supply and has been for several years. Whether that's in a home that a resident buys and mortgages and owns and manages themselves, or in one that we buy and lease and manage on behalf of the resident, we think there is meaningful excess demand in the current market.
Another indicator that gives us some confidence that the market is reasonably strong is that it's very hard to mobilize supply. In fact, it's harder than ever in the United States to source, title, and develop new single family projects. It's challenging in all asset classes, but particularly difficult for home builders to get sites approved today. And we think that will continue to hold back supply in light of this excess demand, which gives us a bit of an optimistic outlook in today's environment.
If rates rise very sharply that obviously curtails buying power for anyone who wants to buy a new home. So we may see new home demand be curtailed a bit if rates see a meaningful spike of a hundred basis points or more and even slower if they were to increase more. But that would really be about the only concern we have in the housing market today.
Daily Beat: Would you say it's a fair characterization to say, “as goes the housing market, so goes to the SFR space?
Andy Carmody: I think that's fair, although you'd have to decouple for sale and for rent because we think that the rental product is generally more accessible and tends to be a little more durable in a downturn. The for sale business tends to run a little hotter in an economic upturn or in the case of this unique situation that we're growing out of here with COVID. So I do think the businesses are reasonably coupled, but one may prevail more over the other depending on where we are in an economic cycle.
Daily Beat: The FICO score of the average home buyer in the United States is over 700. So credit conditions look solid.
Andy Carmody: Mortgage underwriting is still fairly tight in the U.S. And it does seem like the credit risk is less than it has been in quite some time. Credit quality is way better than it was 15 years ago – it does seem reasonable, but it's hard to predict what's going to happen in the next 10 years right in this business, but we're cautiously optimistic.
*The interview has been edited and condensed for clarity.