Tricon Capital Group Inc A Canadian Player In U.S. Housing

TCN : TSX : C$7.80
Target: C$8.50

Source: Interactive Data Corporation
Tricon is a leading asset manager focused on investing in North American residential real estate development and single family homes. The company has over $1.6 billion of assets under management and investments. Tricon’s investments are focused on four markets in Canada (Toronto, Vancouver, Calgary, and Edmonton) and a number of markets in the US including California, Phoenix, Atlanta, Houston, Charlotte, and South Florida.
All amounts in C$ unless otherwise noted.

Real Estate — Real Estate
Tricon reported Q3/13 adjusted diluted EPS of $0.12, up from $0.05 earned in the year-ago quarter, driven by cash flow earned from Tricon American Homes (the company’s single family home rental division), a fair value gain and performance fees associated with its Tricon IX investment, and one-time acquisition fees earned on its two new separate accounts. Of note, advisory fees paid of $4.6 million ($0.04 per share) were excluded in reported adjusted diluted EPS. Tricon’s Q3/13 adjusted EPS was also ahead of our estimate of $0.03. The significant positive variance to our estimate was due to several items, mostly arising from the Tricon IX transaction.
Acquisition of Tricon IX gives glimpse into principal investing strategy. During Q3/13, Tricon acquired a 68.4% interest in one of its funds, Tricon IX, for US$261 million. The remaining 31.6% ownership interest in Tricon IX continues to be held by the State Board of Administration of Florida. Notwithstanding that the acquisition of the 68.4% interest in Tricon IX impacted just half of Q3/13, this quarter’s results gave investors an up close view of Tricon IX’s cash flow generation potential, and also of Tricon’s opportunities in principal investing, in addition to its core asset management business.
Increasing target price to C$8.50, maintain BUY rating. We continue to value Tricon on a sum-of-the parts basis. Following Q3/13 results that gave us additional clarity on the potential investment income arising from the Tricon IX acquisition, we have greater confidence in ascribing value to this cash flow. We believe that Tricon remains well positioned to benefit from a U.S. housing recovery, which appears to be currently underway. We expect to see meaningful cash flow growth over the next few years as projects currently under development held within Tricon IX are completed and sold. Tricon is currently trading at an 8.1% discount to our updated NAV estimate. We are increasing our target price to C$8.50 (from C$7.15), in line with our updated estimate of NAV per share. Combined with an annual dividend of $0.24 per share (3.1% yield), our target price implies a 12-month total return of 12%. We continue to rate Tricon Capital Group Inc. a BUY.


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