Tricon Capital Group Inc. (TCN : TSX : C$6.50) - Buy - Target:C$7.20

Jan 4/2013

Charlotte portfolio acquisition brings Tricon halfway to its single family home investment target; maintain BUY rating, raise tgt to C$7.20 fm C$6.50.  Tricon Capital Group Inc. announced today that it has completed a significant portfolio acquisition of 550 single family rental homes, growing its portfolio to more than 1,500 homes in the US. With a target of acquiring 3,000 rental homes, Tricon is halfway to its goal after commencing this strategy less than one year ago. We note that this portfolio acquisition is unique from Tricon's typical approach in investing in single family homes, and is reflected in the comparatively favourable metrics of the Charlotte portfolio. Specifically, the going-in cap rate of 12.5% for the Charlotte portfolio is better than the ~8-9% Tricon typically aims for, and portfolio occupancy of 95% is exceptionally high considering that Tricon has typically been buying vacant homes with the view of renovating them before leasing them out. Therefore, we believe the required capex spend on the Charlotte portfolio should be materially lower, though we understand Tricon intends to invest capex in the homes as required when they turn over. Valuation and recommendation We continue to value Tricon's shares on a sum-of-the-parts basis, with a current estimated value of C$7.18 per share (from C$6.82). As management continues to execute on its growth initiatives, particularly the growth of its portfolio of stabilized US single family homes, we expect Tricon to achieve material cash flow growth, and its valuation to improve. In arriving at our target price for Tricon, we are now basing our target price on our sum-of-the-parts value, which is improved from our previous basis of a 5% discount to our sum-of-the-parts value. We are raising our target price for Tricon Capital Group to C$7.20 (from C$6.50), which equates to our updated sum-of-the-parts value. With its forecast total return of 14.5%, we continue to rate Tricon Capital Group a BUY.