Trading at just under $10, Tricon Capital Group (TSX:TCN) offers investor exposure to the rapidly growing rental market in the U.S., as well as the continued gradual recovery of the housing market.
The reasons to own Tricon stock are twofold: Tricon offers a diversified portfolio of real estate assets that are benefitting from strong supply/demand trends, and Tricon stock is undervalued, trading at book value despite its value proposition and the many levers it has and will pull to create income and asset growth.
Real estate portfolio
The rental homes segment accounts for 87% of Tricon’s adjusted EBITDA, and in the third quarter of 2018, adjusted EBITDA from this vertical increased 9% to $73.7 million, with a net operating income margin of 60.9%.
And although October U.S. housing starts declined over 5% in October, the investment thesis on Tricon remains strong, as the flip side to that is increasing rental demand and income.
In its Tricon American Homes vertical, a big percentage of the single-family homes that have been purchased to date have been completed at distressed values through foreclosure sales. Once acquired, the company invests in home renovations before renting to tenants.
Tricon continues to expand its portfolio of rental homes. The company completed the acquisition of 810 homes in the latest quarter, in an attempt to position itself to continue to benefit from the booming U.S. rental market, where rental prices are soaring as much as 10%-15% in some markets.
Additionally, Tricon has been expending into various verticals in order to expand its reach in the real estate market, and the most recent vertical that the company entered was the luxury residence segment, “Tricon Luxury Residence”, which is the company’s fourth major business line. This vertical experienced a loss this quarter as investments are being made in order to ultimately increase rents in this area.
Stock trades at book value
Tricon stock is currently trading pretty much at book value, and with an ROE of almost 20%, a dividend yield of 2.82%, and a healthy balance sheet to support future growth, this strikes me as grossly undervalued.
Final thoughts
Tricon has an excellent track record of growing the business and taking advantage of the opportunity in the U.S. real estate market, as evidence by the way management took advantage of the 2008 housing crisis by buying at distressed levels.
And while the stock is certainly under pressure due to concerns about the housing market, the fact is that in the areas that Tricon is present, housing prices have remained strong.
