Tricon Capital Group president, chief executive officer and director Gary Berman joined the company in 2002 and has transformed it into a rental housing powerhouse with $10.5 billion of assets under management.
Things weren’t always easy, however, as Berman recently told a large audience at Toronto Region Board of Trade during an Urban Land Institute “fireside chat” with LeFrak senior managing director Camille Douglas, a New York City-based real estate executive who worked for Olympia and York in the 1980s and ’90s and joined Tricon’s board in 2018.
Berman had worked with Goldman Sachs and Blackstone in the United States after graduating from McGill University and Harvard Business School.
He saw a “tremendous opportunity” to return to Canada to work with and learn from “David” (Berman), which he uses instead of father or dad when referring to Tricon’s (TCN-T) executive chairman.
David initially didn’t think Gary was ready to join Tricon and asked him to work for another developer for a time. So, Berman first spent a few years at Canderel before joining the family firm.
Almost immediately thereafter, however, the company lost two key lead investors.
The Ontario Teachers’ Pension Plan bought Cadillac Fairview and would no longer invest in Tricon. Royal Bank Equity Partners went out of business.
Berman called it “a near-death experience,” and said Tricon went through another difficult time coming out of the 2008 financial crisis.
“For a period of six to 12 months, we didn’t know if we could raise another dollar,” he said.
However, Tricon got through the tough times and raised $1 billion in equity from 2009 to 2012. It invested the money in foreclosed homes selling for below replacement cost in the U.S. Sun Belt region.
While it partnered with seven best-in-class local operators in 13 markets, Berman is still shocked nothing went wrong during that wild and woolly time.
He recalled sending representatives to courthouse steps with “backpacks full of cash and a gun” to buy one home at a time, sight unseen, as bidding went up in $100 increments.
”There were all of these idiosyncrasies in the market where, if you or your competitors ran out of cash, which happened all of the time, you could pick up a home for $60,000 that had just gone for $150,000 minutes before.”
Things went so well for Tricon that it bought out the seven partners in 2014.
It now owns more than 30,000 rental housing units in North America, two-thirds single-family and the other third multifamily.
About 95 per cent of its balance sheet is accounted for in the United States despite trading with a market cap of $2.29 billion on the Toronto Stock Exchange, where it’s been listed since 2010.
What differentiated Tricon from other companies buying single-family homes at the time, according to Berman, was that it focused on yield and acquiring houses that could produce income to pay dividends.
Berman said investors Tricon works with share its vision of holding assets for as long as possible: they’re philosophically aligned and know what they want to achieve.
Tricon and technology
Tricon has been able to accomplish all of this by taking advantage of the confluence of cellular and cloud computing technology, an approach also used by Amazon, Uber and Airbnb.
The company uses technology to buy, lease, service and manage homes.
“You can’t be too set in your ways in the age of disruption,” said Berman.
“If you’re not applying technology to your business today, look out because things are changing really fast.”
Tricon’s proprietary TriAD software scans hundreds of thousands of homes every five or 10 minutes on multiple listing services. It uses a 90-point criteria that acts as a funnel to determine if a home fits Tricon’s purchase criteria.
“As soon as a home hits MLS, it’s going to start dropping through the funnel based on the algorithm,” said Berman. “We can underwrite a home and put in an offer in five minutes.”
Tricon buys 800 homes, one at a time, every quarter. Berman said it could buy more if not for capital restraints.
The turnover ratio in Tricon single-family homes is 27 per cent and residents stay for an average of three to four years, which Berman is happy with.
Maintenance and leasing
Once a house is under contract, a maintenance person is sent to look at the home to input what’s needed using a system called Triforce. An order is automatically prepared and head office is informed immediately.
Tricon has contracts with national suppliers so “all of the components that go into the renovation of a home are the same,” according to Berman.
“We use 3D mapping technology so we can tell in a second the configuration of the home and the square feet.”
While Tricon previously sent leasing agents to meet prospective tenants, Berman said that was inefficient and it now uses technology to do self-showings.
Potential tenants get in touch with Tricon’s call centre and make a deposit with credit card and driver’s licence numbers that allow them to visit the house at any time.
Upon arrival, they take a selfie photo that’s compared with facial recognition from the driver’s licence, and a smart lock automatically opens the door if they match.
Tricon then sends a text to the customers and tells them how to apply to rent the home online if they like it.
Tricon’s Toronto multifamily projects
Tricon Lifestyle Rentals, the company’s multifamily platform, has 3,600 rental units in seven high-rise projects at various stages of development in its Toronto home town.
The first — The Selby, a 50-storey, 441-unit luxury apartment at 592 Sherbourne St. — is completed and operating.
Tricon will have 1,500 units under construction in Toronto this year.
“This will be the highest-quality apartment portfolio in North America,” said Berman.
Berman said the company is developing in Toronto because there aren’t class-A apartment buildings to buy.
However, it’s also difficult to find affordable sites to build rental apartments while competing with condominium developers, who can generally pay more up front because they can make money faster on their projects.
“We have to be more creative,” said Berman.
Tricon looks to partner with landowners who may not have development expertise but, rather than sell their site to a condo developer to maximize short-term gains, will become involved with apartments for generational cash-flow purposes.
Berman believes the technology used in Tricon’s single-family housing rentals can be applied to its multifamily apartments.
However, Berman said its U.S. Sun Belt single-family home rental program can’t be applied in Canada because “the numbers just don’t work” due to higher housing prices and affordability issues.
Tricon’s future growth
Berman said Tricon has a joint venture with two leading institutional investors to acquire another 10,000 housing units.
Tricon also entered into an agreement with the Arizona State Retirement System (ASRS) in September to form a joint venture partnership to target investments in master-planned communities and the development of single-family “build-to-rent” communities in Sun Belt markets.
ASRS committed $400 million to the venture along with $50 million from Tricon, which has a pipeline of potential investments, including two wholly owned master-planned communities that will be used as seed assets for the venture.
“You get the best of both worlds,” said Berman. “You get the privacy of single-family housing but you also get the community aspect,” which can include shared amenities and social events.
Tricon acquired the Starlight U.S. Multi-Family (No. 5) Core Fund for $1.33 billion in June.
It’s comprised of 23 multifamily rental properties with 7,300 units in the same Sun Belt markets and sub-markets as its single-family houses.
“We thought the geographic overlap was a really good fit,” said Berman, who noted Tricon’s portfolio is aimed at households with an annual income of between $60,000 and $100,000 that will pay monthly rents of $1,200 to $1,400.
Tricon’s goal is to have these people as tenants throughout their adult lives: renting apartments when they’re young; moving up to a rental house when they have a family; and then going back to an apartment when they’re older and downsizing.
Berman believes Tricon will add another 100,000 units in the next decade and said that’s not an aggressive forecast.
Tricon uses recourse debt and has 60 per cent leverage, which is relatively high for a public company. However, Berman said the firm has a path to lower it to 50 to 55 per cent, where it thinks it should be.
Tricon is “purpose-driven”
Berman said Tricon is a “purpose-driven” rental housing company with an aspirational goal of enriching the lives of its employees and residents.
He said it looks out for its employees’ education, career progression and health and wellness goals through both its facilities and policies.
Participants aren’t allowed to have cellphones in company meetings of less than 60 or 90 minutes so they can “be in the moment,” and employees aren’t allowed to eat at their desks.
“If you can’t take a 15-minute break, you’re too busy,” said Berman. “You’re also missing a great opportunity to socialize with others in the company to exchange ideas and just to take a break.”