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Tricon Capital Group Inc.: Still a Buy 1 Year Later

Last May, I picked three stocks under $10 that were worth the risk. One of them was Tricon Capital Group Inc. (TSX:TCN), a Toronto-based residential real estate investor and asset manager with amazingly diversified streams of revenue.

At the time of my pick, Tricon’s stock was trading around $8.45. I felt it deserved to be trading north of $10, and that it would soon hit $12, a few cents short of its July 22, 2015, all-time high of $12.11.

Tricon is up 32% in large part because of its Tricon American Homes (TAH) division, which owns 16,800 single-family homes in the U.S. it acquired at reasonable prices; it pretties them up and rents them out to prospective tenants in 18 major markets across 10 states.

In early May, TAH completed its US$1.4 billion acquisition of Silver Bay Realty Trust, making it the fourth-largest publicly traded single-family rental company in the U.S. This deal delivers scale to its business model and is accretive to earnings.

As a result of its acquisition, Tricon has decided to reduce its core businesses from five down to three: TAH, Tricon Housing Partners, which focuses on master planned community development, and Tricon Luxury Residences, which focuses on building luxury rental apartment buildings in Canada.

Tricon expects to sell both its Tricon Lifestyle Communities division, which owns 3,065 manufactured housing community rental sites, and its luxury rental business in the U.S. In both cases, management feels the company can’t scale the businesses to where they need to be to compete effectively in their respective marketplaces.

Once the sales completed, Tricon will be left with three strong operating businesses as well as a real estate advisory business that generates significant third-party fee revenue.

It’s a great business model that starts and ends with its single-family homes business.

TAH will generate 45% of Tricon’s overall revenue, much of it in the form of recurring monthly rent and account for 61% of its US$4.5 billion in assets under management, much of which is Tricon’s money, not third-party investments.

Frankly, we live in an age when people are either under-housed (not enough bedrooms for members of a family) or over-housed (too many bedrooms) with home ownership rates that are far too high for our good.

By substituting individual middle-market home ownership with institutional ownership, suitable single-family rental accommodation will always be available to those interested in renting rather than owning.

With 92 million millennials, many of whom graduate college with significant student debt and can’t afford to buy, Tricon and its competitors in the single-family rental business deliver a win/win scenario.

Over the past four years, Tricon has grown its book value per share and adjusted EBITDA by 20% compounded annually. Yes, its stock is more expensive today than it was a year ago, but I believe you’ll be saying the same thing next year and the year after that.

Triton is transforming into a major player in the real estate business, and when investors realize this, its stock will shoot to $20 and beyond.

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Fool contributor Will Ashworth has no position in any stocks mentioned.

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