SCPT.A Starlight US Multi Family No 2 Core Plus Fund

/NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES./

TORONTO, April 29, 2024 /CNW/ - Starlight U.S. Multi-Family (No. 2) Core Plus Fund (TSXV: SCPT.A) (TSX: SCPT.U) (the "Fund") announced today its results of operations and financial condition for the three months ended December 31, 2023 ("Q4-2023") and year ended December 31, 2023 ("YTD-2023"). Certain comparative figures are included for the three months ended December 31, 2022 ("Q4-2022") and year ended December 31, 2022 ("YTD-2022").

All amounts in this press release are in thousands of United States ("U.S.") dollars except for average monthly rent ("AMR")¹ or unless otherwise stated. All references to "C$" are to Canadian dollars. 

"The Fund owns a high-quality, well located portfolio of multi-family communities which achieved a 3.9% increase in average monthly rents during 2023," commented Evan Kirsh, the Fund's President. "The Fund continues to focus on increasing net operating income at its properties through active asset management and navigating the current challenging capital markets environment with the goal of maximizing the total return for investors upon exit."

Q4-2023 HIGHLIGHTS

• Q4-2023 revenue from property operations and net operating income ("NOI")¹ were $5,266 and $3,248 (Q4-2022 - $5,146 and $3,174), respectively, representing an increase of 2.3% for both items relative to Q4-2022.
• The Fund achieved a 3.9% increase in AMR from Q4-2022 to Q4-2023.
• The Fund completed six in-suite value-add upgrades at Summermill at Falls River ("Summermill") during Q4-2023, which generated an average rental premium of $280 and an average return on cost of approximately 22.0%.
• The Fund achieved physical occupancy of 92.6% during Q4-2023, which subsequently increased to 95.0% physical occupancy as at April 25, 2024.
• As at April 28, 2024, the Fund had collected 98.3% of rents for Q4-2023, with further amounts expected to be collected in future periods, demonstrating the Fund's high quality resident base and operating performance.
• The Fund reported a net loss and comprehensive loss for Q4-2023 of $30,780 (Q4-2022 - $9,200), primarily resulting from the fair value loss on investment properties reported in Q4-2023 and increases in finance costs, partially offset by NOI growth in Q4-2023.
• On January 22, 2024, the Fund modified the Summermill loan payable to discharge its obligation to purchase a replacement interest rate cap and defer a portion of the debt service at the property, up to a maximum of $290 per month subject to certain terms. The amendment will allow the Fund to retain additional liquidity of up to $3,480, per annum, highlighting the Fund's focus on preserving liquidity to allow the Fund to capitalize on more robust market dynamics upon the eventual sale of the Fund's properties (see "Subsequent Events").
• On February 27, 2024, Summermill was selected as a winner of the Carbon Reduction and Energy Conservation Award under the US multi-family asset class for exceptional water conservation, as part of the Institute of Real Estate Management submissions.
• On August 9, 2023, Starlight U.S. Multi-Family (No.2) Core Plus, GP Inc., the general partner of the Fund ("Starlight GP") approved the first one-year extension of the Fund's term to January 8, 2025. On April 29, 2024, Starlight GP amended the one-year extension of the Fund's term to March 31, 2025 to coincide with the close date of the Fund and provide the Fund with the opportunity to capitalize on more robust market dynamics.

YTD-2023 HIGHLIGHTS 

• Revenue from property operations and NOI for YTD-2023 were $21,129 and $13,208 (YTD-2022 - $18,238 and $11,837), respectively, representing a $2,891 and $1,371 increase relative to YTD-2022. The significant increases were primarily due to the acquisition of Summermill in Q2-2022, same property revenue growth of 5.7% and same property NOI¹ growth of 1.5%.
• Net loss and comprehensive loss for YTD-2023 was $42,068 (YTD-2022 - $6,214) primarily as a result fair value loss on investment properties reported during YTD-2023 as well as increases in finance costs, partially offset by the increases in NOI including same property NOI growth and recoveries recorded during YTD-2023 for the non-cash provisions for carried interest and deferred taxes.
• The Fund completed 54 in-suite value-add upgrades at Summermill during YTD-2023, which generated an average rental premium of $298 and an average return on cost of approximately 21.0%.
• On July 26, 2023, the Fund amended the existing loan payable to modify the loan at Hudson at East ("Hudson") to a fixed rate loan bearing interest only payments at 5.75% from the date of the amendment to the initial maturity date of May 7, 2025. As part of such amendment, the Fund discharged its obligation to purchase a replacement interest rate cap in November 2023, allowing the Fund to retain liquidity that otherwise would have been utilized for the purchase of a replacement interest rate cap.

FINANCIAL CONDITION AND OPERATING RESULTS

Highlights of the financial and operating performance of the Fund as at December 31, 2023, for Q4-2023 and YTD-2023, including a comparison to December 31, 2022, Q4-2022 and YTD-2022 as applicable, are provided below:

NON-IFRS FINANCIAL MEASURES AND RECONCILIATIONS

The Fund's consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). Certain terms that may be used in this press release including AFFO, AMR, adjusted net income and comprehensive income, cash provided by operating activities including interest costs, economic occupancy, estimated gap to market versus in-place rents, FFO, gross book value, indebtedness, indebtedness coverage ratio, indebtedness to gross book value, interest coverage ratio, same property NOI and NOI (collectively, the "Non-IFRS Measures") as well as other measures discussed elsewhere in this press release, do not have a standardized definition prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other reporting issuers. The Fund uses these measures to better assess the Fund's underlying performance and financial position and provides these additional measures so that investors may do the same. Further details on Non-IFRS Measures are set out in the Fund's management's discussion and analysis ("MD&A") in the "Non-IFRS Financial Measures" section for Q4-2023 available on the Fund's profile on SEDAR+ at www.sedarplus.ca.

A reconciliation of the Fund's interest coverage ratio and indebtedness coverage ratio are provided below:

The Fund's interest coverage ratio and indebtedness coverage ratio were each 0.86x during Q4-2023. The increase in both ratios during Q4-2023 relative to Q4-2022, were primarily due to a prior year adjustment to true-up interest costs for YTD-2022 in Q4-2022, partially offset by an increase in interest costs resulting from increases in SOFR as well as higher average indebtedness outstanding during Q4-2023. Although the interest coverage and indebtedness coverage ratios have been negatively impacted by the increases in SOFR, operating results for the Fund's properties have remained stable and any shortfalls in debt service ratios are funded from cash on hand, including any proceeds from financing activities as applicable.

The Fund also utilizes interest rate caps, swaps and fixed rate debt in certain instances to protect the Fund from increases in SOFR beyond stipulated levels.

CASH PROVIDED BY OPERATING ACTIVITIES RECONCILIATION TO FFO and AFFO

The Fund was formed as a "closed-end" limited partnership with an initial term of three years, which was extended by one-year on August 9, 2023 (see "YTD-2023 Highlights"), a targeted yield of 4.0% and a pre-tax targeted total annual return of 11% across all classes of units of the Fund. For Q4-2023, basic and diluted AFFO and AFFO per Unit were $(518) and $(0.05), respectively (Q4-2022 - $(923) and $(0.08)), representing an increase in AFFO of $404, primarily as a result of NOI growth and slightly lower finance costs, partially offset by higher amortization of deferred financing costs relating to the refinancing of the Montane loan payable and modification of the Hudson loan payable. The Fund covered any shortfall between cash provided by operating activities, including interest costs¹ through either cash from operating activities during such applicable periods or cash on hand, including any proceeds from financing activities as applicable.

A reconciliation of the Fund's cash provided by operating activities determined in accordance with IFRS to FFO and AFFO for Q4-2023, Q4-2022, YTD-2023 and YTD-2022 are provided below:

SUBSEQUENT EVENTS

On January 1, 2024, Starlight Investments US AM Group LP (the "Manager") agreed to waive the Fund's obligation to pay asset management fees, guarantee fees and capital project fees until further notice to allow the Fund to retain substantial liquidity.

On January 22, 2024, the Fund modified the Summermill loan payable to discharge its obligation to purchase a replacement interest rate cap and defer a portion of the debt service at the property, up to a maximum of $290 per month subject to certain terms, allowing the Fund to retain additional liquidity of up to $3,480, per annum. Any debt service amounts deferred on a monthly basis are repayable in full upon repayment of the loan and accrue interest at Term SOFR + 8.00% per annum.

On March 15, 2024, the Fund  extended the term of it's $9,000 unsecured credit facility to July 1, 2024.

FUTURE OUTLOOK

Since early 2022, concerns over elevated levels of inflation have resulted in a significant increase in interest rates with the U.S. Federal Reserve raising the Federal Funds Rate by approximately 525 basis points. Interest rate increases typically lead to increases in borrowing costs for the Fund, reducing cash flow, given the Fund primarily employs a variable rate debt strategy due to the Fund's initial three-year term in order to provide maximum flexibility upon the eventual sale of the Fund's properties during or at the end of the Fund's term. Historically, investments in multi-family properties have provided an effective hedge against inflation given the short-term nature of each resident lease which has been demonstrated by the rent growth achieved at the Fund's properties where AMR increased by 3.9% from Q4-2022 to Q4-2023. Furthermore, the Fund does have certain interest rate caps, swaps or fixed rate debt in place which protect the Fund from increases in interest rates beyond stipulated levels and for stipulated terms as described in detail in the Fund's audited consolidated financial statements for the year ended December 31, 2023 and the audited consolidated financial statements for the year ended December 31, 2022 which are available at www.sedarplus.ca. The Fund also continues to closely monitor the U.S. employment and inflation data as well as the U.S. Federal Reserve's monetary policy decisions in relation to future interest rates and  resulting impact these may have on the Fund's financial performance in future periods.

The primary markets in which the Fund operates in, have seen an elevated level of new supply delivered during 2023 which contributed to the deceleration in rent growth in the primary markets during late 2023, relative to levels achieved in 2022 and earlier in 2023. Interest rates also continue to remain elevated which, along with higher levels of inflation and a softening in market conditions in late 2023, has significantly disrupted active and new construction of comparable communities in the primary markets in which the Fund operates that would have otherwise been delivered in the second half of 2025 or 2026. This potential reduction in construction may create a temporary imbalance in the supply of comparable multi-suite residential properties in future periods. This imbalance, alongside the continued economic strength and solid fundamentals may be supportive of favourable supply and demand conditions for the Fund's properties in future periods and could result in future increases in occupancy and rent growth. The Fund believes it is well positioned to take advantage of these conditions should they transpire given the quality of the Fund's properties and the benefit of having a resident pool employed across a diverse job base.

The Fund continues to closely monitor the financial impact of elevated interest rates and higher levels of inflation on the Fund's liquidity and financial performance, including the costs of purchasing interest rate caps required to be replaced under certain of the Fund's loan payables. In addition, market forecasts from RealPage anticipate a potential reduction in rent growth and occupancy in 2024 for the markets in which the Fund operates in relative to the levels achieved in 2023, which the Fund considers along with a range of potential outcomes for financial performance when evaluating the Fund's liquidity position. During this period of capital markets uncertainty, the Fund may also enter into additional financing or evaluate potential asset sales to allow the Fund to maintain sufficient liquidity to provide the Fund with the opportunity to capitalize on more robust market dynamics with the goal of maximizing the total return for investors during the Fund's term.

Further disclosure surrounding the Future Outlook is included in the Fund's MD&A in the "Future Outlook" section for Q4-2023 under the Fund's profile, which is available on SEDAR+ at www.sedarplus.ca.

FORWARD-LOOKING STATEMENTS 

Certain statements contained in this press release constitute forward-looking information within the meaning of Canadian securities laws and which reflect the Fund's current expectations regarding future events, including the overall financial performance of the Fund and its properties, as well as the impact of elevated levels of inflation and interest rates

Forward-looking information is provided for the purposes of assisting the reader in understanding the Fund's financial performance, financial position and cash flows as at and for the periods ended on certain dates and to present information about management's current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes.

Forward-looking information may relate to future results, the impact of inflation levels and interest rates, the ability of the Fund to make and the resumption of future distributions, trading price of the Fund's TSX Venture Exchange listed class A units and U units ("Listed Units") and the value of the Fund's unlisted units, which include all Units other than the Listed Units, acquisitions, financing, performance, achievements, events, prospects or opportunities for the Fund or the real estate industry and may include statements regarding the financial position, business strategy, budgets, litigation, projected costs, capital expenditures, financial results, occupancy levels, AMR, taxes, and plans and objectives of or involving the Fund. Particularly, matters described in "Future Outlook" are forward-looking information. In some cases, forward-looking information can be identified by terms such as "may", "might", "will", "could", "should", "would", "occur", "expect", "plan", "anticipate", "believe", "intend", "seek", "aim", "estimate", "target", "goal", "project", "predict", "forecast", "potential", "continue", "likely", "schedule", or the negative thereof or other similar expressions concerning matters that are not historical facts.

Forward-looking statements involve known and unknown risks and uncertainties, which may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities may not be achieved. Those risks and uncertainties include: the extent and sustainability of potential higher levels of inflation and the potential impact on the Fund's operating costs; the pace at which and degree of any changes in interest rates that impact the Fund's weighted average interest rate may occur; the ability of the Fund to make and the resumption of future distributions; the trading price of the Listed Units; changes in government legislation or tax laws which would impact any potential income taxes or other taxes rendered or payable with respect to the Fund's properties or the Fund's legal entities; the impact of rising interest costs, high inflation and supply chain issues on new supply of multi-family apartments; the extent to which favourable operating conditions achieved during historical periods may continue in future periods; the applicability of any government regulation concerning the Fund's residents or rents; and the availability of debt financing as loans payable become due during the Fund's term. A variety of factors, many of which are beyond the Fund's control, affect the operations, performance and results of the Fund and its business, and could cause actual results to differ materially from current expectations of estimated or anticipated events or results.

Information contained in forward-looking information is based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including management's perceptions of historical trends, current conditions and expected future developments, as well as other considerations that are believed to be appropriate in the circumstances, including the following: the impact of inflation and interest rates on the Fund's operating costs; the impact of future interest rates on the Fund's financial performance; the availability of debt financing as loans payable become due during the Fund's term and any resulting impact on the Fund's liquidity; the trading price of the Listed Units; the applicability of any government regulation concerning the Fund's residents or rents; the realization of property value appreciation and timing thereof; the inventory of residential real estate properties (including single-family rental homes); the availability of residential properties for potential future acquisition, if any, and the price at which such properties may be acquired; the ability of the Fund to benefit from any value add program the Fund conducts at certain properties; the price at which the Fund's properties may be disposed of and the timing thereof; closing and other transaction costs in connection with the acquisition and disposition of the Fund's properties; the extent of competition for residential properties; the impact of interest costs, high inflation and supply chain issues on new supply of multi-family apartments; the extent to which favourable operating conditions achieved during historical periods may continue in future periods; the growth in NOI generated and from its value-add initiatives; the population of residential real estate market participants; assumptions about the markets in which the Fund operates; expenditures and fees in connection with the maintenance, operation and administration of the Fund's properties; the ability of the ability of the Manager to manage and operate the Fund's properties or achieve similar returns to previous investment funds managed by the Manager; the global and North American economic environment; foreign currency exchange rates; the ability of the Fund to realize the estimated gap in market versus in-place rents through future rental rate increases; and governmental regulations or tax laws. Given this  period of uncertainty, there can be no assurance regarding: (a) operations and performance or the volatility of the Units; (b) the Fund's ability to mitigate such impacts; (c) credit, market, operational, and liquidity risks generally; (d) that the Manager or any of its affiliates, will continue its involvement as asset manager of the Fund in accordance with its current asset management agreement; and (e) other risks inherent to the Fund's business and/or factors beyond its control which could have a material adverse effect on the Fund.

The forward-looking information included in this press release relates only to events or information as of the date on which the statements are made in this press release. Except as specifically required by applicable Canadian securities law, the Fund undertakes no obligation to update or revise publicly any forward-looking information, whether because of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

ABOUT STARLIGHT U.S. MULTI-FAMILY (NO. 2) CORE PLUS FUND

The Fund is a limited partnership formed under the Limited Partnerships Act (Ontario) for the primary purpose of indirectly acquiring, owning and operating a portfolio of value-add, income producing rental properties in the U.S. multi-family real estate market. The Fund currently owns interests in three properties, consisting of 995 suites with an average year of construction in 2013.

For the Fund's complete audited consolidated financial statements and MD&A for the year ended December 31, 2023 and any other information related to the Fund, please visit www.sedarplus.ca. Further details regarding the Fund's unit performance and distributions, market conditions where the Fund's properties are located, performance by the Fund's properties and a capital investment update are also available in the Fund's April 2024 Newsletter which is available on the Fund's profile at www.starlightinvest.com.

Please visit us at www.starlightinvest.com and connect with us on LinkedIn at www.linkedin.com/company/starlight-investments-ltd- 

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release. 

SOURCE Starlight U.S. Multi-Family (No. 2) Core Plus Fund