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Starlight US Multi-Family (No 1) Value-Add Fu
Symbol C : SUVA.A
Shares Issued 1,724,993
Close 2019-08-13 C$ 10.06
Recent Sedar Documents

Starlight U.S. (No. 1) loses $2.1-million (U.S.) in Q2

2019-08-13 18:16 ET - News Release

Mr. Evan Kirsh reports

STARLIGHT U.S. MULTI-FAMILY (NO. 1) VALUE-ADD FUND ANNOUNCES SECOND QUARTER FINANCIAL RESULTS INCLUDING SAME PROPERTY NOI GROWTH OF 16.1%

Starlight U.S. Multi-Family (No. 1) Value-Add Fund has released its results of operations and financial condition for the three months ended June 30, 2019, and the six months ended June 30, 2019.

All amounts in this press release are in thousands of U.S. dollars except for average monthly rent (AMR) or unless otherwise stated.

Value-add program highlights

  • The fund continued to implement its value-add capital improvement program during the second quarter. Rental premiums continued to increase during the second quarter as the fund upgraded and re-leased 65 suites, achieving average rent increases of $206 per month per suite, representing an estimated average return on investment of 28.4 per cent. Since inception of the fund, 296 suites have been upgraded and re-leased, achieving average rent increases of $180 per month per suite and an estimated average return on investment of 26.8 per cent. The fund's value-add initiatives have resulted in significant improvements to common areas, amenities and building exteriors.

Second quarter highlights

  • On April 12, 2019, the fund acquired the remaining 8.50705-per-cent interest in the Veranda (formerly known as Landmark at Coventry Pointe) for $1,310. Upon closing of the acquisition, the fund owned 100 per cent of the Veranda.
  • During the second quarter, the fund refinanced the mortgage at the Veranda for net proceeds of $2,694. After completion of the refinancing, the mortgage secured on the property amounted to $28,554 with an additional $3,800 capital advance line available to finance future value-add initiatives at the Veranda. The mortgage bears interest at U.S. 30-day London interbank offering rate (LIBOR) plus 2.00 per cent and requires interest-only payments until maturity in January, 2021.
  • Total portfolio revenue from property operations for the second quarter was $4,680, an 18.7-per-cent increase over the same period in the prior year, primarily due to the acquisition of additional ownership interests in the Veranda during and since the three months ended June 30, 2018, as well as same-property revenue growth of 8.8 per cent. Same-property revenue growth was driven by a 350-basis-point increase in same-property occupancy to 93.2 per cent, strong ancillary income growth and AMR growth of 4.4 per cent, reflecting the impact of the fund's value-add capital improvements program.
  • Total portfolio net operating income (NOI) for the second quarter was $2,687, representing a 25.6-per-cent increase over the same period in the prior year, relating to the acquisition of additional ownership interests in the Veranda and same-property NOI growth of 16.1 per cent, driven by strong same-property revenue growth and a reduction in same-property operating costs attributable to efficient cost management at the properties, partially offset by increases in same-property taxes.
  • The fund recognized a fair value gain on investment properties during the second quarter of $1,068, which was primarily as a result of capitalization rate compression.
  • Adjusted funds from operations (AFFO) for the second quarter totalled $761 (three months ended June, 30 2018 -- $620), resulting in an AFFO payout ratio of 126.9 per cent (three months ended June 30, 2018 -- 164.7 per cent).
  • The fund uses a variable rate collar contract to provide protection from the impact of any potential weakening of the U.S. dollar on the fund's Canadian-dollar distributions. The contract expires on Dec. 10, 2019, and allows the fund to exchange U.S. funds each month within a range of $1.3125 (Canadian) to $1.3725 (Canadian).
  • Portfolio AMR as at June 30, 2019, was $1,258, an increase of 4.3 per cent from $1,206 as at June 30, 2018. The strong rental growth continues to reflect increasing average rents from suites which were upgraded and re-leased as part of the value-add capital improvement program (see "Second quarter value-add initiatives").

Second quarter value-add initiatives

The fund continued a second-generation upgrade program at Spectra South which added quartz countertops and tile backsplashes to the kitchens of previously renovated suites. The second-generation program is expected to provide additional rental premiums to the first-generation upgrades and reposition the suites at the top of the market. The new upgrade program targets unrenovated suites, with a scope that combines the first-generation and second-generation upgrade programs. In addition to suite upgrades, package lockers were installed in the clubhouse and landscaping enhancements were completed at Spectra South.

The fund continued with its suite upgrade program at the Landing, which includes plank flooring, stainless steel appliances, upgraded lighting, refinished kitchen cabinets, upgraded kitchen sinks and faucets, and the addition of quartz countertops in kitchens and bathrooms. The program continues to achieve substantial rental premiums on upgraded suites. In 2018, the fund completed upgrades to the main clubhouse (including relocating the leasing office, adding a Wi-Fi cafe and a package locker system, and repurposing the movie theatre and games room into a larger, open-concept media room), and also added an exterior barbeque grilling centre, painted the exterior of phase 2 of the Landing, and installed new pool furniture and an outdoor putting green. The fund has now completed all immediately planned major common area upgrades at the Landing and will continue to focus on the suite upgrade program.

The fund completed the rebranding of the property from Landmark at Coventry Pointe to the Veranda. The rebranding included installation of new monument signs, updated collateral materials, revised search engine optimization and conversion to the new website. In addition, new furniture and fixtures were installed in the model suite and the controlled access gate system was replaced at the Veranda's entrance. Previous improvements include: the clubhouse and leasing office renovation; conversion of the common area laundry room to a package locker room; upgrades to the fitness centre; enhancements to the pool area, including new pool furniture and the addition of a grilling station; and the painting of the building exterior trim and bay window repairs. The fund plans to complete the following in the remainder of 2019: (i) landscaping enhancements; (ii) parking lot repairs and seal coating; and (iii) the continuing suite upgrade program, which includes new plank flooring, stainless steel appliances, refinished kitchen cabinets, quartz countertops, backsplashes, and upgraded lighting, sinks, faucets and hardware in the kitchens and bathrooms.

The planned suite upgrades at all three properties are expected to continue to generate significant increases in rental rates and attractive returns on the capital invested.

                                  FINANCIAL CONDITION AND OPERATING RESULTS

                                  IFRS -- as at     Adjusted -- as at     IFRS -- as at     Adjusted -- as at
                                  June 30, 2019         June 30, 2019     Dec. 31, 2019         Dec. 31, 2019
Operational information
Number of properties                          3                     3                 3                     3
Total suites                              1,193                 1,193             1,193                 1,172
Economic occupancy (2)                    93.2%                 93.2%             92.9%                 92.9%
Same-property AMR
(in actual dollars)                      $1,289                $1,289            $1,255                $1,255
Same-property AMR per
square foot (in actual
dollars)                                  $1.11                 $1.11             $1.08                 $1.08
Financial information
Gross book value                       $232,920              $232,920          $226,200              $222,575
Indebtedness                           $144,579              $144,579          $140,689              $138,506
Indebtedness to gross
book value                                62.1%                 62.1%             62.2%                 62.2%
Weighted average mortgage
interest rate                             4.40%                 4.40%             4.52%                 4.52%
Weighted average mortgage
term to maturity                     1.18 years            1.18 years        1.67 years            1.67 years


                                                                                IFRS --           Adjusted --
                                                                           three months          three months
                                        IFRS --           Adjusted --             ended                 ended
                                         second                second           June 30,             June 30,
                                        quarter (3)           quarter (4)          2018 (3)              2018 (4)
Revenue from property 
operations                               $4,690                $4,680            $3,597                $3,942
Property operating costs                ($1,216)              ($1,211)          ($1,007)              ($1,123)
Property taxes (5)                        ($782)                ($782)                -                 ($679)
Income from rental 
operations/NOI                           $2,692                $2,687            $2,590                $2,140
Net (loss) income and 
comprehensive (loss) income             ($2,105)              ($2,105)          ($1,029)              ($1,029)
FFO                                                              $474                                    $233
FFO per unit -- basic and 
diluted                                                         $0.06                                   $0.03
AFFO                                                             $761                                    $620
AFFO per unit -- basic and 
diluted                                                         $0.09                                   $0.08
Interest coverage ratio                                         1.47x                                   1.66x
Indebtedness coverage ratio                                     1.47x                                   1.66x
FFO payout ratio                                               203.8%                                  438.2%
AFFO payout ratio                                              126.9%                                  164.7%


                                         IFRS --          Adjusted --            IFRS --          Adjusted --
                                      six months           six months         six months           six months
                                           ended                ended              ended                ended
                                         June 30,             June 30,           June 30,             June 30,
                                            2019 (3)             2019 (4)           2018 (3)             2018 (4)

Revenue from property 
operations                                $9,306               $9,217             $6,932               $7,688
Property operating costs                 ($2,364)             ($2,333)           ($1,840)             ($2,079)
Property taxes (5)                       ($1,553)             ($1,553)           ($2,645)             ($1,379)
Income from rental  
operations/NOI                            $5,389               $5,331             $2,447               $4,230
Net (loss) income and 
comprehensive (loss) income              ($4,693)             ($4,693)            $4,497               $4,497
FFO                                                            $1,208                                    $926
FFO per unit -- basic and 
diluted                                                         $0.15                                   $0.11
AFFO                                                           $1,507                                  $1,422
AFFO per unit -- basic and 
diluted                                                         1.49x                                   1.64x
Indebtedness coverage ratio                                     1.49x                                   1.64x
FFO payout ratio                                               160.4%                                  218.9%
AFFO payout ratio                                              128.6%                                  142.5%

(1) Total suites, gross book value and indebtedness include the proportionate amounts of the fund's 
    approximately 91.5-per-cent interest in the Veranda as at Dec. 31, 2018.
(2) Economic occupancy for the six months ended June 30, 2019, and year ended Dec. 31, 2018.
(3) Revenue from property operations, property operating costs and property taxes are those reported in the 
    condensed consolidated interim financial statements, adjusted to exclude the impact of international 
    financial reporting interpretations committee 21 (IFRIC 21). Net (loss) income and comprehensive (loss)  
    income excludes any amounts attributable to the non-controlling interest during each period.
(4) Revenue from property operations, property operating costs, property taxes and NOI include the 
    proportionate amounts for the fund's approximately 91.5-per-cent interest in the Veranda for the period 
    from Jan. 1 to April 11, 2019, 100-per-cent interest from April 12 to June 30, 2019, 50-per-cent  
    interest for the period from Jan. 9 to June 12, 2018, and 91.5-per-cent interest from June 13 to June 
    30, 2018.
(5) Property taxes were adjusted to exclude the IFRIC 21 adjustment and treat property taxes as an expense 
    that is amortized during the fiscal year for the purpose of calculating NOI.

Cash provided by operating activities to AFFO

AFFO for the second quarter was $761 (three months ended June 30, 2018 -- $620). The AFFO payout ratio was 126.9 per cent for the second quarter (three months ended June 30, 2018 -- 164.7 per cent). The increase in AFFO and the decrease in the AFFO payout ratio were mainly due to same-property NOI growth as well as the acquisition of additional ownership interests in the Veranda during 2018 and the remaining approximate 8.5 per cent on April 12, 2019, partially offset by increases in interest costs.

The fund was formed as a closed-end limited partnership with an initial term of three years, a target yield of 6.0 per cent and a targeted minimum 14-per-cent pretax investor internal rate of return across all classes of units. Although the payout ratio was in excess of 100 per cent, distributions have been maintained at 6.0 per cent while interest costs have increased as a result of increases in LIBOR since the fund's inception. The fund continues to focus on its active management strategy and value-add capital improvement program, which the manager of the fund expects will yield improvements in NOI in future periods. The fund believes that maintaining the targeted distributions is in the best interests of investors based on the fund's terminal nature as compared with a perpetual real-estate investment trust and the fund's investment objectives and strategy.

For the fund's complete consolidated financial statements and management's discussion and analysis (MD&A) for the three and six months ended June 30, 2019, and any other information relating to the fund, please visit SEDAR. 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 August, 2019, newsletter, which is available on the fund's website.

About Starlight U.S. Multi-Family (No. 1) Value-Add 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. multifamily real estate market. The fund currently owns interests in three properties, consisting of 1,193 suites with an average year of construction in 2003.

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