Management of the Northview Canadian High-Yield Residential Fund (NHF-UN-T) has announced a complex recapitalization plan which involves its conversion back to a REIT, the acquisition of three multiresidential portfolios for $742 million and increased investment from affiliates of Starlight Investments and KingSett Capital.

Starlight and KingSett are already major investors in the fund, and they will be joined by a “new, significant investment from a global institutional investor,” the announcement states.

Upon closing of the acquisitions, Northview intends to internalize management and restructure as Northview Residential REIT, a TSX-listed, traditional open-ended, real estate investment trust expected to trade under the ticker NRR-UN.

“We are excited to complete the recapitalization event through the acquisition of these high-quality portfolios,” Daniel Drimmer, founder and CEO of Starlight Investments and chair of the board of trustees of the fund, said in the announcement.

“Over the long term, this transformative transaction will benefit unitholders through enhanced access to capital which is expected to result in increased financial stability. 

“This will help establish the foundation for further growth opportunities in the years to come.”

Drimmer, through Starlight and affiliates, is the largest shareholder in Northview.

Northview to become $2.7-billion REIT

If all goes as planned, the moves will create a REIT valued at about $2.7 billion based on current pricing. It would control a portfolio of 14,622 residential units and 1.25 million square feet of commercial space, located in nine provinces and two territories.

The acquisitions would add over 3,300 multiresidential units and 119,000 square feet of commercial space to Northview’s existing inventory. The three portfolios are:

• 12 properties owned by the Galaxy Value Add Fund LP in Alberta, Ontario, Nova Scotia and Quebec. It comprises 2,088 apartments and 7,148 square feet of commercial space. This portfolio is to be acquired for $453 million, including the assumption of $209 million in mortgages and $40 million in credit facilities.
• Four properties owned by a Starlight affiliate, in Brantford and Guelph, Ont., and in Edmonton. This totals 368 housing units and 11,532 square feet of commercial. The $109 million purchase price will include the assumption of $57 million in mortgages.
• A portfolio of five properties in Winnipeg from two global, institutional investors which contain 845 housing units and 100,963 square feet of commercial space. The $180 million acquisition will include assumption of $68 million in mortgages.

The balance of all the acquisitions is to be satisfied via a series of fund unit issuances to the vendors.

Lower debt ratio, improved financial flexibility

One key outcome for Northview will include a significant reduction in its leverage. The fund reported a loan-to-value ration of 67 per cent in its Q1 financials, but management says this will be reduced by 500 basis points through the transactions and conversions.

Despite healthy increases in net operating income of 9.2 per cent year-over-year, Northview had reported a loss of $9.4 million in Q1 2023 (up from $3.3 million in the year-earlier period) due to increased financing costs.

The fund’s floating interest rate on its credit facility had almost doubled from an average of 4.38 per cent in Q1 2022 to 8.56 per cent a year later.

Its unit price had also remained well below the highs of 2021 (when it peaked above $16.80). As of Friday’s close, it was trading at $9.14.

“Building on the positive operating performance of Northview’s assets since inception, the addition of these portfolios will provide expanded opportunities in strong and growing markets to enable continued unitholder value in the future,” Northview CEO Todd Cook said in the release.

“We are enthusiastic about the opportunity this transaction provides to build scale and to set us on a path to further expand our portfolio and start growing our portfolio in areas with compelling market fundamentals.”

Also in line with strengthening the balance sheet, the announcement states existing bank facilities with a current maturity of Oct. 31, 2023 are expected to be extended to Dec. 31, 2024. 

The weighted average maturity of the REIT’s mortgages is expected to increase from 2.6 years to three years and management expects the REIT to benefit from an increased proportion of fixed-rate debt, rising from 67 per cent to 71 per cent.

In addition, the REIT expects to obtain a new $60 million secured credit facility secured by the Starlight portfolio and the Winnipeg portfolio.

Key unitholders to increase ownership share

Each of Starlight, KingSett and an institutional investor with an interest in the vendor in the 12-property portfolio will increase its ownership interest in Northview Apartment REIT.

Additionally, one of the two global, institutional investors involved in the Winnipeg portfolio will become a significant investor in Northview. 

Following completion of the transaction, Starlight through its affiliates will be the REIT’s largest unitholder with an approximate 28 per cent effective interest; KingSett will control approximately 22 per cent of the REIT, and another existing institutional investor will control approximately 14 per cent.  

The new institutional investor will own 11 per cent (based on a market price of $15.06 per unit for the redeemable units in its share of the transaction).

Northview intends to complete a 1.75 to 1 consolidation of all classes of units concurrent with the closing of the transaction.

The Northview board of trustees is to be comprised of six members, consisting of Drimmer as chair, Cook, Rob Kumer, Harry Rosenbaum, Kelly Smith and Lawrence Wilder (the lead trustee).

The transaction also requires a series of regulatory and shareholder approvals.

The transaction is expected to close in August.