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Starlight to sell $760M in US multifamily, wrap up fund

The seven properties owned by Starlight’s U.S. Multi-Family No. 1 Core Plus Fund (SCPO-V) will be...

IMAGE: The La Vie Southpark apartments in Charlotte, N.C., is one of the U.S. properties owned by the Starlight U.S. multi family No. 1 fund. (Google Maps)

The La Vie Southpark apartments in Charlotte, N.C., is one of the U.S. properties owned by the Starlight U.S. multi family No. 1 fund. (Google Maps)

The seven properties owned by Starlight’s U.S. Multi-Family No. 1 Core Plus Fund (SCPO-V) will be sold to a Sherrin U.S. fund for about $760 million (all figures Cdn unless noted), with proceeds to be paid to unitholders and the fund delisted from the TSX Venture exchange.

The announcement Friday morning identifies Sherrin U.S. Multi-Family No. 1 Holding LP as the buyer. Starlight CEO Daniel Drimmer is also identified as one of the limited partners in the Sherrin fund.

The Starlight fund’s holdings comprise 2,219 apartments and rental units in seven institutional-quality, class-A properties. The average age of the properties is about 18 years.

They are:

– 401 Teravista in Austin, comprising 320 units and constructed in 2008;

– Autumn Vista Apartments in Atlanta, 280 apartments constructed in 1996;

– Grand Oak at Town Park in Nashville, 300 units constructed in 2014;

– La Vie Southpark in Charlotte, 321 units constructed in 2015;

– Southpoint Crossing in Raleigh, 288 units constructed in 1999;

– The Bluffs at Highland Ranch in Denver, 340 units constructed in 1994;

– and Tuscany Bay Apartments in Tampa, 370 units constructed in 2001.

The transaction is expected to include a gross cash payout of about $340 million, along with the assumption of about $421 million of debt. The agreement also accounts for about $1.3 million in working capital and capital expenditures of about $2.5 million leading up to the closing of the sale, which is expected in mid- to late October.

Returns to exceed projections

“Under the direction of Starlight’s asset management team, the income and value of the underlying assets in the fund have grown significantly, exceeding our pre-tax targeted IRR for unitholders,” explained Evan Kirsh, president of the fund GP, in the announcement Friday morning.

“Given the progress in the fund’s business plan and the favourable real estate market conditions in the regions where the properties comprising the fund portfolio are located, entering into the proposed transaction at this time is a compelling opportunity for unitholders to realize a significant return on their initial investment in excess of the targeted amount.”

The announcement provides additional information about the expected returns.

“The consideration per unit to be received by unitholders in connection with the transaction represents a significant and attractive cumulative pre-tax internal rate of return for unitholders and a significant premium to the fund’s targeted 12 per cent pre-tax internal rate of return at or before the end of the fund’s targeted three-year investment horizon,” the release states.

Based on current exchange values and projections, Starlight estimates the payouts to be:

Class of Units Issue Price per Unit Pre-US Tax Expected Consideration Target IRR Pre-US Tax Expected IRR Post-US Tax Expected Consideration
Class A C$10.00 C$13.44 12.0% 28.2% C$12.31
Class C C$10.00 C$14.22 12.0% 28.1% C$13.03
Class D C$10.00 C$13.44 12.0% 28.2% C$12.31
Class E US$10.00 US$14.54 12.0% 31.7% US$13.31
Class F C$10.00 C$13.88 12.0% 28.1% C$12.72
Class I C$10.00 C$14.79 12.0% 31.1% C$13.60
Class U US$10.00 US$14.07 12.0% 31.7% US$12.88

Starlight approval process

The deal remains subject to standard regulatory approvals. In addition, the involvement of Drimmer – the chief executive officer and director of the general partner of the Starlight fund – in the Sherrin fund invokes other approvals into the sale process.

A special meeting of unitholders will be held to seek the appropriate approvals – including a vote of disinterested unitholders.

The transaction has received unanimous approval of an independent special committee Starlight U.S. Multi-Family No. 1 board, the general partner of the fund, and the board of directors (with Drimmer recusing himself) of the fund GP.

The committee received a fairness opinion from CIBC World Markets, and as a result both the fund GP board and executive officers have entered into support agreements to vote in favour of the proposed transaction. They represent about 2.82 per cent of the outstanding units.

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