Tricon Capital Group (TCN-T) says it will acquire the Starlight U.S. Multi-Family No. 5 Core Fund (STUS-A-X) in an all-share transaction valued at about $1.9 billion (all figures Cdn unless specified). The fund comprises 23 multi-family properties totalling 7,289 units located primarily in the U.S. Sun Belt.

Tricon will fund the equity portion of the acquisition, about $660 million, by issuing 50,779,314 shares to the fund’s unitholders at an implied price of $13.10 per share. It will also indirectly assume approximately $1.22 billion of the fund’s existing debt.

Tricon calls the acquisition “transformational” in a release issued late Tuesday afternoon. It establishes a U.S. multi-family rental platform with immediate scale for the company, and positions it for future growth both through acquisitions and the ability to raise capital for new multi-family investment strategies.

“The transaction will provide Tricon a significant presence in U.S. multi-family, which is the largest investible property type in residential real estate,” said president and CEO Gary Berman in the release. “The portfolio enhances our exposure to high-growth markets and aligns with our U.S. rental focus on the middle market demographic.

“With this acquisition, we will have created a strong foundation for future growth as well as a major source of recurring rental income to complement our thriving single-family rental and Canadian build-to-core multi-family rental businesses.”

Upon completion of the transaction, Tricon is expected to have a market capitalization of approximately $2.3 billion and approximately 194.2 million shares outstanding.

Unanimous Tricon, Starlight board approval

The transaction has unanimous approval from the boards of directors of both Tricon and the Starlight No. 5 fund’s general partner.

“The NAV-for-NAV all-share transaction is expected to be meaningfully accretive to Tricon’s EPS and book value per share, while offering the fund’s unitholders an attractive premium to the prevailing unit price and the opportunity to participate in the future growth of our combined company,” Berman said in the release.

“Going forward, we expect investors to benefit as Tricon continues to evolve into a larger, stronger and more diversified investment manager focused largely on rental housing.”

In line with Starlight’s acquisition strategy, the portfolio is modern with an average vintage of 2012. The assets are primarily garden-style apartment complexes featuring resort-style amenities in desirable suburban neighbourhoods.

“Under Starlight’s management, the income and value of the underlying assets in the fund have grown significantly, delivering a strong internal rate of return for fund unitholders,” said Daniel Drimmer, chief executive officer and director of Starlight and the fund. “The sale of the fund is a compelling opportunity for fund unitholders to realize the value on their initial investment on a tax-deferred basis.

“Becoming Tricon shareholders allows us to become a part of a larger and more geographically diversified investment vehicle and provides increased liquidity. Management are pleased to become significant shareholders of Tricon.”

The transaction will bring the Tricon Lifestyle Rentals multi-family rental portfolio to over 10,000 units, including 3,000 units under development and management in Canada. The firm’s total assets under management will also increase by $1.9 billion, to $9.5 billion, predominantly focused on rental housing in high growth markets.

The Starlight No. 5 portfolio is concentrated in 13 high-growth markets predominantly in the U.S. Sun Belt with what the investors have considered “desirable population, economic, and employment fundamentals.”

Tricon has also historically targeted the region across all of its investment verticals. Tricon’s management team has deep operating experience in the Sun Belt and across the middle market demographic, in particular through its Tricon American Homes single-family rental platform.

The implied value per class-A Unit and class-U Unit represent premiums of 26.4  and 33.4 per cent, respectively, to the 20-day volume-weighted average price of the units on the TSX Venture Exchange for the period ending on April 1.

Upon completion of the transaction, Starlight Group will also have the right to nominate one board member to the Tricon Board of Directors for so long as fund insiders continue to hold at least 4.5 per cent of the outstanding Tricon Shares. It will also have the right to appoint Daniel Drimmer as a board observer (with no voting rights) for a period of one year.

The transaction is subject to numerous standard approvals and conditions, including approval from “disinterested” shareholders in the Starlight No. 5 fund.

It is expected to close in June or July 2019.

About Tricon

Tricon is an investment manager focused on the residential real estate industry in North America with approximately $7.6 billion of assets under management.

Tricon invests in a portfolio of single-family rental homes, multi-family rental apartments and for-sale housing assets, and manages third-party capital in connection with its investments. Since its inception in 1988, Tricon has invested in real estate and development projects valued at approximately $20 billion.