SURF.U Starlight US Residential Fund

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

TORONTO, April 29, 2024 /CNW/ - Starlight U.S. Residential Fund (TSXV: SURF.A) (TSXV: SURF.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 reported an increase in same property net operating income of 1.7% from Q4-2022 to Q4-2023," 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 total portfolio revenue and net operating income ("NOI")¹ were $9,808 and $5,916 (Q4-2022 - $9,912 and $6,973), with the reduction in revenue primarily due to the disposition of 73 single-family properties ("SF Properties") during YTD-2023, partially offset by same property revenue growth of 3.2%. The increase in NOI is primarily due to a 1.7% increase in same property NOI¹, excluding the impact of certain property tax adjustments in both periods.
• The Fund completed 34 in-suite value-add upgrades at the multi-family properties ("MF Properties") during Q4-2023, which generated an average rental premium of $156 and an average return on cost of approximately 31.0% (YTD-2023 - 225 upgrades at an average rental premium of $155 and an average return on cost of approximately 28.6%).
• The Fund achieved physical occupancy of 92.7% during Q4-2023, which subsequently increased to 93.9% physical occupancy as at April 25, 2024.
• As at April 28, 2024, the Fund had collected approximately 97.9% 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 attributable to unitholders for Q4-2023 of $53,592 (Q4-2022 - $15,424), primarily resulting from the fair value loss on investment properties reported in Q4-2023.
• During Q4-2023, the Fund continued with the disposition program of the SF Properties completing six dispositions during the quarter for net proceeds of $1,605 (YTD-2023 - 73 dispositions for net proceeds of $18,583).
• Subsequent to December 31, 2023, the Fund extended $78,187 of debt maturing in 2024 (see "Subsequent Events") and is actively working through an extension of the Ventura loan payable prior to its initial maturity. This, together with the SF Properties disposition program, highlights the Fund's continued focus on preserving liquidity for the duration of the Fund's term to allow the Fund to capitalize on more robust market dynamics upon the eventual sale of the Fund's properties.

YTD-2023 HIGHLIGHTS

• YTD-2023 total portfolio revenue and NOI were $39,386 and $24,331 (YTD-2022 - $34,530 and $22,224), respectively, with the increases primarily as a result of the acquisition of The Ventura and Eight at East in YTD-2022, partially offset with the disposition of certain SF Properties during YTD-2023 (the "Primary Variance Drivers").
• The Fund reported a net loss and comprehensive loss attributable to unitholders for YTD-2023 of $106,299 (YTD-2022 - $21,709), primarily resulting from the fair value loss on investment properties reported in YTD-2023.
• On January 25, 2023, the Fund entered into an interest rate swap relating to the Indigo Apartments property loan payable at a swap rate of 3.75%, fixing the all-in interest rate at 5.70% until maturity.
• On July 26, 2023, the Fund amended the existing Eight at East loan payable to a fixed rate loan bearing interest only ("IO") payments at 5.75% from the date of the amendment to the initial maturity date of May 7, 2025. As part of the amendment, the Fund discharged its obligation to purchase a replacement interest rate cap in January 2024, which is expected to allow the Fund to retain liquidity that otherwise would have been utilized for the purchase of a replacement interest rate cap.
• On May 23, 2023, the Fund entered into a $25,000 credit facility which bears IO payments until maturity in May 2024 ("Fund Credit Facility"). On April 24, 2024, the Fund extended the Fund Credit Facility term to December 31, 2024 (see "Subsequent Events").

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, Q3-2022 and YTD-2022, as applicable, are provided below:

NON-IFRS FINANCIAL MEASURES AND RECONCILIATIONS

The Fund's condensed consolidated interim 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 0.79x during Q4-2023. The decline in both ratios during Q4-2023, relative to Q4-2022, was primarily due to increases in SOFR, partially offset by NOI growth due to the Primary Variance Drivers and same property NOI growth. 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 favourable. During Q4-2023, the Fund covered any operating shortfall through cash on hand, including any proceeds from financing activities as applicable.

The Fund also utilizes interest rate caps, swaps or fixed rate debt in certain instances to protect the Fund from increases in SOFR beyond stipulated levels. As at December 31, 2023, the Fund's weighted average interest rate was 5.78%.

CASH PROVIDED BY OPERATING ACTIVITIES RECONCILIATION TO FFO and AFFO

The Fund was formed as a "closed-end" trust with an initial term of three years, 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 $(1,418) and $(0.05), respectively (Q4-2022 - $(671) and $(0.02)), representing a decrease of $747, primarily as a result of the decrease in NOI at the Fund's properties due to the sale of 73 SF Properties in YTD-2023. The Fund covered any shortfall between cash used by operating activities, including interest costs¹, through either cash from operating activities during such applicable periods, cash on hand, or the Fund Credit Facility, 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 is provided below:

SUBSEQUENT EVENTS

On February 14, 2024, the Fund purchased a replacement interest rate cap for the Lyric Apartments loan payable with a three-month term, notional amount of $91,375 and 3.0% SOFR strike rate.

On April 9, 2024, the Fund amended the Emerson at Buda loan payable to extend the term by one year to April 9, 2025 and reduced the requirement to purchase a one-year interest rate cap to a six-month cap with a notional amount of $57,687 and 2.75% SOFR strike rate.

On April 24, 2024, the Fund extended the Fund Credit Facility term to December 31, 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 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. 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 is 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 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 in that would otherwise have been delivered in the second half of 2025 or 2025. This potential reduction in construction may create a temporary imbalance in the supply of comparable multi-suite residential properties and single-family rental homes 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, the trading price of the Fund's TSX Venture Exchange listed class A 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 Fund's ability to sell single-family homes; 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 communities; 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, inflation and supply chain issues on new supply of multi-family communities; 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 Starlight Investments US AM Group LP or its affiliates (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. RESIDENTIAL FUND

The Fund is a "closed-end" fund formed under and governed by the laws of the Province of Ontario, pursuant to a declaration of trust dated September 23, 2021, as amended and restated The Fund was established for the primary purpose of directly or indirectly acquiring, owning and operating a portfolio primarily composed of income producing residential properties in the U.S. residential real estate market that can achieve significant increases in rental rates as a result of undertaking high return, value-add capital expenditures and active asset management. As at December 31, 2023, the Fund owned interests in six multi-family properties consisting of 1,973 suites as well as 25 single-family rental homes.

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. Residential Fund