STARLIGHT U.S. MULTI-FAMILY (NO. 2) CORE PLUS FUND ANNOUNCES Q3-2023 RESULTS

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

TORONTO, Nov. 14, 2023 /CNW/ - Starlight U.S. Multi-Family (No. 2) Core Plus Fund (TSXV: SCPT.A) (TSXV: SCPT.U) (the "Fund") announced today its results of operations and financial condition for the three months ended September 30, 2023 ("Q3-2023") and nine months ended September 30, 2023 ("YTD-2023"). Certain comparative figures are included for the three months ended September 30, 2022 ("Q3-2022") and nine months ended September 30, 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 achieved a 3.9% increase in average monthly rents from Q3-2022 to Q3-2023," 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."

Q3-2023 HIGHLIGHTS

• Q3-2023 revenue from property operations and net operating income ("NOI")¹ were $5,333 and $3,387 (Q3-2022 - $5,074 and $3,339), respectively, representing an increase of 5.1% and 1.4% relative to Q3-2022.
• The Fund achieved a 3.9% increase in AMR from Q3-2022 to Q3-2023 as well as an estimated gap to market versus in-place rents¹ of 3.8% as at the end of Q3-2023, providing further opportunity for rental increases in future periods.
• The Fund completed 13 in-suite value-add upgrades at Summermill at Falls River ("Summermill") during Q3-2023, which generated an average rental premium of $300 and an average return on cost of approximately 22.0%.
• As at November 13, 2023, the Fund had collected 98.0% of rents for Q3-2023, 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 income and comprehensive income for Q3-2023 of $104 (Q3-2022 - net loss and comprehensive loss of $6,013), primarily resulting from NOI growth and recoveries recorded for non-cash provision for carried interest, partially offset by the fair value loss on investment properties reported in Q3-2023 as well as increases in finance costs.
• On July 26, 2023, the Fund amended the existing loan payable to modify the loan at Hudson at East ("Hudson") to a fixed rate loan bearing interest only payments at 5.75% from the date of the amendment to the initial maturity date of May 7, 2025. As part of such amendment, the Fund discharged its obligation to purchase a replacement interest rate cap in November 2023, 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. The Fund continues to have interest rate caps, swaps or fixed rate debt in-place for 100% of its mortgages on the Fund's properties.
• On August 9, 2023, Starlight U.S. Multi-Family (No.2) Core Plus, GP Inc., the general partner of the Fund, approved a one-year extension of the Fund's term to January 8, 2025 to provide the Fund with the opportunity to capitalize on more robust market dynamics.

  ¹ This metric is a non-IFRS measure. Non-IFRS financial measures do not have standardized meanings prescribed by IFRS (see "non-IFRS financial measures").

YTD-2023 HIGHLIGHTS 

• Revenue from property operations and NOI for YTD-2023 were $15,863 and $9,960 (YTD-2022 - $13,092 and $8,663), respectively, representing a $2,771 and $1,297 increase relative to YTD-2022. The significant increases were primarily due to the acquisition of Summermill in Q2-2022, same property revenue growth of 7.6% and same property NOI¹ growth of 1.9%.
• Net loss and comprehensive loss for YTD-2023 was $11,288 (YTD-2022 - net income and comprehensive income of $2,986) primarily as a result fair value loss on investment properties reported during YTD-2023 as well as increases in finance costs, partially offset by the increases in NOI including same property NOI growth as well as recoveries recorded during YTD-2023 for the non-cash provisions for carried interest and deferred taxes.
• The Fund completed 48 in-suite value-add upgrades at Summermill during YTD-2023, which generated an average rental premium of $301 and an average return on cost of approximately 21.0%.

  ¹ This metric is a non-IFRS measure. Non-IFRS financial measures do not have standardized meanings prescribed by IFRS (see "non-IFRS financial measures").

FINANCIAL CONDITION AND OPERATING RESULTS 

Highlights of the financial and operating performance of the Fund as at September 30, 2023, for Q3-2023 and YTD-2023, including a comparison to December 31, 2022, Q3-2022 and YTD-2022 as applicable, are provided below:

					September 30, 2023	December 31, 2022
Operational Information^(1)
Number of properties					3	3
Total suites					995	995
Economic occupancy^(2)(3)					91.3 %	94.1 %
Physical occupancy^(2)(3)					93.0 %	94.4 %
AMR (in actual dollars)					$           1,732	$           1,678
AMR per square foot (in actual dollars)					$             1.72	$             1.67
Estimated gap to market versus in-place rents					3.8 %	8.0 %
Selected Financial Information
Gross book value^(3)					$       338,900	$       355,500
Indebtedness^(3)					$       250,863	$       243,684
Indebtedness to gross book value^(3)					74.0 %	68.5 %
Weighted average interest rate - as at period end^(3)(4)					5.78 %	5.42 %
Maximum weighted average interest rate - as at period end^(3)(4)					5.78 %	5.42 %
Weighted average loan term to maturity					1.43 years	3.63 years
			Q3-2023	Q3-2022	YTD-2023	YTD-2022
Summarized Income Statement
Revenue from property operations			$           5,333	$           5,074	$         15,863	$         13,092
Property operating costs			(1,409)	(1,241)	(4,212)	(3,119)
Property taxes^(5)			(537)	(494)	(1,691)	(1,310)
Adjusted income from operations / NOI			$           3,387	$           3,339	$           9,960	$           8,663
Fund and trust expenses			(375)	(387)	(1,108)	(979)
Finance costs (including non-cash items)^(6)			(6,571)	(521)	(14,725)	(1,298)
Other income and expenses^(7)			3,663	(8,444)	(5,415)	(3,400)
Net income (loss) and comprehensive income (loss)			$              104	$          (6,013)	$        (11,288)	$           2,986
Other Selected Financial Information
FFO^(3)			$          (2,383)	$             (267)	$          (3,456)	$           1,606
FFO per unit - basic and diluted			$            (0.22)	$            (0.02)	$            (0.32)	$             0.15
AFFO^(3)			$             (732)	$               (96)	$          (1,396)	$           1,903
AFFO per unit - basic and diluted			$            (0.07)	$            (0.01)	$            (0.13)	$             0.17
Weighted average interest rate - average during period^(4)			5.57 %	4.85 %	5.51 %	3.61 %
Interest coverage ratio^(3)(8)			0.81 x	0.99 x	0.87 x	1.38 x
Indebtedness coverage ratio^(3)(8)			0.81 x	0.99 x	0.87 x	1.38 x
Distributions to unitholders			$                 —	$              830	$                 —	$           2,511
Weighted average units outstanding (000s) - basic/diluted			10,902	10,902	10,902	10,902

(1)	The Fund commenced operations following the acquisition of Montane Apartments and Hudson on March 31, 2021 and subsequently acquired Summermill on April 27, 2022.
(2)	Economic and physical occupancy for Q3-2023 and for the three months ended December 31, 2022. As at September 30, 2023, adjusting for the vacant suites undergoing in-suite upgrades at that time, the Fund's occupancy would have been 93.4%.
(3)	This metric is a non-IFRS measure. Non-IFRS financial measures do not have standardized meanings prescribed by IFRS (see "non-IFRS financial measures and reconciliation").
(4)	Based on interest rate caps in place as at September 30, 2023, which protect the Fund from increases in the one-month term Secured Overnight Financing Rate ("SOFR") beyond stipulated levels, the Fund's maximum interest rate is approximately 5.78%. The weighted average interest rate on loans payable is presented as at September 30, 2023 based on SOFR as at that date, subject to any interest rate caps in place.
(5)	Property taxes include the International Financial Reporting Interpretations Committee 21 – Levies fair value adjustment and treat property taxes as an expense that is amortized during the fiscal year for the purpose of calculating NOI. These amounts have been reported under property taxes under the Fund's condensed consolidated interim financial statements for Q3-2023.
(6)	Finance costs include interest expense on loans payable, non-cash amortization of deferred financing costs, loss on early extinguishment of debt and fair value changes in derivative financial instruments. The FFO figure reported for Q3-2023 and YTD-2023 includes the loss on early extinguishment of debt incurred by the Fund which is a non-cash charge amounting to $1,363 during Q3-2023 and YTD-2023, where such amount is added back for the purposes of calculating AFFO (Q3-2022 and YTD-2022 - $nil).
(7)	Includes distributions to unitholders, dividends to preferred shareholders, unrealized foreign exchange gain, realized foreign exchange loss, fair value loss of investment properties, provision for carried interest and deferred income taxes.
(8)	The Fund's interest and indebtedness coverage ratios were 0.81x during Q3-2023, with the Fund's operating results have been offset by increases in the Fund's interest costs as a result of the Fund utilizing a variable rate debt strategy which allows the Fund to maintain maximum flexibility for the potential sale of the Fund's properties at the end of, or during, the Fund's term. The Fund also has interest rate caps on the Fund's loans payable in place as at September 30, 2023 which protect the Fund from increases in SOFR beyond approximately 3.00%. Given the Fund was also formed as a "closed-end" limited partnership with an initial term of three years (see "Q3-2023 Highlights"), a targeted yield of 4.0% and a pre-tax targeted annual total return of 11% across all classes of Units, the Fund continues to monitor the Fund's interest and indebtedness coverage ratios with the goal of maximizing the total return for investors during the Fund's term. On August 9, 2023, the General Partner approved a one-year extension of the Fund's term to January 8, 2025 to provide the Fund with the opportunity to capitalize on more robust market dynamics.

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 adjusted funds from operations ("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, funds from operations ("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 Q3-2023 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:

Interest and indebtedness coverage ratio		Q3-2023	Q3-2022	YTD-2023	YTD-2022
Net income (loss) and comprehensive income (loss)		$                104	$            (6,013)	$          (11,288)	$             2,986
(Deduct) / Add: non-cash or one-time items including distributions^(1)		(786)	5,986	10,028	(897)
Adjusted net (loss) income and comprehensive (loss) income^(2)		$              (682)	$                (27)	$            (1,260)	$             2,089
Interest coverage ratio^(3)		0.81x	0.99x	0.87x	1.38x
Indebtedness coverage ratio^(4)		0.81x	0.99x	0.87x	1.38x

(1)	Comprised of unrealized foreign exchange gain, deferred income taxes, amortization of financing costs, fair value adjustment on derivative instruments,  loss on early extinguishment of debt, fair value adjustment on investment properties and provision for carried interest.
(2)	This metric is a non-IFRS measure. Non-IFRS financial measures do not have standardized meanings prescribed by IFRS (see "non-IFRS financial measures").
(3)	Interest coverage ratio is calculated as adjusted net (loss) income and comprehensive (loss) income excluding interest expense divided by interest expense.
(4)	Indebtedness coverage ratio is calculated as adjusted net (loss) income and comprehensive (loss) income excluding interest expense divided by interest expense and mandatory principal payments on the Fund's loans payable.

The Fund's interest coverage ratio and indebtedness coverage ratio were each 0.81x during Q3-2023. The decline in both ratios during Q3-2023 relative to Q3-2022, was primarily due to increases in SOFR, partially offset by 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 stable and any shortfalls in debt service ratios are funded from cash on hand, including any proceeds from financing activities as applicable.

The Fund also utilizes interest rate caps, swaps and fixed rate debt to limit the potential impact on the Fund's financial performance from any increases in interest rates. Based on interest rate caps in place as at September 30, 2023, which protect the Fund from increases in SOFR beyond stipulated levels, the Fund's maximum interest rate was approximately 5.78%.

CASH PROVIDED BY OPERATING ACTIVITIES RECONCILIATION TO FFO and AFFO

The Fund was formed as a "closed-end" limited partnership with an initial term of three years, which was extended by one-year on August 9, 2023 (see "Q3-2023 Highlights"), 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 Q3-2023, basic and diluted AFFO and AFFO per Unit were $(732) and $(0.07), respectively (Q3-2022 - $(96) and $(0.01)), representing a decrease in AFFO of $635, primarily as a result of increases in the Fund's interest costs driven by increases in SOFR, partially offset by increases in NOI. The Fund covered any shortfall between cash provided by operating activities, including interest costs¹ through either cash from operating activities during such applicable periods or cash on hand, 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 Q3-2023, Q3-2022, YTD-2023 and YTD-2022 are provided below:

		Q3-2023	Q3-2022	YTD-2023	YTD-2022
Cash provided by operating activities		$            3,291	$            3,050	$            7,478	$            7,298
Less: interest costs		(3,676)	(2,954)	(10,031)	(5,565)
Cash (used in) provided by operating activities, including interest costs		$             (385)	$                 96	$          (2,553)	$            1,733
Add / (Deduct):
Change in non-cash operating working capital		(596)	(506)	(943)	(742)
Loss on early extinguishment of debt		(1,363)	—	(1,363)	—
Change in restricted cash		304	388	2,250	1,109
Amortization of financing costs		(343)	(245)	(847)	(494)
FFO		$          (2,383)	$             (267)	$          (3,456)	$            1,606
Add / (Deduct):
Amortization of financing costs		343	245	847	494
Loss on early extinguishment of debt		1,363	—	1,363	—
Vacancy costs associated with the properties upgrade program		20	—	72	—
Sustaining capital expenditures and suite renovation reserves		(75)	(74)	(222)	(197)
AFFO		$             (732)	$               (96)	$          (1,396)	$            1,903

SUBSEQUENT EVENTS

On November 7, 2023, the Fund purchased an interest rate cap related to the Summermill loan payable for a 30-day term, having a notional amount of $82,895 at a strike rate of 3.00%.

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 initial 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 which has been demonstrated by the rent growth achieved at the Fund's properties where AMR increased by 3.9% from Q3-2022 to Q3-2023. 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 condensed consolidated interim financial statements for the three and nine months ended September 30, 2023 and the audited consolidated financial statements for the year ended December 31, 2022 which are 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 impact of rising interest rates and higher levels of inflation have also significantly disrupted active and new construction of comparable communities in the primary markets in which the Fund operates which may create a temporary imbalance in supply of comparable multi-suite residential properties 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 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 Q3-2023 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, trading price of the Fund's TSX Venture Exchange listed class A units 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 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 apartments; the extent to which favorable 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; ; 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, high inflation and supply chain issues on new supply of multi-family apartments; the extent to which favorable 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. MULTI-FAMILY (NO. 2) CORE PLUS 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. multi-family real estate market. The Fund currently owns interests in three properties, consisting of 995 suites with an average year of construction in 2013.

For the Fund's complete condensed consolidated interim financial statements and MD&A for the three and nine months ended September 30, 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 November 2023 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. Multi-Family (No. 2) Core Plus Fund

Evan Kirsh, President, Starlight U.S. Multi-Family (No. 2) Core Plus Fund, [phone], [email protected]; Martin Liddell, Chief Financial Officer, Starlight U.S. Multi-Family (No. 2) Core Plus Fund, [phone], [email protected]