Starlight recent acquisitions

The $1.7 billion deal for Continuum Residential Real Estate Investment Trust could impact the entire Canadian multifamily sector, according to a report.

Troy MacLean, an analyst with BMO Capital Markets, predicted higher property values after the offer last week from Starlight Investments, which wiped out the only initial public offering for a REIT this year on the Toronto Stock Exchange.

"The transaction valuation highlights that despite Canadian apartments trading at an all-time high, there may be further upside," said MacLean in a note he released before markets opened Monday.

Toronto-based Starlight, a closely held investment and asset management company with a portfolio of about 36,000 multifamily units across Canada and the United States, stunned the market with an offer of $20.10 per trust unit for the Continuum REIT portfolio of 44 high-rise concrete buildings located primarily in the Greater Toronto Area and containing 6,271 rental suites.

Dan Argiros, president and chief executive of Continuum, an affiliate of Q Management LP, had said the $300 million IPO was way oversold and had an order book of more than $1 billion.

Starlight approached the REIT to buy the whole portfolio, easily outbidding investors for the IPO, which would have been priced between $15.50 to $16.50 per unit.

"We have elected to proceed with the Starlight offer to acquire the portfolio, and we will be withdrawing the IPO," he said in a statement about what is set to become Canada's largest real estate transaction in 2019.

The deal is expected to close in December.

In his note, MacLean said about 85% of the portfolio is in the GTA and Hamilton, Ontario. Based on net operating income, he calculated the portfolio traded at about a 3.6% capitalization rate, or the expected rate of return on investment.

"This is above the valuation range of Canadian apartment REITs," said MacLean. Based on an implied cap rate basis, Canadian apartment REITs trade in a range of about 3.6% to about 5.8%, he noted.

"Geographically, Continuum is most closely like CAP REIT, InterRent and Minto, which all have a significant presence in the GTA," said the analyst, who calculated Continuum being purchased at $276,192 per door. He estimated replacement costs would have been $400,000 per door.

"Since 2015, population growth in Canada has increased, particularly in Toronto. Over that same time, purpose-built rental completions have increased, but the rate of growth is still below the rate needed to satisfy the increased demand," said MacLean.

CoStar data puts the average market sale price per unit in the GTA at $262,000, with the average market cap rate in the GTA at 4%.

It is just the latest deal for Starlight, which in September 2018 bought a 1,527-suite portfolio in the GTA that was owned by the Wynn Group for $402.1 million at about $263,351 per door.

In September, Starlight purchased 12 properties and 626 suites in the GTA from Akelius Canada for $176.8 million, or about $281,529 per door at a roughly 3.8% cap rate, the analyst noted.

Starlight has also teamed up with New York City’s Blackstone Property Partners to buy six apartment properties in Toronto and Montreal.

The deal announced Friday could also provide expansion opportunities for Northview Apartment Real Estate Trust, which has a strategic relationship with Starlight, said Michael Markidis, an analyst with Desjardins.

Starlight's founder, president and CEO, Daniel Drimmer, sits on Northview's board and beneficially owns or controls about 13% of its equity.

"Starlight has sold properties to Northview in the past," said Markidis, pointing to $53 million in transactions in 2019 and $180 million in 2018. "Considering Starlight's pending acquisition, it is logical to believe that Northview might be offered additional acquisition opportunities from Starlight in the not too distant future."

NOVEMBER 11, 2019|GARRY MARR via Co-star