Starlight looks south for more opportunities with US$1.3B deal
Starlight Investments, one of the largest privately held apartment landlords in Canada, is creating a US$1.3 billion partnership with two of the largest pension funds in the country to look for multi-family assets in the U.S. south, a region largely free of rent control.
Raj Mehta, global head of private capital and partnerships with Toronto-based Starlight, said the expanded rent control regime in Ontario isn’t the reason the company is looking south for property in its partnership with the Public Sector Pension Investment Board and the Alberta Investment Management Corp. But the reality is, the province is not a place he expects to see more opportunity in the future.
“It’s an interesting conclusion. You are looking at two large pension funds in Canada. Part of their strategy is they want to diversify anyway and that’s a big part of it,” Mehta said.
“But the second part of it is if you really like multi-family, and many institutional investors do because it’s very stable, safe and has low volatility — and there is no product to buy in Canada, then you are forced to look elsewhere. The United States is natural.”
As part of its 16-point Fair Housing Plan unveiled in April, Ontario expanded rent control provincewide to tie annual rent increases to the rate of inflation. Those increases are capped at 2.5 per cent annually. Previously, buildings constructed after 1991 were exempt from the rules.
RioCan, Canada’s largest publicly traded real estate investment trust, said last month it changed its mind on a 133-unit rental apartment in downtown Toronto, in part because of rent control, and will now sell the buildings off as condominiums.
A report from condo research firm Urbanation Inc., commissioned by landlords and released in September, said 1,000 rental units have been cancelled since Ontario expanded rent control rules across the province.
Pension funds are return-driven organizations, Mehta said, because they have to match liabilities and real estate is an important part of any portfolio. “If you are in markets that are going to be lower in terms of growth and hard to access, which many parts of Canada are in terms of rent control, then naturally, you are going to look elsewhere.”
The deal between Starlight and PSP Investments and AIMCo starts with a 465-unit Class A garden-style multi-family property built in 2017 in Denver. The venture will also focus on markets in Atlanta, Austin, Dallas, Orlando, Tampa and Phoenix.
Starlight Investments controls about 35,000 multi-family units, about 24,000 in Canada and 11,000 in the U.S. The deal with its two institutional partners already has an equity commitment, though the company won’t say how much debt it will take on, just that it plans to acquire US$1.3 billion in real estate. Debt-to-equity in these types of deals is typically 60 to 65 per cent.
“The strategy is brand new real estate that is very attractive and very stable,” said Mehta, whose company will collect fees from operations and further investments. “It’s essentially a sunbelt strategy in seven markets.”
The deal is just the latest example of the growing appetite of pension funds for real estate.
A report from RBC analysts Neil Downey and Michael Smith issued this month found Canada’s 24 largest pension funds owned about $188 billion in real estate at the end of 2016, about 13 per cent of their total assets owned. Downey and Smith think real estate allocation will jump to 14 per cent to 16 per cent over the next five years.
PSP Investments, which has about $135.6 billion of net assets under management, invests funds for the pension plans of the Public Service, Canadian Armed Forces, Royal Canadian Mounted Police and the Reserve Force.
AIMCo, has more than $95.7 billion of assets under management, and is responsible for the investments of 32 pension, endowment and government funds in Alberta.