True North Acquires properties from Starlight

True North Apartment REIT’s owns middle-market multi-residential properties across Canada.  Their rented suites tend to be suitable for the price sensitive tenant, and TN properties are located outside of prime areas of major centres such as Toronto or Vancouver.  TN’s properties tend to be located in cities such as KW, Guelph and more suburban areas of the GTA.  They also hold properties in places like Peterborough and St Catherines / Niagara.  Investors should expect lower quality tenants and probably a higher portion of student tenants.

Investors should also note that True North is externally managed. The manager of the REIT is Starlight Investments, which is a property management company controlled by Daniel Drimmer.  The structure creates some conflicts of interest between minority shareholders of TN and Starlight/Drimmer.  Although the management agreement between TN and Starlight seems straightforward along industry standards, conflicts of interest are raised when Starlight/Drimmer sell properties to TN, which has occurred recently.

Investors should be very cautious of this acquisition and the series of transactions associated with it.  This is a perfect opportunity for Drimmer/Starlight to suck some value from minority public shareholders.  The implied cap rate of the acquired properties is reported at about 5.50%, which seems pretty low considering these are not high quality properties (although TN states that the properties have been improved considerably recently). Its hard for public shareholders to tell whether this deal is good value for them.

The board has approved the deal, and there are no laws that are being broken, but this deal brings up the issue of whether this deal is good for current shareholders, how conflicts of interest are being treated, and whether TN shareholders should expect similar deals like this in the future.  With cap rates on multi-unit apartments near all time lows, this would probably be a good time for Drimmer/Starlight to offload some assets to TN REIT at favourable prices.

Below I have linked PDFs of the two public documents that contain the details of this transactions.  They are dense and technical, and investors should consult with their financial advisor about analysing them.  Self directed investors can always obtain public documents at www.sedar.com

TN_debenture_prospectus_060414

TN_deal_details_060414

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