Toronto-based Starlight Investments, an owner of 12,000 multifamily units in the United States, is cutting its distribution on two of its U.S. funds after finding itself squeezed on variable rate debt.

Starlight, which is based in West Toronto at 3280 Bloor St. W, has more than 25 billion Canadian dollars in assets under management, or about 18.5 billion U.S. dollars, and is one of the largest multifamily owners in Canada. Still, the company said two of its funds for U.S. residential properties are moving to cut the payout after investing in short-term debt.

Starlight U.S. Residential Fund, which launched in September 2021, trades on the Toronto Stock Exchange and has CA$540 million in assets under management, recorded a loss in the third quarter of US$14.8 million that was driven by a fair value loss on investment properties during the period that ended Sept. 30 because of rising capitalization rates.

The fund has paused monthly distributions to shareholders, Starlight U.S. Residential Fund said in a filing last week. The cuts are expected to provide the Fund with US$9.6 million in flexibility per year.

"The Fund's financing strategy has been to source shorter-term, flexible mortgage debt" that is repayable with no or minimal cost, the filing said. "As a result, the Fund's properties are financed with variable rate mortgages, rather than long-term, fixed-rate debt with restrictive and costly repayment terms.

"Since early 2022, concerns over rising inflation have resulted in significant increases in interest rates with the U.S. Federal Reserve raising the federal funds rate by 375 basis points, with further increases anticipated. The size and pace of interest rate increases have been unprecedented and have resulted in interest rates that are significantly higher than projected at the time the Fund financed its properties," Starlight said in the filing.

Starlight U.S. Residential Fund owned interests in six multifamily properties comprising 1,973 units in Tampa, Florida; Austin, Texas; Orlando, Florida; Raleigh, North Carolina; Las Vegas, Nevada; and Phoenix, Arizona, as of Sept. 30. It also owned 98 single-family rental homes.

"The Fund’s target markets have continued to experience strong demand and limited new supply. This dynamic, coupled with declining household affordability, has historically been supportive of capital appreciation," said Evan Kirsh, president of Starlight U.S. Residential Fund, in the statement.

The fund's properties recorded a 17.4% increase in annualized rent growth during the quarter driven by increased demand for multifamily units in the markets where it operates, the statement said.

The story was similar for Starlight U.S. Multi-Family (No. 2) Core Plus Fund, which also trades on the TSX and has CA$300 million in assets under management. That fund said it recorded 15% in annualized rent growth in the quarter but is facing the same pressure from short-term debt coming due and rising interest rates.

Starlight U.S. Multi-Family (No. 2) Core Plus Fund is pausing monthly distributions starting with November's distribution that would have been payable on Dec. 15. The distribution cut is expected to save the fund US$3.3 million annually, according to a statement. Starlight U.S. Multi-Family (No. 2) Core Plus Fund owns three properties comprising 995 units.

Starlight believes pausing the distributions for both U.S. funds will allow them to maximize the total return for investors upon the eventual sale of the properties, said Kirsch in the statement. Kirsch also heads up Starlight's much larger U.S. residential division that has CA$4 billion in assets under management.