CALGARY, May 14, 2019 /CNW/ - Mainstreet Equity Corp.
("Mainstreet" or the "Corporation"), an add- value, mid-market
consolidator of apartments in Western
Canada, is announcing its operating and financial results
for the quarter ended March 31,
2019.
Bob Dhillon, Founder and Chief
Executive Officer of Mainstreet, said, "Our second quarter results
point to a very promising upturn in operational results over the
past year." He added, "We believe this substantial achievement is
the direct result of our countercyclical strategy, stretching over
the past four years, to create value for shareholders during
periods of slow economic growth."
Mainstreet's Q2 2019 results mark the fourth consecutive quarter
of year-over-year double-digit growth in revenues, net operating
income ("NOI"), and funds from operations ("FFO"), extending a
sharp upswing in our operational performance over the past 12
months. This achievement comes despite a prolonged and frigid
winter that increased Mainstreet operating costs, as well as Q2
being a typically low season in the rental market. NOI and rental
revenues both rose 19%, while FFO increased 28% compared with Q2
2018.
Our success over the quarter was a direct result of Mainstreet's
countercyclical growth strategy, which Management adopted more than
four years ago in anticipation of an economic downturn. The plan
included aggressively acquiring underperforming properties during
the period of economic slowdown; strengthening our internal
resources to more rapidly stabilize apartment units; and locking in
the majority of our debt at low interest rates, which both reduces
our interest costs (Mainstreet's single-largest expense) and
provides low-cost capital to fund future growth.
Improved earnings also come as market conditions of our core
markets of Alberta and
Saskatchewan have further been
improved. Meanwhile, Vancouver/Lower Mainland, which makes up 28%
of our portfolio, continued to outperform with a near record-low
vacancy rate of 0.5% over the quarter.
FINANCIAL HIGHLIGHTS:
- Growth: Achieved 100% organic, non-dilutive growth by
acquiring 130 units for $13.3 million
over the quarter. Year-to-date including subsequent acquisitions,
the Corporation acquired 840 units with a total consideration of
$105.7 million.
- Operations: Increased NOI and FFO sharply, by 19% and
28% respectively, despite an accelerated rate of unstabilized
acquisitions over the past couple of years, which typically
increases vacancy rates and lowers both NOI and FFO. With a total
of 1,980 units or 16% in unstabilized units, management believes
there is plenty of room to further boost operating metrics
- Vacancy: Reduced same asset vacancy rates to 6.0%,
nearly half the 11.1% in Q2 2018
- Financing: Raised $21.7
million in 10-year, long-term CMHC-insured mortgages at an
average interest rate of 3.02% to fund our acquisition and growth.
The interest rate of our most recent financing at 10-year rates
were subsequent to the quarter end dropped to just 2.65%, providing
cheaper financing options in future
- Liquidity: Maintained a liquidity level of approximately
$100 million, even after
approximately $150 million in
acquisitions in 2018 and $105.7
million over the current year
- Technological investment: Continued to embrace new
technologies through a five-year, $3
million investment in a leading software technology from
Yardi System Inc., which will automate our systems and, we believe,
improve our operational efficiencies
RESULTS
Rental revenues in Q2 2019 increased 19% to
$33.7 million, compared with
$28.3 million in Q2 2018; this coming
alongside a 10% increase in same-asset rental revenues to
$29.4 million, from $26.7 million in Q2 2018. NOI increased 19% to
$20.2 million, and increased 17% to
$17.8 million on a same-asset basis.
FFO increased 28% to $8.3 million,
compared with $6.5 million in Q2
2018. FFO per basic share increased 24% to $0.92, compared with $0.74 in Q2 2018.
Operating margins stayed the same at 60% compared to a year
earlier; margins improved on a same-asset basis to 61%, up from 60%
in Q2 2018, despite the especially cold winter season. The Q2 2019
vacancy rate on a same-asset basis dropped to 6.0%, compared with
11.1% one year earlier. Overall vacancy decreased to 6.5%, down
from 11.3% in Q2 2018, due in part to Mainstreet's fast-paced
stabilization of assets over the year, and despite a record number
of acquisitions in 2018 that would typically drive up vacancy
rates.
For more detailed analysis of Mainstreet operating results for
Q2 2019, please refer to the sections titled "Profit", "Rental
Operations", "Funds from Operations" and "Rental Operations" in our
MD&A.
CHALLENGES
Negative macroeconomic forces remain our
biggest challenge. The Bank of Canada in April put a hold on plans to raise
interest rates in the near term, after recent economic data showed
Canadian GDP growth had fallen below 1%. Adding to these domestic
worries are fears of a wider global recession amid international
trade disputes, slower economic growth in China and stock market volatility.
Rising operating costs also pose a challenge. While the
political situation in Alberta has
shifted, operating costs in the Province remain higher due to a
number of policies introduced by the former government, including
increased minimum wages, and carbon taxes, which raise heating
costs for property owners. In addition, a hike in municipal
property taxes and our continued and aggressive stabilization of
residential units will also continue to raise operating costs for
Mainstreet until they are stabilized.
And, despite the decision to hold interest rates in April, many
analysts are predicting that the Bank of Canada is still set to gradually raise its
overnight interest rate through 2019 and 2020, which would increase
the cost of Mainstreet's future debt.
Management also believes negative macro-economic forces could
likewise have caused short positions in respect of the trading of
Mainstreet common stock. We believe this is partly responsible for
our share price continuing to trade well below what we believe to
be its true net asset value of the Corporation.
Lastly, commodity prices have been on the rise since the
beginning of 2019, but remain volatile amid a lack of pipeline
capacity in Alberta and
Saskatchewan. Ongoing
complications in Canada's
regulatory and legal regime have halted progress on several large
pipeline projects, including the Trans Mountain expansion project
now owned by the federal government. Such delays have led to
depressed prices for Canadian crude oil. Management believes this
regulatory and legal failure could lead to a broader cooling off in
the investment climate in Canada,
and could continue to hamper our business competitiveness relative
to other jurisdictions.
OUTLOOK
As we enter the second half of the fiscal
year, Management sees plenty of unique opportunities to pursue our
countercyclical growth strategy. In particular, we see the
potential for more acquisitions in 2019, supported by a drop in
10-year interest rates, immigration growth, and stricter stress
tests for mortgages that are expected to push more people into the
rental market. Mainstreet already took advantage of these cheaper
buying opportunities when we recently acquired a property in
Saskatoon for just $50,000 per apartment unit, for example. Similar
to last year, we will also continue our aggressive stabilization
strategy, which should further grow our top-line revenues and NOI,
particularly amid a gradually recovering economy. In addition,
Mainstreet anticipates that the performance of our BC portfolio,
which accounts for approximately 23% of Mainstreet's portfolio,
will continue to grow through rent increases.
Meanwhile, our core markets continue to show promising migration
numbers. In-migration into Alberta
nearly doubled to 9,196 in Q4 2018, up from 4,838 in Q4 2017,
according to Government of Alberta
data. In-migration into Saskatchewan also doubled over the same period
from 605 to 1,248.
Better in-migration numbers could be compounded by a rising
number of foreign students entering Canada. The number of international students
in Canada has nearly tripled to
572,000 over the last 20 years, according to the most recent data
from Statistics Canada—a growth rate that is three times higher
than enrollment numbers by Canadian students over the last two
decades. Canada now boasts the
second-highest level of foreign student enrollments in the world on
a per capita basis.
Better student enrolment numbers come as labour indicators
remain between stable and slightly improved. Alberta's unemployment rate was 6.9% in
March 2019, up slightly from 6.4% a
year earlier. Saskatchewan
unemployment dropped to 4.9% in March 2019—the lowest since
August 2015, according to Statistics
Canada.
Mainstreet believes these positive indicators have in turn
helped return the rental market closer to balance. Rental markets
have been oversupplied in recent years following a rapid build out
of condominiums during years of high economic growth, which then
spilled over into the broader rental space. However, we see this
trend gradually reversing as new tenants continue to absorb that
oversupply.
We also believe that broader market volatility in turn creates
areas of opportunity for Mainstreet. In our opinion, mid-market
rental rate, with a price-point average between $900 and $1,000, is
perfectly positioned to attract would-be renters in today's market.
Renters tend to favour mid-market prices during times of economic
uncertainty as they defer major investments like new homes. We
believe we are uniquely positioned to capture foreign workers,
foreign students and new migrants within this lower bracket.
Management believes this trend among first-time buyers (who
usually come out of the overall rental pool) are underscored by
tighter borrowing requirements under the Office of the
Superintendent of Financial Institutions, announced in 2017, which
will make it more difficult for first-time homebuyers to secure
financing. We see this trend as generally supportive of the rental
market. The Bank of Canada
estimates the new rules could disqualify as much as 10% of new
buyers every year.
RUNWAY ON EXISTING PORTFOLIO
1)
|
Closing the NOI gap:
In Q2 2019, 16% of the Mainstreet portfolio was going through the
stabilization process, even as we achieved lower overall vacancy
rates compared to 2018. This inherent challenge in our business
model is further increased by our record-high volume of
acquisitions in recent years, which causes higher rates of
unstabilized properties that decreases our NOI, FFO and margins.
However, we see plenty of opportunity to lower that imbalance we
enter the second half of fiscal 2019.
|
2)
|
Pursuing our 100%
organic, non-dilutive growth model: Using our strong potential
liquidity position of approximately $100 million, we believe there
is significant opportunity to continue acquiring new assets at low
cost. We also believe Mainstreet's business strategy will allow us
to continue to improve NOI and FFO while improving quality of
living standards for middle class Canadians in our
markets.
|
3)
|
Buying back common
shares at a discount to NAV: We believe MEQ shares continue to
trade well below their NAV. We will therefore continue to buy back
our own common shares on an opportunistic basis under our normal
course issuer bid or any renewal thereof.
|
Forward-Looking Information
Certain statements
contained herein constitute "forward-looking statements" as such
term is used in applicable Canadian securities laws. These
statements relate to analysis and other information based on
forecasts of future results, estimates of amounts not yet
determinable and assumptions of management. In particular,
statements concerning estimates related to future acquisitions,
dispositions and capital expenditures, increase or reduction of
vacancy rates, increase or decrease of rental rates and rental
revenue, future income and profitability, timing of refinancing of
debt and completion, timing and costs of renovations, increased or
decreased funds from operations and cash flow, the Corporation's
liquidity and financial capacity, improved rental conditions,
future environmental impact the Corporation's goals and the steps
it will take to achieve them the Corporation's anticipated funding
sources to meet various operating and capital obligations and other
factors and events described in this document should be viewed as
forward-looking statements to the extent that they involve
estimates thereof. Any statements that express or involve
discussions with respect to predictions, expectations, beliefs,
plans, projections, objectives, assumptions of future events or
performance (often, but not always, using such words or phrases as
"expects" or "does not expect", "is expected", "anticipates" or
"does not anticipate", "plans", "estimates" or "intends", or
stating that certain actions, events or results "may", "could",
"would", "might" or "will" be taken, occur or be achieved) are not
statements of historical fact and should be viewed as
forward-looking statements.
Such forward-looking
statements are not guarantees of future events or performance and
by their nature involve known and unknown risks, uncertainties and
other factors, including those risks described in this Annual
Information Form under the heading "Risk Factors", that may cause
the actual results, performance or achievements of the Corporation
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking
statements. Such risks and other factors include, among others,
costs and timing of the development of existing properties,
availability of capital to fund stabilization programs, other
issues associated with the real estate industry including
availability but without limitation of labour and costs of
renovations, fluctuations in vacancy rates, unoccupied units during
renovations, rent control, fluctuations in utility and energy
costs, credit risks of tenants, fluctuations in interest rates and
availability of capital, and other such business risks as discussed
herein. Material factors or assumptions that were applied in
drawing a conclusion or making an estimate set out in the
forward-looking statements include, among others, the rental
environment compared to several years ago, relatively stable
interest costs, access to equity and debt capital markets to fund
(at acceptable costs) and the availability of purchase
opportunities for growth in Canada. Although the Corporation
has attempted to identify important factors that could cause actual
actions, events or results to differ materially from those
described in forward-looking statements, other factors may cause
actions, events or results to be different than anticipated,
estimated or intended. There can be no assurance that such
statements will prove to be accurate as actual results and future
events could vary or differ materially from those anticipated in
such forward-looking statements. Accordingly, readers should not
place undue reliance on forward-looking statements contained
herein.
Forward-looking statements are based on
Management's beliefs, estimates and opinions on the date the
statements are made, and the Corporation undertakes no obligation
to update forward-looking statements if these beliefs, estimates
and opinions should change except as required by applicable
securities laws or as otherwise described
therein.
Certain information set out herein may be
considered as "financial outlook" within the meaning of applicable
securities laws. The purpose of this financial outlook is to
provide readers with disclosure regarding the Corporations
reasonable expectations as to the anticipated results of its
proposed business activities for the periods indicated. Readers are
cautioned that the financial outlook may not be appropriate for
other purposes.
SOURCE Mainstreet Equity Corporation