CALGARY, July 23, 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 June 30,
2019.
Bob Dhillon, Founder and Chief
Executive Officer of Mainstreet, says, "Our third quarter results
are an indication of a gradual shift in the macroeconomic climate
in Alberta and Saskatchewan." He adds, "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 Q3 2019 results mark the fifth consecutive quarter
of year-over-year double-digit growth in revenues, net operating
income ("NOI"), and funds from operations ("FFO"), continuing a
steady improvement in our operations over the last 18 months.
Revenues rose 18%, NOI increased 17%, and FFO increased 29%
compared with Q3 2018.
The cause of this extended upswing is twofold. First, the
economic picture in Alberta has
undergone a positive shift over the last year, supported by higher
oil prices and the election of the United Conservative Party, which
many observers view as being pro-business. In addition, population
growth in Alberta has outpaced
other provinces, partly due to positive interprovincial migration
numbers in recent quarters that have reversed a years-long negative
trend. Second, our successful results are a direct result of
Mainstreet's countercyclical growth strategy, which we adopted more
than four years ago in anticipation of an economic downturn. The
plan included aggressively acquiring underperforming properties at
low cost; strengthening our internal resources to more rapidly
convert residential units; and locking in the majority of our debt
at competitive interest rates, which both reduces our interest
costs (Mainstreet's single-largest expense) and provides low-cost
capital to fund future growth. Such opportunistic acquisitions have
underpinned Mainstreet's sharp growth trajectory over the years:
The Corporation's total asset value now exceeds $2 billion, spread over nearly 13,000 units.
While Mainstreet has capitalized on the macroeconomic shift in
Alberta, our diversified portfolio
continues to bolster financial results elsewhere. Vacancy rates in
Vancouver/Lower Mainland, which
makes up 21% of our portfolio, were driven down to 0.3% in Q3
compared with 0.5% a year earlier—an almost record low. In
addition, we expanded our Saskatchewan portfolio by 23% since the
financial year ended September 30,
2018, where NOI increased by 36% over the quarter compared
with 2018.
FINANCIAL HIGHLIGHTS:
- Growth: Achieved 100% organic, non-dilutive growth by
acquiring $65.6 million in asset
value over the quarter, or $116,000
per door, most of which are located in Calgary's inner city. Year-to-date including
acquisitions subsequent to the completion of Q3 2019, the
Corporation has acquired $130 million
in new asset value
- Operations: Increased NOI and FFO, by 17% and 29%
respectively, despite an accelerated rate of unstabilized
acquisitions over the past couple of years, which typically
increases vacancy rates and lowers both operating metrics
- Vacancy: Reduced overall vacancy rates to 6.4%, well
below the 10.0% rate in Q3 2018
- Financing: Raised $41.6
million in 10-year, long-term CMHC-insured mortgages at an
average interest rate of 2.87% to fund our acquisition and growth.
The interest rate of our most recent financing dropped to
2.65%
- Liquidity: Maintained a liquidity level of approximately
$80 million in Q3, even after
approximately $150 million in
acquisitions in 2018, and $130
million in year-to-date acquisitions in 2019
- 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,
will improve our operational efficiencies
RESULTS
Rental revenues in Q3 2019 increased 18% to
$34.7 million, compared with
$29.3 million in Q3 2018; this came
alongside an 8% increase in same-asset rental revenues to
$29.5 million, from $27.4 million in Q3 2018. NOI increased 17% to
$21.3 million, and increased 6% to
$18.4 million on a same-asset basis.
FFO increased 29% to $9.3 million,
compared with $7.2 million in Q3
2018. FFO per basic share increased 21% to $0.99, compared with $0.82 in Q3 2018.
Operating margins have remained largely constant, averaging 62%
in Q3, despite higher property taxes in the region. The Q3 2019
vacancy rate on a same-asset basis dropped to 5.8%, compared with
9.6% one year earlier. Overall vacancy decreased to 6.4%, down from
10.0% in Q3 2018, due in part to Mainstreet's fast-paced
stabilization of assets over the year, and despite a record number
of acquisitions in 2018 and 2019 that would typically drive up
vacancy rates.
For more detailed analysis of Mainstreet operating results for
Q3 2019, please refer to the sections titled "Profit", "Rental
Operations", "Funds from Operations-Non IFRS measurement" and
"Rental Operations" in our MD&A.
CHALLENGES
Despite gradual improvement in Alberta, negative macroeconomic forces remain
our biggest challenge. While benchmark oil prices increased to
around US$60 per barrel in mid-2019,
they remain well below the highs of US$70 at the end of last year — and nowhere near
pre-2014 levels. A lack of available pipeline capacity has weighed
on Canadian oil prices in particular, and has continued to drive
foreign investment away from Alberta and Saskatchewan.
Observers warn that ongoing trade wars between China and the U.S., among other concerns,
could trigger a global recession that would ripple through the
Canadian economy. Meanwhile, rifts between China and Canada on the trade of meat and other
commodities have also dampened investment. In July 2019, the Bank of Canada announced it would hold its overnight
interest rate at 1.75%, citing trade uncertainty, and said a rate
cut is now equally as likely as a hike in 2020.
Management believes negative macroeconomic forces have likewise
caused the ongoing short positions in 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.
Rising operating costs also pose a challenge. While Mainstreet
will enjoy roughly six months free of a carbon tax in Alberta in 2019, a federal carbon tax backstop
will be imposed in the province beginning in 2020, which in turn
raises heating costs for property owners. Various municipalities
have meanwhile continued to increase property taxes. Our continued
and aggressive stabilization of residential units will also
continue to raise overall operating costs for Mainstreet.
Lastly, lower Canadian oil prices have underscored decades of
complications in the country's regulatory and legal regime, which
have caused delays in large projects like oil pipelines and hydro
transmission lines. While the federal government's June 2019 approval of the Trans Mountain pipeline
sent a positive signal, it is still uncertain when the pipeline
project can actually be commenced.
OUTLOOK
Management sees plenty of unique opportunities
to pursue our countercyclical growth strategy. In particular, we
see the potential for more accretive acquisitions, supported by a
drop in 10-year interest rates, immigration growth, and tighter
stress tests for mortgages announced in 2017, which make it more
difficult for first-time homebuyer to secure financing and
potentially push more people into the rental market. Similar to
2018, we will also continue our aggressive stabilization strategy,
which, management believes should further grow our top-line
revenues and NOI, particularly amid a gradually recovering
economy.
We view the election of a United Conservative Party as broadly
positive for the business climate in Alberta. The party has mulled corporate tax
cuts and other business-friendly policies, according to media
reports, which could improve investor sentiment.
Meanwhile, Alberta's population
grew 1.73% in the year ended March 31,
2019, outpacing all other provinces and performing well
above the national average of 1.41. In-migration into Alberta was 10,474 in Q1 2019, up from 7,483
in Q1 2018, according to the provincial government. The increase
was driven largely by higher interprovincial migration in the
quarter of 3,428, after several years of negative migration
flows.
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 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 6.6% in
June 2019, or equal to a year
earlier, despite faster population growth in province. Saskatchewan unemployment was 5.1% in
June 2019, down from 6.2% in
June 2018. British Columbia's unemployment rate was 4.4%
in the same month, and has remained among the lowest in
Canada. A tight market in B.C.
drove up Mainstreet's top-line revenues in the province by 8% in
Q3, the highest in several quarters.
Mainstreet believes these positive indicators have in turn
helped return the Alberta 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, our mid-market
rental rate, with a price-point average between $900 and $1,000, is
perfectly positioned to attract 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 mid-market rental
bracket.
RUNWAY ON EXISTING PORTFOLIO
- Closing the NOI gap: In Q3 2019, 20% of the Mainstreet
portfolio was going through the stabilization process, even as we
achieved lower overall vacancy rates compared to 2018. We believe
this provides us plenty of room to lower that imbalance as we enter
the final quarter of 2019.
- Pursuing our 100% organic, non-dilutive growth model: Using our
strong potential liquidity position of approximately $80 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
boost NOI and FFO while improving quality of living standards for
middle class Canadians in our markets.
- 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.
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