CALGARY, Feb. 11, 2020 /CNW/ - Mainstreet's Q1 2020
results mark the 7th consecutive quarter of year-over-year
double-digit growth in all of its key metrics, extending a steady
improvement in its operational performance that has continued to
deliver non-dilutive value to shareholders. Continued growth in
rental revenue, net operating income ("NOI"), and funds from
operations ("FFO") comes despite the fact that Q1 is typically a
low rental season.
Bob Dhillon, Founder and Chief
Executive Officer of Mainstreet, said, "Our achievements over the
past few years are a testament to Mainstreet's countercyclical
growth strategy, which has continued to deliver real value to our
shareholders ever since we listed in TSX in 2000." He added, "As we
enter the remainder of the fiscal year, we believe that a
fundamental and positive shift in the macroeconomic climate,
underpinned by healthy population growth in our core markets, will
lay the foundation for years of future wealth
creation."
We believe that these achievements are a direct result of
Mainstreet's countercyclical growth strategy, which our management
team introduced five years ago in anticipation of an economic
downturn. They are also partly connected to an ongoing population
surge across Canada, including in
Alberta, which has driven down
vacancy rates and bolstered our value-added growth model. Over the
last four years Alberta has added
226,825 new residents, 70,595 of which came in 2019 alone
(Statistic Canada). During that same four-year period, rental
supply in the province remained flat, adding only 13,736 new units,
including townhomes, according to CMHC data. In the Edmonton/Calgary corridor, where 76% of the residents
of Alberta reside (roughly 3.32
million people) and where the majority of Mainstreet's properties
located. The total purpose-built rental universe, including
townhouses, is just 123,134 (CMHC). By 2046, the portion of
Albertans living within that corridor is expected to rise to 80%
(Government of Alberta).
While we recognize that a sizeable number of these new residents
are either would-be homebuyers or children, many others are foreign
students, immigrants and young people who will continue to enter,
and therefore expand, the broader rental space. We believe these
supply-demand figures point to a fundamental robustness in the
rental market that, Mainstreet believes will extend well into the
future, supporting Mainstreet's 100% organic, non-dilutive growth
model.
As we enter fiscal year 2020, we plan to leverage improving
market fundamentals by accelerating our countercyclical growth
strategy. Our management team will also continue to fine-tune key
processes across our operations. This includes anything from
identifying underperforming assets for acquisition, creating
efficiencies in our supply chain, strengthening internal training
and adopting new technologies, shortening cycle times for
stabilization, and unlocking future growth by refinancing
long-term, CMHC-insured debts at low cost. As of Q1 2020, 12% of
our portfolio was unstabilized, and our liquidity position stood at
$147 million. Looking to the coming
fiscal year, we believe this provides Mainstreet a firm foundation
to continue our record of top-tier performance and delivering
non-dilutive value to shareholders.
FINANCIAL HIGHLIGHTS:
- Operations: 13% growth in rental revenue, 12% growth in NOI and
18% growth in FFO. On a same-asset basic, both NOI and rental
revenue increased 5%. We achieved these results despite a high
number of acquisitions that would typically drive down operating
results
- Refinancing: $26 million in
additional funds raised through the financing of six clear-title
properties at an interest rate of 2.47%
- Occupancy: Vacancy rate reduced to 5.9%, compared with 6.7% in
Q1 2019
- Acquisitions: $11.3 million (134
units) in new acquisitions in Q1 2020, with $36.2 million (236 units) in Calgary and Edmonton subsequent to end of quarter.
Year-to-date acquisitions amounted to $47.5
million (370 units)
- Mortgage: 95% of mortgage portfolio locked in as
CMHC-insured mortgages at an average interest rate of 2.98% with an
average maturity period of 6 years, substantially lowering exposure
to interest rate risks
- Liquidity: $147 million liquidity
position to fund future growth
CHALLENGES
Despite our achievements, Mainstreet faces challenges on several
fronts. Higher municipal property taxes and other policies have
continued to raise operating costs. The federal carbon tax, which
targets property owners through higher heating costs, came into
force in Alberta in 2020. New
federal regulations under the 'Clean Fuel Standard' are anticipated
to come into force around 2023, layering new costs onto natural gas
consumption. Our efforts to reduce stabilization cycle times have
also increased expenses for human resources, materials and other
operational necessities.
Market volatility also remains a challenge. Prices for West
Texas Intermediate, an American crude oil benchmark, hovered around
US$55 per barrel in 2019, well below
prices five years ago. Industry investment has likewise fallen as
producers delay major decisions, denting the economic output of
oil-dependent provinces like Alberta and Saskatchewan.
Low oil prices have underscored deeper shortfalls in
Canada's regulatory and legal
regime, which have caused delays in major projects. Two
multi-billion dollar developments in B.C., the Trans Mountain
pipeline and LNG Canada natural gas facility, have now entered the
early construction phase, which we view as positive. However, we
believe that the broader uncertainty around project approvals in
Canada could yet cause a further
cooling in investor appetites, as major investment funds look to
other markets, particularly the U.S. The federal government's
pending approval of the Frontier oilsands mine in northern
Alberta, expected by the end of
February, will likely feed into investor sentiments.
Management also believes negative macro-economic forces could
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.
We also see risks in the recent outbreak of the coronavirus,
causing global travel restrictions, border closures, factories and
businesses closures in China,
which could ripple out into the Canadian economy in 2020.
OUTLOOK
Even in the face of some challenges, Mainstreet has benefited
over the last four years from a vast improvement in almost every
possible macroeconomic measure. We believe that employment levels,
population growth, and GDP across Canada appear to be on the upswing. This trend
supports our plan to accelerate our acquisition strategy in 2020,
funded by low interest, long-term, CMHC-insured financing. We will
also continue efforts over the past two years to re-stabilize units
at a record pace, boosting NOI and cash flows.
We believe that it appears that positive macroeconomic trends
appear poised to continue. According to Statistics Canada,
Canada's population could reach 48
million by 2050 under a medium growth scenario. Under a high growth
scenario, that could reach as high as 56 million. The province of
Alberta, which makes up 54% of
Mainstreet's portfolio, could reach 6.6 million by 2046, or an
increase of 2.3 million, according to estimates by the provincial
government.
We believe that positive international and inter-provincial
migration numbers, coupled with a steady rise in foreign student
enrolments, could continue to bolster this trend. More than 720,000
foreign students enrolled in Canadian institutions in 2018
(Immigration, Refugees and Citizenship Canada 2019), higher than
many developed nations. International in-migration into
Canada reached 437,000 (Statistic
Canada) in 2019, nearly on par with the 595,000 people (Census
Bureau) who entered the U.S.
We expect that improved population and in-migration levels could
translate into economic growth over the long term. At a projected
growth rate of 1.6% in 2020, Canada's economy is comparable to that of the
U.S. (1.9%), but still below the Bank of Canada's target inflation rate of 2%. Job
growth remains robust. Unemployment levels across Canada were 5.6% in December 2019, among the lowest in years. In
Alberta, unemployment in December
was 7.0%, roughly in line with its five-year average. British Columbia, which makes up 21% of our
portfolio, has continued to outperform the national average, with
an unemployment rate of 4.8% in December
2019 (Statistics Canada and Bank of Canada) .
Mainstreet believes these positive indicators will continue to
return the rental market to balance. Rental markets have been
oversupplied following a rapid build out of condominiums during
years of high economic growth, which then spilled over into the
broader rental space. But we believe that recent data suggests
absorption of that oversupply is already underway. Vacancy rates
for purpose-built rental units in metropolitan Edmonton fell to 4.9% in 2019, down from 5.3%
a year earlier, according to CMHC data. Vacancies in Calgary have fallen as low as 3.9%, directly
in line with a year earlier. Vancouver remained among the lowest vacancy
rates in Canada (1.1%), while
vacancies fell sharply in Saskatoon (down to 5.7% from 8.3%) and
remained unchanged in Regina
(7.7%).
We also believe that expected increases in housing prices will
continue to push more young people into the rental market. In our
opinion, Mainstreet's mid-market rental rate, with a price-point
average between $900 and $1,000, are perfectly positioned to attract
would-be renters in today's market. We believe that renters, which
often include millennials, foreign students and new migrants, tend
to favour mid-market prices as they defer major investments like
new homes. We believe we are uniquely positioned to capture renters
who fall within this bracket.
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 we believe 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
- Pursuing our 100% organic, non-dilutive growth model: Using our
strong potential liquidity position of approximately $147 million, we believe there is significant
opportunity to continue acquiring new assets at low cost.
- Closing the NOI gap: In Q1 2020, 12% of the Mainstreet
portfolio was going through the stabilization process. Once
stabilized, we believe same-asset revenue, vacancy rate, NOI and
FFO will be meaningfully improved.
- Leveraging our loss-to-lease: We believe our Vancouver/Lower Mainland market, which makes
up 21% of our portfolio (2,799 units), offers a significant
opportunity for future same-store NOI growth. This is partly due to
a continued increase in market rates, combined with rules under the
provincial Tenancy Act that has kept some annual rent rate
increases substantially below the rest of the market, resulting in
loss-to-lease of approximately $258
per unit per month. Currently, over 91% of our tenants in the
region are below the market average. With an average annual
turnover rate of about 25%, we expect our NOI will continue to
improve while we reduce our loss-to-lease over time.
- Lowering interest costs: Approximately $130 million of Mainstreet mortgage loans with an
average interest rate of 4.1% are maturing in 2020 and 2021. The
current 10-year, CMHC-insured mortgage rate is about 2.5%. We
expect interest rates to remain low, and our refinancing of these
maturing debts will result in a substantial reduction in future
mortgages expenses.
- Buying back shares at a discount: We believe MEQ shares
continue to trade below their true 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