CALGARY, AB, May 11, 2021 /CNW/ - Even under immensely
challenging operating conditions in Q2 2021, Mainstreet managed to
achieve growth across all of our key metrics. Funds from operations
("FFO") increased 11% compared with last year, while revenues rose
5% and net operating income ("NOI") increased 4%. Year-to-date
("YTD") we successfully expanded our portfolio as part of a broad
diversification effort, acquiring 662 residential apartment units
for a total consideration of $80
million, including 393 units in British Columbia ($50
million). We also raised an additional $54.8 million through the refinancing of
long-term, CMHC-insured debt at an average interest rate of
1.81%.
Bob Dhillon, Founder and Chief
Executive Officer of Mainstreet, said, "Our ability to achieve
results in Q2 demonstrates the fundamental durability of the
multifamily apartment market, and underscores Mainstreet's proven
growth model." He added, "The environment in which Mainstreet
operates has changed dramatically over the last 12 months. However,
our countercyclical growth strategy has not, and will provide our
management team with unique opportunities to create shareholder
growth in the coming year."
Our management team is encouraged by these Q2 results, which
further proves our ability to execute on Mainstreet's value-added
business model and countercyclical growth strategy, driving
long-term value to shareholders. We believe our achievements also
demonstrate the remarkable resiliency of the mid-market multifamily
apartment space, particularly at a time when other sectors have
encountered widespread disruption. Mainstreet collection rates over
the past year have averaged 98%, roughly equal to pre-pandemic
levels of 99.4%.
Even so, fiscal 2020 and early 2021 were extremely challenging
periods for Mainstreet. As anticipated, economic conditions in Q2
2021 did not improve, and even worsened by some measures amid a
third pandemic wave. Global economic growth remains hindered by
widespread pandemic restrictions. Border closures and other travel
restrictions have continued to cut off the inflow of immigrants and
foreign and domestic students, driving up Mainstreet vacancy rates.
Operating costs, including an uncontrollable and sharp increase in
property taxes, insurance and utilities, have continued to rise.
Pandemic lockdowns in 2020 also caused us to miss out on the high
rental season—typically Q3 and Q4.
Still, we anticipate that volatile economic conditions will
persist through the entirety of fiscal 2021, or perhaps longer,
until recovery is well underway. However, we strongly believe that
any negative financial impacts incurred by Mainstreet are strictly
short-term and will not impact the solid long-term foundation of
our industry and of our countercyclical growth strategy. Today, we
strongly believe that the current pandemic downturn creates a
greater opportunity than ever for our management team to continue
the aggressive acquisition of underperforming assets, funded by
record-low costs of debt and our sizeable liquidity position.
Regardless of any negative financial impact Mainstreet incurs
during the pandemic, we will continue to adapt to these new
realities and to prioritize the health, safety, and wellbeing of
our residents and team members. We have continued to defer rental
increases and non-payment evictions for residents, and will
continue financial support to team members whose financial or
health circumstances were affected by the pandemic.
QUARTERLY FINANCIAL HIGHLIGHTS:
- 11% - FFO per share growth (despite sizeable cost
increases)
- $54.8 M - Funds raised through
long-term refinancing at average rate of 1.81% (since the beginning
of the pandemic, our lowest rate was 1.58%)
- 5% - Rental revenue growth
- 8.7% - Same-asset vacancy rate
- $80M - Acquisitions YTD
(including $50 million in
British Columbia)
CHALLENGES
Pandemic restrictions have struck
Mainstreet on several critical fronts, negatively impacting costs,
revenues, and the overall macroeconomic climate in which we
operate.
First, the temporary closure of the Canadian border has
completely choked off the inflow of foreign students and
immigrants. Closures of colleges and universities have also
restricted inter-provincial movement of domestic students. This
blockage has in turn created higher than normal vacancy rates in
Q2, but we remain extremely confident that it will rebound as
immigration returns to target levels.
Third, rising operating costs continue to pose a challenge.
Major fixed expenses have increased sharply, including property
taxes, insurance, and utilities. Carbon taxes, which effectively place the
financial burden on property owners, have added to these increases.
Paid leave was extended to team members whose children were not
able to attend school, and costs for additional cleaning,
sanitizing, human resources, and the purchase of personal
protective equipment ("PPE") increased expenses. The cost of
renovations to improve building units—which have occurred with high
frequency given our rate of recent acquisitions and aggressive
financing schedules—has also risen due to public emergency orders
that restrict on-site work. Cost increases and labour shortages
caused by the pandemic also increase cycle times for the renovation
and stabilization process, which we also remain confident will
normalize as the economy and business open more fully.
Adding to those challenges, Mainstreet's ability to offset
increased operating costs through rental increases or other means
is significantly restricted under current economic conditions.
British Columbia, for example, has
outlawed rental increases for existing clients until at least
December 31, 2021. Regardless of
provincial laws, our management team has determined that it would
temporarily defer rental increases given the stressful labour
market facing many Mainstreet clients., which we also remain
confident will normalize as the economy and business open more
fully.
The resiliency of the virus will ultimately determine when and
how Mainstreet returns to normal operations. The majority of
Canadians are expected to be fully vaccinated by end of summer,
which could ease the need for lockdowns come summer, according to
public health officials. However, reopening the economy could force
the federal government to wind down some of its biggest financial
assistance programs, negatively impacting the ability of some
Mainstreet tenants to pay their rent.
OUTLOOK
We believe Mainstreet's value-added business
model is a competitive advantage during periods of economic
volatility, presenting substantial opportunities to continue to
create shareholder value. Mainstreet's highly experienced
management team has proven its ability to execute on Mainstreet's
countercyclical growth model during past recessions, demonstrated
by strong financial and shareholder returns without any equity
dilution since our inception.
Lower costs for acquisitions and debt (the two biggest factors
affecting our future growth) will form the basis for these growth
plans. The Corporation has continued to expand its reach in the
British Columbia market with YTD
acquisitions totaling $50 million.
Mainstreet will pursue further acquisitions and diversification of
this sort in the rest of the fiscal year, particularly underserved
and undervalued markets like British
Columbia and Winnipeg.
New growth opportunities will also be supported by our strong
liquidity position. After accounting for $80
million in YTD acquisitions, our estimated potential
liquidity for the remainder of fiscal year 2021 is approximately
$174 million, not including an
additional available credit facility of $102
million.
We believe workforce-affordable rental housing will remain an
essential and safe asset class, underpinned by favorable long-term
market fundamentals, which have not changed in the last year. On
the demand side, healthy fundamentals can be seen across our
portfolio, including in our core Alberta market. Population growth in
Calgary (1.9%) and Edmonton (1.8%) outpaced the national average
of 1.1% in 2020, according to Statistics Canada. In addition, the
federal government is boosting its immigration targets, totaling
1.2 million newcomers over the next three years. That, along with
Ottawa's recent decision to extend
work permits for international students, underpin a positive inflow
of people into Western Canada.
New supply in Alberta remains
flat: Calgary added just 6,236 new
rental units over the past five years, while Edmonton has introduced just 10,704, of which
the supply is predominantly higher-end class A products. Compare
that with the 127,895 net new migrants who came to Calgary over the same period, or the 139,929
who came to Edmonton. We believe
these broad trajectories are overwhelmingly supportive of the
long-term rental market.
This fundamental imbalance in supply and demand in affordable
housing comes alongside an improved macroeconomic picture in
Alberta and Saskatchewan. Prices for Canadian West Texas
Intermediate, a U.S. oil benchmark, traded around US$60 per barrel for the first three months of
2021, among the highest prolonged trading sessions since commodity
markets collapsed in 2015. The Government of Canada, meanwhile, forecast 5.8% economic
growth for fiscal year 2021-22 in its budget, aided by $143 billion in new spending measures aimed at
stimulating the economy. The U.S. government's US$1.9 trillion infrastructure package is also
expected to spur growth that experts say will spillover into the
Canadian economy.
British Columbia, which
accounts for approximately 21% and 30% of our overall portfolio and
NOI, will continue to drive performance for Mainstreet as vacancies
remain among the lowest and rents highest in the country. With an
average monthly market-to-market gap of $327 per suite per month, 98% of our customers in
the region are below the market rent.
We believe the robust residential housing market in recent
months could force young millennials to remain in the rental
market. Roughly 73% of Canadians' annual income (including both
working and non-working citizens) is below $50,000, according to Statistic Canada, creating
huge demand for affordable housing and low rent apartments.
Mainstreet's mid-market rental rate, with a price-point averaging
between $900 and $1,000, is perfectly positioned to attract those
seeking affordable and quality options in today's market.
RUNWAY ON EXISTING PORTFOLIO
- Pursuing our 100% organic, non-dilutive growth model: Using our
strong potential liquidity position which we estimate will be
approximately $174 million in the
remaining fiscal 2021, excluding $102
million available line of credit, we believe there is
significant opportunity to continue acquiring new assets at
attractive valuations below replacement costs.
- Closing the NOI gap: In Q2 2021, 8% of the Mainstreet portfolio
was going through the stabilization process. Once stabilized, we
remain confident same-asset revenue, vacancy rate, NOI and FFO will
be meaningfully improved. We are cautiously optimistic that we can
take advantage of the high rental season in coming quarters to
boost cash flow. In the BC market alone, potential upside for NOI
growth is close to $11.8 million,
which mainly represents leveraging our loss-to-lease gaps.
- Lowering interest costs: The current 10-year, CMHC-insured
mortgage rate falls around 2.5%. We expect interest rates to remain
low in the near term, and we believe that our refinancing of the
debts of $193 million maturing in the
next 3 years at an average interest rate of 3.3%, will result in
approximately $1.6 million in annual
savings.
- 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