During 2010, Mainstreet solidified a foundation for ambitious, opportunistic growth
CALGARY, Dec. 13 /CNW/ - Mainstreet Equity Corp. ("Mainstreet" or the "Corporation") (TSX:MEQ) today released the financial results for its fiscal year ended September 30, 2010. To meet head-on the year's continued recessionary conditions while positioning the Corporation for significant future growth, Mainstreet pursued a focused set of bold strategic moves in 2010:
- Worked tirelessly to bring down vacancy rates and maximize cash flow - Aggressively refinanced debt into long-term, lower interest mortgage loans to minimize the costs and risks of floating debt - Took advantage of recessionary conditions to restructure and build human resources and internal systems in anticipation of the next wave of growth - Focused diligently on reducing expenses and improving operating margins.
In the process, Mainstreet believes it transformed from a lean entrepreneurial company into a strong corporate entity with the systems, processes and people required to enlarge Mainstreet's position as a leading consolidator of mid-market, add-value rental apartments in key Western Canadian markets.
KEY PERFORMANCE METRICS
Funds from Operations (FFO) - / Up 46% to $7.7 million (vs. $5.3 Continuing Operations million in 2009) Rental Revenue / Up 3% to $53.1 million (vs. $51.7 million in 2009) Rental Revenue - Same Assets / Down 5% to $47.9 million (vs. $50.2 Properties million in 2009) Net Operating Income (NOI) - / Up 6% to $33.2 million (vs. $31.3 Continuing Operations million in 2009) NOI - Same Assets Properties / Down 2% to $29.6 million (vs. $30.3 million in 2009) Operating Margin / 62% (vs. 61% in 2009/ 57% in 2008) Operating Margin - Same Assets / 62% (vs. 60% in 2009/ 58% in 2008) Properties Total Acquisition and Capital / $55.3 million (vs. $42.7 million in Expenditures 2009) Stabilized Units / 105 properties (4,795 units) out of 134 properties (6,419 units) Growth / 480 units, representing a portfolio increase of 8% Growth subsequent to year-end / 510 units, representing a further portfolio increase of 8% Refinancing / $48.3 million (69% of Mainstreet's total floating and maturing debt as at September 30, 2009) refinanced to $73.3 million long- term CMHC-insured mortgages - average interest rate is 4.39% (from 5.43%) Total debt consolidation as / 99% of September 30, 2010 Appraised market value of portfolio (Sept. 30, 2010) / $752 million Cash on Balance Sheet / $1.4 million ($0.14/share) Cash on Balance Sheet as at / $12 million ($1.16/share) November 30, 2010 ------------------------------------------------------------------------- NOTEWORTHY VACANCY RATE TRENDS ------------------------------------------------------------------------- Q1 2010 Q2 2010 Q3 2010 Q4 2010 As of September As of September 30, 2010 30, 2010 (including (excluding properties properties closed for closed for renovations) renovations) ------------------------------------------------------------------------- 18.9% 18.8% 15.0% 11.3% 9.6% 8.1% -------------------------------------------------------------------------
2010 IN REVIEW / Noteworthy Achievements in Recessionary Times
1 / Reduced vacancy rate to 8.1% (9.6% including properties closed for renovation) on September 30, 2010, from 17.2% at year-end 2009
Every 1% reduction in vacancy within Mainstreet's portfolio of stabilized properties adds over $670,000 (before rental concessions) to the Corporation's bottom line.
2 / Ended the year with the highest FFO ($0.33/common share before financing cost) in one quarter since Mainstreet's inception
By lowering vacancy rates and minimizing variable costs, Mainstreet earned record Funds from Operations (Continuing Operations) of $3.4 million before financing cost in Q4 2010 at an average vacancy rate of 11.3%.
3 / Reduced the average interest rate to 4.73% in 2010 (from 4.93% in 2009) by refinancing 69% of the Corporation's floating and maturing debt into long-term, lower interest commitments. As of year-end, Mainstreet had consolidated 99% of its total debt into mid- to long-term fixed-rate mortgages.
To minimize the cost of debt while mitigating the Corporation's exposure to interest risk, Mainstreet locked an additional $48.3 million of debt into long-term, lower interest loans in 2010. The Corporation's average interest rate of 4.73% as at September 30, 2010, represents annualized savings of $800,000 over the average rate of 4.93% in 2009. Subsequent to year-end, Mainstreet obtained approval from CMHC to refinance approximately $36 million of matured debts and a clear-title property, which will raise an additional $28 million for growth. Of this $36 million in approved loans, $22 million has been financed at an interest rate of 3.85% for a 10-year term.
4 / Expanded Mainstreet's portfolio of properties by 8% (480 units) in 2010 and an additional 8% (510 units) in the first quarter of 2011, setting the stage for a year of opportunistic acquisitions in 2011
During 2010, Mainstreet strategically expanded its presence in its key Western Canadian markets, increasing its portfolio of properties by 8%. Subsequent to year-end, the Corporation added an additional $43 million in acquisitions to its portfolio, marking Mainstreet's return to an ambitious growth strategy for 2011.
Additional 2010 Highlights - Kept G&A expenses at the same cost-per-unit level as in 2009, even with significant additions to Mainstreet's senior management team. - Repurchased and cancelled 28,212 common shares at an average price of $9.90 per common share.
A COMPELLING SNAPSHOT OF MAINSTREET'S 'ADD-VALUE' STRATEGY
Everything Mainstreet does serves the broad strategic mission of the company - namely, to create long-term value for shareholders.
Independent appraisals by Altus Group and Colliers International put the market value of Mainstreet's portfolio of properties at $752 million as at September 30, 2010 (exclusive of residual land value and condo conversion value, and not including Mainstreet's $43 million in acquisitions subsequent to year-end). With outstanding debts of $401 million, Mainstreet boasts a Net Asset Value per Share of $33.8 - which in the management's opinion, a clear demonstration of how the Corporation has created shareholder value with limited dilution since the Company's inception, when Mainstreet's portfolio had a market value of approximately $17 million.
To counter the higher vacancy rates and softer rental markets typical of recessionary times, Mainstreet took a very aggressive position on concessions in 2010, resulting in $3.7 million in costs and decreased revenue for the year. Mainstreet sees a potential for ongoing concessions in 2011 as well as continued challenges with bad debts and higher than normal rates of tenant turnover; however, the Corporation should see increases in top-line revenue if the economy's gradual recovery continues.
Mainstreet's greatest challenge in 2011 will be the cycle time of stabilizing new acquisitions. The Corporation only buys properties that require extensive renovations to bring them into line with Mainstreet's branded standard; and during stabilization, vacancy rates are higher than usual. All 510 units Mainstreet acquired in Q1 2011 require significant renovation, and this will impact the Corporation's overall vacancy rates and cash flow during the year.
OUTLOOK & STRATEGY
Depressed revenues due to higher vacancies and lower rental rates have softened property values in the mid-market, add-value space compared to two to three years ago. As management believes revenues on the properties it acquires will return to (and ultimately surpass) their previous levels, this creates outstanding add-value potential to new acquisitions and, together with continued low interest rates, presents an ideal condition for Mainstreet to grow aggressively in 2011.
As always, the Corporation will execute its growth strategy around the same macro fundamentals that have sustained its past success: purchasing only mid-market, add-value properties well below replacement cost in select Western Canadian cities with strong GDP, robust potential in-migration and limited supply of rental product.
To fulfill Mainstreet's strategic goals for 2011, capital is crucial. As of year-end, Mainstreet held clear titles on assets with a book value of $52 million and an appraised value of $67 million - assets Mainstreet can monetize for growth. The Corporation also has a $22 million line of credit at its avail; and at year-end, the Corporations had $1.4 million cash on its balance sheet ($12 million as at November 30, 2010).
CMHC has tightened its restrictions around income property investments, requiring down payments of at least 20% for CMHC-insured loans on rental properties. As a certain percentage of condo purchases migrate into the rental universe, these tighter restrictions are anticipated to have a positive impact on Mainstreet's vacancy rates both by reducing rental market infiltration by speculative condo purchases and, over the longer term, curtailing demand for the construction of new condominiums.
New CMHC rules impacting first-time homebuyers (wherein borrowers must meet qualification standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate and shorter term) should also benefit Mainstreet's business by making it more difficult for mid-market renters to transition into home ownership.
With vacancy rates down, cash flow up, renovations nearly complete on Mainstreet's existing properties, 99% of the Corporation's debt locked into low-interest, long-term mortgages, and a talented senior management team in place, Mainstreet Equity Corp believes it is well positioned to do more of what its does best: acquire underperforming assets and create value for shareholders.
Mainstreet is a Calgary-based, growth-oriented real estate corporation focused on the acquisition, redevelopment, repositioning, and asset and property management of mid-market apartment buildings. The Corporation currently owns and operates residential rental units including apartments and townhouses in Vancouver/Lower Mainland, Calgary, Edmonton, Saskatoon and Greater Toronto Area. Mainstreet's common shares are listed on the Toronto Stock Exchange under the symbol MEQ. As of September 30, 2010, there were 10,377,615 common shares outstanding.
The above disclosure may contain forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond the Corporation's control, including: the impact of general economic conditions in Canada, industry conditions, increased competition, the lack of available qualified personnel or management, equipment failures, stock market volatility, and fluctuations in rental prices, energy costs and foreign exchange or interest rates. The Corporation's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or, if any of them do so, what benefits the Corporation will derive from them.