CALGARY, July 23, 2013 /CNW/ - Mainstreet Equity Corp. (TSX: MEQ) is pleased to report that it continues to deliver significant shareholder value, with the third quarter in its 2013 fiscal year marking the 11th consecutive quarter of double-digit, year-over-year growth in funds from operations (FFO) and net operating income ("NOI"). With a lengthy track record of non-dilutive growth, Mainstreet is also showing operational improvement, reflected in better rental rates and diminished rental incentives on existing properties.
"Nothing was easy in the third quarter. Utility rates are rising, mortgage rates are lifting from their lows and Alberta, our core operational area, was hit by historic floods. Yet Mainstreet continues to thrive and grow," says Bob Dhillon, Chief Executive and Founder. "We are locking in discounted electricity rates and directing significant new funds to refurbishment of existing facilities, which we expect will allow us to maintain our streak of NOI growth. We have shown a commitment to relentlessly pursuing improvement, but still see room for even better financial performance as we move to lock in better interest rates on a large number of mortgages in coming quarters. That model has made us a top-performing Canadian real estate company over the past decade, and we continue to see ample opportunity in today's market."
RESULTS FROM CONTINUING OPERATIONS
Funds from operations in Q3 2013 rose 12% to $5.3 million, up from $4.7 million in Q3 2012. Quarterly rental revenue increased 15% to $19.8 million, from $17.2 million in Q3 2012. Net operating income climbed to $13.2 million, a 10% increase from $12.0 million in Q3 2012.
Mainstreet achieved these results while acquiring 738 unstabilized units in the past year. Same-asset revenues rose 7% to $17.1 million, up from $15.9 million in the comparable quarter, while vacancy in those properties dropped to 6.9% in Q3 2013 from 7.6% in Q3 2012.
NON-DILUTIVE ORGANIC GROWTH
Mainstreet's total continued-operations investment portfolio has grown to 8,170 units, up 10% from 7,432 units at June 30, 2012. In the third quarter, Mainstreet acquired an additional 394 units in Edmonton at a cost of $42.3 million.
Interest rates near historic lows present a remarkable opportunity to refinance existing mortgage debts at low interest rates. For Mainstreet, this results in a marked reduction in interest expenses, our number one cost, while raising a substantial amount of low-cost capital for growth. It is a powerful double win that Mainstreet is racing to seize by actively refinancing a large number of mortgages. In Q3 2013, Mainstreet refinanced $19.1 million in mature mortgages into 10-year, long-term CMHC-insured mortgage loans at an average interest rate of 2.8%, saving approximately $276,000 in annual interest expenses while also raising $3.9 million in additional funds for future growth. Mainstreet has also obtained approval from CMHC to take out $23.1 million in new 10-year insured mortgages on five Abbotsford properties, as well as approximately $40 million (28%) of mortgages maturing in 2013 and 2014. Refinancing is expected to raise an additional $10 million. At an estimated interest rate of 3%, Mainstreet expects an annualized interest expense savings of approximately $450,000.
As Canada's multi-family rental pool ages, Mainstreet is setting out on a significant improvement campaign. For the nine-month period ended June 30, 2013, Mainstreet spent over $1 million on capital improvement projects. For FY 2014, Mainstreet expects to spend approximately $4 million on improvements to items such as roofs, boilers and windows. To combat unstable utility rates, Mainstreet recently booked a five-year forward electricity contract at 6.5 cents per kwh for our Alberta portfolio, roughly 18% below prevailing rates. As mortgage interest rates also rise, we have escalated our refinancing program. Although June's historic floods in Alberta have not affected Mainstreet's operations directly, they may pose further challenges. Substantial re-construction programs stand to add more tension to an already tight construction labour market. Mainstreet is looking for alternative labour sources.
For nearly three consecutive years now, we have shown our ability to continually improve performance. But we believe there is much more to come, with substantial room remaining in the current portfolio for NOI growth through improvements in vacancy rates, reductions in rental incentives and increases in rental rates after stabilization.
Mainstreet holds two other powerful financial levers: $145 million in mortgage debt maturing in 2013 and 2014 and $100 million in funds available for continuing expansion. The $145 million in mortgages currently bear average interest rates of 4.15%. In today's market, Mainstreet expects to be able to refinance mortgages at rates near 3%. The impact of this refinancing is hugely advantageous for Mainstreet: we are able to free additional funds through up-financing, while still reducing interest payment obligations. In addition, Mainstreet holds $100 million in available funds through a combination of existing cash balances, credit facilities, clear title assets and the refinancing of existing mortgages. That war chest leaves Mainstreet fully equipped financially for continued organic growth in existing western Canadian markets and for possible expansion into the U.S.
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 the B.C. Lower Mainland, Calgary, Edmonton, Saskatoon and the Greater Toronto Area. Mainstreet's common shares are listed on the Toronto Stock Exchange under the symbol MEQ. As of July 23, 2013 there were 10,465,281 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, expansion into the United States 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.
SOURCE: Mainstreet Equity Corporation