CALGARY, July 15, 2015 /CNW/ - Mainstreet Equity Corp. ("Mainstreet" or the "Corporation"), an add-value, mid-market consolidator of apartments in Western Canada, is pleased to announce its 19th consecutive quarter of year-over-year double-digit growth in pre-tax funds from operations ("FFO") and net operating income ("NOI").
Any business operating in the current economic turbulence faces challenges, particularly in the short term. But Management believes Mainstreet's unique model offers shelter from some aspects of the storm, and also positions Mainstreet to gain from current circumstances. We also believe a weak Western Canadian economy supports demand for the kind of rental housing Mainstreet provides by creating uncertainty for homebuyers, it eases competition for acquisitions, contributes to lower interest rates, reduces demand for labour and weakens prices for energy and construction materials. For Mainstreet, each of these elements provides a unique opportunity to substantially expand its corporate foundation in ways that are more difficult in times of robust growth. In addition, we believe Mainstreet has the strength to capitalize on these opportunities, with substantial liquidity that allows Mainstreet to pursue added value for shareholders.
"The economy looks tough, but we have found great things behind the headlines. We believe we are a counter-cyclical company, a defensive asset class – and down times are helping us cut costs while offering up chances to expand our portfolio that we could not have imagined even a year ago," said Mainstreet Founder and CEO, Bob Dhillon. "We built our company with the idea that we could make a real difference in the quality and living standards in Western Canadian apartments, while at the same time consistently creating value for our shareholders. We are proud of what we have accomplished, and pleased at the opportunity to pursue even greater opportunities in the current economic environment."
In Q3 2015, pre-tax FFO was up 19% to $7.9 million, an increase from $6.6 million in Q3 2014. FFO per basic share after income tax increased 16% to $0.73 from $0.63 in Q3 2014. NOI from continuing operations increased 10% to $16.8 million, while growing 7% to $15.8 million on a same asset basis. Mainstreet's revenue from continuing operations rose 9% to $25.1 million, up from $23 million in Q3 2014; this included a 4% rise in same asset rental revenues to $23.2 million, from $22.2 million in Q3 2014. The same asset operating margins improved to 68%, from 67% in the same period last year.
The same asset vacancy rate decreased year-over-year to 6.7% from 7.6% in Q3 2014. As of July 1, the vacancy rate – excluding unrentable units currently undergoing renovations — stood at 7.3%.
During the quarter, Mainstreet acquired a 156-unit townhouse complex in Lethbridge, Alberta for $13.4 million, seizing an opportunity to expand in a new market at attractive metrics and bringing the growth of the portfolio to 6% since the last financial year. During Q3 2015 Mainstreet refinanced $22.5 million in maturing mortgages and clear title assets to 10-year CMHC-insured fixed-rate debt at 140 basis points below that of maturing mortgages. This translated into $25,000 in annual interest expense savings, while also extracting $20.9 million in additional equity.
Also in Q3 2015, under the normal-course issuer bid Mainstreet repurchased and cancelled 57,900 shares at a weighted average price of $37.90 per share or an aggregate amount of $2.2 million. As of the day of this report, Mainstreet has repurchased and cancelled 172,830 shares at a weighted average price of $37.33 per share or an aggregate amount of $6.5 million.
Though British Columbia is now Canada's strongest economic performer (Statistics Canada), Mainstreet faces an uncertain economic outlook in the Provinces of Alberta and Saskatchewan, which together account for 71% of our total rental portfolio. Rental markets in these provinces are being impacted by continued weakness in petroleum and natural gas commodity prices, slowing in-migration figures, and weakened Canadian economic performance. Management is mindful of the unpredictability inherent in the current situation, and is keeping a close watch on costs, operating margins and marketplace conditions. Current challenges are in addition to hurdles inherent to the Mainstreet add-value business model. The renovation and repositioning of properties temporarily raises the overall vacancy rate and hampers NOI performance. Stabilized apartments are previously underperforming properties that Mainstreet has purchased and renovated to Mainstreet standards. However, Management believes that Mainstreet's unstabilized portfolio (13% of the portfolio) is one of its greatest levers for future growth in NOI and FFO.
Mainstreet has produced consistent growth by sticking to a strategy of careful operational management while creating new value through opportunistic acquisitions. This two-pronged approach continues to serve the Corporation well, particular in light of the current economic uncertainty, and we see several important reasons to remain cautiously optimistic.
Finding promise in uncertain times
The economic impact of falling energy prices in our core markets remains uncertain and, if it persists, may negatively affect vacancy rates and rental concessions. Mainstreet is not immune from broader economic forces. However, we believe any future impact should be considered against the slate of opportunities we believe the downturn has provided.
Buying in Mainstreet's backyard, enjoying a strong coastal economy
We are of the opinion that the downturn is providing significant opportunity to buy in the Provinces of Alberta and Saskatchewan, regions that form the heart of our company. This is a chance to buy in Mainstreet's backyard and it is moving accordingly, as can be seen with our Lethbridge townhouse acquisition, which boasts metrics that were difficult to match in recent years. British Columbia, meanwhile, is enjoying the strongest economic performance in Canada, according to Statistics Canada. Buoyant conditions there have lowered vacancy rates, while operating costs have remained low. Mainstreet now enjoys greater than 30% market share in the Abbotsford-Surrey corridor, and conditions continue to support further expansion in the Lower Mainland.
Finally, we believe Mainstreet enjoys a position of strength to capitalize on these opportunities. Mainstreet anticipates approximately $120 million in potential available liquidity by the end of fiscal year 2016. This includes cash on hand and availability in the line of credit of $37 million, in addition to an estimated $83 million that we believe could be raised through refinancing of mortgages maturing in the remaining fiscal year 2015 and fiscal year 2016. Based on a leverage level of 75%, this large liquidity position equates to roughly $500 million in buying capacity at a time of low mortgage interest rates, and positions Mainstreet to act decisively when acquisition opportunities arise, while upholding the commitment not to dilute shareholder value.
Plenty of remaining run-way
Mainstreet existing portfolio provides for $7.8 million in further NOI gains if Mainstreet can achieve ideal operating conditions, which it defines as fully-stabilized units operating at market rents and 5% vacancy.
Low interest rates are generating new possibilities. For the remainder of fiscal 2015 and fiscal 2016, Mainstreet plans to refinance $90 million of maturing mortgages. With an estimated interest rate of 2.7%, Mainstreet estimates the refinancing will result in a further annual interest expense savings of $1.6 million while potentially raising additional capital of approximately $83 million.
Value close to home: Stock market volatility has created a buying opportunity in Mainstreet's own shares. Management believes that the current share price, at roughly $37 per share, is substantially below the Corporation's Net Asset Value. Mainstreet intends to continue to purchase and cancel shares on an opportunistic basis under the normal course issuer bid.
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 there in.
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