CALGARY, May 13, 2014 /CNW/ - Mainstreet Equity Corp. ("Mainstreet" or "Corporation") (TSX: MEQ) is pleased to report the 14thth consecutive quarter of year-over-year double-digit increases in funds from operations ("FFO") and net operating income ("NOI"). It was an especially strong performance amid a frigid and prolonged western Canadian winter, which came at a time of substantially increased heating and weather-related expenses. Alberta and Saskatchewan both experienced their coldest winter in decades, as an example. At the same time, natural gas expenses increased by approximately 60% compared with the same quarter last year, adversely impacting the overall operating margin by over 3%.
"It's no secret that this was a tough winter. But we kept our growth streak going and our same assets properties NOI improved by 5%, which again shows the strength of our core add-value business model," says Bob Dhillon, Chief Executive Officer and founder of Mainstreet. "Now, with spring around the corner, we are ready for the high rental season. We operate in very strong markets, and see great opportunities for stronger rental rates and even better vacancy numbers. We are picking up the pace on expansion, and mortgage rates are falling once again. We see our run-way room getting longer and longer."
Results
In Q2 2014, Mainstreet's revenue from continuing operations rose 16% to $21.7 million, up from $18.7 million in Q2 2013. Same asset rental revenues climbed 9% to $20.0 million, from $18.4 million in Q2 2013. NOI from continuing operations increased 12% to $13.6 million, while growing 5% to $12.4 million at same asset properties. Funds from continuing operations were up 17% to $4.9 million, an increase over $4.2 million in Q2 2013. The same asset vacancy rate fell to 7.1% from 9.7% in Q2 2013, a 20 basis-point improvement over Q1 2014.
From the beginning of the fiscal year , Mainstreet has expanded its portfolio by 5.3%, an acceleration in growth. During the second quarter, we refinanced approximately $ 48 million in matured mortgage loans to long-term 10-year, CMHC-insured mortgages at an average interest rate of 3.6%. This refinancing reduced annualized interest expense costs by approximately $300,000, while freeing an additional $10 million in funds.
Challenges
Mainstreet faces rising costs, property tax pressures and increasing utility prices, all of which form significant challenges. To mitigate these challenges, Mainstreet has entered into a rate-protected natural gas contract that caps future gas costs at $4.50 per GJ.
Outlook
We see ample to reason to believe our growth will continue upwards, particularly with winter now behind us. We believe coming months will feature a strong rental season which Mainstreet is well-positioned to benefit from. We see four reasons for optimism.
1. Same-asset properties NOI Run-way
A strong economic recovery in western Canada has left the financial crisis far behind, while in-migration is adding to housing demand. All of this creates an environment for strong NOI growth at same-asset properties, enabling Mainstreet to achieve even better performance by further reducing vacancy rates, cutting rental concessions and continuing the process of stabilizing, or completing renovations on, apartment holdings.
2. Low-cost debt mitigates interest risk and provides low cost of capital for future growth
The recent surge in mortgage rates has begun to ease, with 10-year rates falling to 3.3% from a recent high of 3.9%. In FY 2014, Mainstreet expects to refinance $96 million in maturing debt. In doing so, Mainstreet expects to achieve substantial savings in interest expenses and raise additional funds for future organic growth. Refinancing also substantially extends the average maturity period of the entire loan portfolio.
3. Strong liquidity position for organic and non-dilutive growth
Mainstreet maintains substantial funds to support continued acquisitions, including an $85 million line of credit, holding substantial amount of clear-title properties, in addition to the continued liberation of cash through refinancing.
4. Western Canada: Strong net migration, GDP growth and low vacancy rate are setting favourable market condition for a higher rent
In Calgary, March saw a 9.9% increase in single-family home prices over the previous year, while Saskatoon prices were up 5.4%. Higher home prices have the dual effect of pushing up demand for rental accommodations, while also supporting higher rental rates. Furthermore, western Canada leads the nation in net migration numbers and GDP growth. Taken together, these developments set the stage for solid increases in rental rates. Mainstreet expects 2014 to see rent increases of our portfolio, which will serve as an important driver of continued growth.
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, reduction of vacancy rates, increase of rental rates and rental revenue, future income and profitability, timing of refinancing of debt and completion, timing and cost of renovations, increased cash flow, the Corporation's liquidity and financial capacity, the Corporation's anticipated funding sources to meet various operating and capital obligations, expansion into the United States, 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 involve known and unknown risks, uncertainties and other 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, but without limitation, fluctuations in vacancy rates, unoccupied units during renovations, fluctuations in utility and energy costs, credit risks of tenants, fluctuations in interest rates and availability of capital, availability of labour and costs of renovation and other such business risks as discussed herein. 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 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.
Management closely monitors factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements and will update those forward-looking statements where appropriate in its quarterly financial reports.
SOURCE Mainstreet Equity Corporation
