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
