CALGARY, Dec. 6, 2016 /CNW/ - Mainstreet Equity Corp. (TSX: MEQ, "Mainstreet" or the "Corporation"), an add-value, mid-market consolidator of apartments in Western Canada, is announcing its operating and financial results for the year ended September 30, 2016.
Bob Dhillon, Founder and Chief Executive Officer of Mainstreet, said, "The past year was a challenging one for us. We are acutely aware of the impacts of ongoing economic uncertainty in some of our core markets, and Mainstreet continues to monitor its operations and finances closely in order to remain in a position of strength." Dhillon adds, "Mainstreet will continue to pursue its 100% organic growth model, which has allowed us to substantially grow our portfolio over the years without diluting the number of issued shares. This model has served our shareholders well in the past, and we believe current market conditions provide us significant opportunities for future growth."
The financial results in fiscal 2016 were adversely affected by a slow economic activity in our Alberta and Saskatchewan markets, resulting in increased vacancies, lower rental rates and concessions to tenants. Alberta was especially impacted by uncertain economic conditions, and posted slower in-migration rates over the year. That slower in-migration was directly related to a 20-year high unemployment rate of 8.6% across the province, as well as record-high unemployment of 10.6% in Calgary (Statistics Canada).
However, lower returns in the Prairie provinces were partially offset by our Vancouver/Lower Mainland assets, which comprises 30% of our portfolio. The region steadily grew in performance over the year, maintaining a vacancy rate below 2% and NOI growth of 5% YTD.
2016 FINANCIAL ACHIEVEMENTS
- We continued to demonstrate the effectiveness of our 100% organic, non-dilutive growth model by growing our portfolio without increasing share capital. Since its inception Mainstreet's portfolio has grown close to 10,000 units, while our total number of shares has remained at 8.8 million – the same as when Mainstreet began trading on the TSX in 2000.
- Completed our substantial issuer bid ("SIB") and normal course issuer bid ("NCIB") totaling
$49.3 million, allowing us to buy back 1,387,918 shares at a discount to their true net asset value ("NAV"). - Refinanced pre-maturity debts and clear title assets totalling $113 million at an average rate of interest of 2.48%, as well as an additional $89 million of mostly 10-year, long-term CMHC insured mortgages at an average rate of interest of 2.41% subsequent to the year-to-date ("YTD"), for a total refinancing of $202 million.
- Grew our portfolio base by 6% through acquisitions totalling $57 million at an average cost of $97,000 per residential apartment unit. Subsequent to the year-end date, we acquired an additional 56 residential apartment units for a total consideration of $5.2 million ($91,000 per unit).
- Maintained our sizeable year-to-date estimated liquidity position of $150 million, including a cash balance of $50 million, to pursue further potential growth opportunities.
RESULTS
In fiscal year 2016, FFO decreased 13% to $26.2 million, compared with $30.0 million in 2015. FFO per basic share decreased 5% to $2.74, compared with $2.89 in 2015. Mainstreet's rental stayed relatively the same at $100.3 million, compared with $100.4 million in 2015; this came alongside a 4% fall in same asset rental revenues to $93.7 million, from $97.9 million in 2015. NOI decreased 5% to $64.0 million, while falling 9% to $60.0 million on a same asset basis. Operating margins dropped to 64% compared to 67% in 2015.
The same asset vacancy rate increased year-over-year to 9.0% from 6.5% in 2015. The overall 2016 vacancy rate, which includes vacant units as apartments undergo stabilization, increased year-over-year to 8.9% from 7.5% in 2015. As of the year-end date, 1,164 units, or 12% of the portfolio, remained in the stabilization process.
During fiscal year 2016, Mainstreet refinanced $30.5 million of pre-matured debts with an average interest rate of 4.89% into 10-year, long-term CMHC-insured mortgage loans totalling $73.4 million at an average rate of interest of 2.43%. We also financed 10 clear-title asset properties for $71.3 million at an average rate of interest of 2.53%. Together, this refinancing activity raised approximately $113 million in additional funds after a pay-out penalty of $745,000, and resulted in an annualized savings in interest expense of approximately $758,000.
Subsequent to the financial year ended September 30, 2016, Mainstreet has successfully refinanced an additional $50 million of pre-matured debts with an average rate of interest of 5.25% into 10-year, long-term CMHC-insured mortgage loans for $101.5 million at an average rate of interest of 2.44%. Mainstreet also financed 4 clear-title properties for $37.7 million at an interest rate of 2.34%. Together, this subsequent refinancing activity raised approximately $89.2 million in additional funds after a pay-out penalty of $ 2.3 million, and resulted in an annualized savings in interest expense of approximately $1.5 million.
Management is well aware that the one-time pay-out penalty of $745,000 and $2.3 million paid in the financial year ended September 30, 2016 and the first quarter of financial year 2017 would have adverse effect on the Corporation's financial performance in the respective periods. However, with estimated annualized interest savings of over $2.2 million in the next 10 years, totally $22 million; the potential raising of over $200 million of low cost capital for potential future share buy backs and acquisitions; and reduction of the Corporation's overall interest risk exposure, Management expects that the long-term benefits will far outweigh the short-term effect on financial performance of the Corporation.
CHALLENGES
Ongoing volatility in petroleum, natural gas and other commodity prices continues to create economic uncertainty in some of our core markets. This uncertainty is compounded by an oversupply of condominiums in such markets, which were commissioned during years of high economic growth and began entering the rental pool around mid-2015. In response to these challenges we have boosted our maintenance, customer service and marketing efforts, causing a rise in operating costs.
Negative macro economic forces have likewise caused significant short positions on Mainstreet stock. We believe this is partly responsible for our share price trading below NAV. As of September 30, the short position on Mainstreet totalled 751,098 shares. A 16% increase in property taxes, increase in rent concessions, tenant turnover and bad debts also created additional cost pressures. Finally, one of the biggest challenges we face is the overbuilding of condominiums during years of high economic growth, which has led to a supply glut in the market.
Broadly speaking, the impact of lower oil and gas prices is difficult to measure in precise terms. However, we believe the current situation also creates a series of opportunities that are discussed at greater length in the Outlook section below.
OUTLOOK
Despite challenges, we see plenty of reason to remain cautiously optimistic about the rental market in Western Canada. In-migration levels in Alberta have slowed, but are expected to remain positive in 2017 at 38,200 (Statistics Canada). Additionally, we expect the recent relaxation of Canadian immigration policies to attract a number of foreign workers, foreign students and immigrants to some of our core regions—most of whom are likely to enter the rental market.
The oil and gas industry in Western Canada is also showing early indications of improvement. The federal government recently approved the construction of two major pipeline projects, which is expected to attract new investment into the energy sector. Moreover, oil prices are gradually rising. Prices have been notoriously volatile over the past two years, but in recent months have remained 60% above their February lows. The International Energy Agency estimates demand will continue to steadily grow through 2017.
In our view, stricter requirements on CMHC-insured mortgages recently implemented by the federal government could impact the buying market in Canada. We believe that the new legislation will deter first-time homebuyers in particular, who potentially will be more exposed to higher interest rates and therefore more likely to remain in the rental market. This could also, in our view, help to absorb the aforementioned excess capacity in the condominium market.
Times of economic uncertainty also favour the affordability of Mainstreet rental units. With a price point average rental rate between $900 and $1,000, we are perfectly positioned to capture the middle rental market as buyers delay major investments like new homes.
Mainstreet believes these broader market conditions create substantial opportunities for growth, and we are pushing the reset button on our approach to acquisitions. The current environment of low interest rates and slower GDP growth makes this an ideal time to expand our portfolio on an opportunistic basis. We believe that the acquisitions we completed in fiscal year 2016 were highly accretive to our shareholders in the long-term, and we plan to carry that momentum into fiscal year 2017 by continuing our non-dilutive growth strategy.
Lastly, we expect to benefit from lower costs and availability of labour, particularly in the Alberta and Saskatchewan markets. The easing of labour market pressure provides us with an opportunity to bulk up on senior and middle management personnel at a cost that would have been impossible when economic activity was at its peak. We also expect to see substantial reductions in heating costs due to low natural gas prices.
RUNWAY ON EXISTING PORTFOLIO
- Closing the NOI gap: At the end of fiscal year 2016, 12% of the Mainstreet portfolio remained unstabilized, which contributed to higher vacancy rates. While this is a normal part of the Mainstreet business model, our continual work in renovating and improving properties before releasing them back to the market provides, in our opinion, potential to improve NOI and FFO performance. This inherent challenge in our business model is further increased by recent acquisitions, which causes higher rates of unstabilized properties that affect our NOI and FFO.
- Renegotiating long-term debt: Interest rates, which account for Mainstreet's single largest expense, are among the lowest we have ever experienced. We expect to cut these expenses further by refinancing our remaining $37 million in mortgage loans maturing in 2017 and some of debts maturing in 2018 at an average interest rate, which we expect will be much lower than the current average rate of 5.2%.
- Leveraging our ample liquidity: Finally, we maintain a substantial YTD liquidity position that will allow us to capitalize on opportunities for acquisitions and the repurchasing of shares. We anticipate that our estimated YTD liquidity of $150 million will translate into roughly $600 million in acquisition opportunities based on a leverage level of 75%. Following any future acquisitions, this could significantly boost our NOI per share and FFO per share in the long term.
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, increase or decrease in interest rates, future in-migration level, the oversupply of condominiums, future price of oil and natural gas, timing and costs of renovations, increased or decreased funds from operations and cash flow, the Corporation's liquidity and financial capacity, improved rental conditions, the effect of stricter federal regulation regarding insured mortgage laws, 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, fluctuations in interest 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 materially 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
