CALGARY, July 21, 2016 /CNW/ - Mainstreet Equity Corp. (TSX: MEQ, "Mainstreet" or the "Corporation), an add-value, mid-market consolidator of apartments in Western Canada, announces its operating and financial results for the three months ended June 30, 2016. After six years of sustained growth, Mainstreet encountered a negative trend in net operating income ("NOI") and funds from operations ("FFO") in the quarter.
Bob Dhillon, Founder and Chief Executive Officer of Mainstreet, said, "We recognize that current economic conditions have negatively impacted our operating revenues in the near term. However, we are pushing the reset button on our approach to acquisitions, and we see plenty of opportunity to expand our portfolio on an opportunistic basis going forward." Dhillon adds, "Mainstreet currently enjoys a substantial liquidity position to take full of advantage of these opportunities, and we think the current environment complements our 100% organic, non-dilutive growth model."
Mainstreet's revenues were also impacted by the Fort McMurray wildfires, during which the Corporation supplied displaced evacuees with three months of free rent in 100 suites in Edmonton, Calgary and Saskatoon. We felt the gesture was a necessary and meaningful way to support the victims of the disaster during a very difficult period in their lives.
HIGHLIGHTS
- Substantial issuer bid ("SIB") closed in Q3, totaling $43.2 million.
- Following the completion of the SIB and NCIB, Mainstreet has 8.8 million outstanding common shares – the same number of common shares it had when it began trading on the TSX in 2000, demonstrating the effectiveness of its 100% organic, non-dilutive growth model.
- After suspending its acquisition activities for several months, Mainstreet is now prepared to push the reset button on acquisitions and pursue opportunistic acquisitions to further expand its portfolio. Subsequent to Q3, Mainstreet purchased 478 new units for a total consideration of $46 million ($96,000 per door), of which 178 units ($13.4 million) were purchased at $75,000 per door.
- Long-term 10-year mortgages were refinanced at a highly favourable rate of 2.1%.
- Considerable liquidity position of $150 million.
RESULTS
In Q3 2016, FFO decreased 18% to $6.2 million, compared to Q3 2015. FFO per basic share decreased 7% to $0.68 from $0.73 in Q3 2015. Mainstreet's rental revenue dropped 2% to
$24.5 million, from $25.1 million in Q3 2015; this came alongside a 6% fall in same asset rental revenues to $23.0 million, from $24.4 million in Q3 2015. NOI decreased 8% to $15.5 million, while falling 11% to $14.7 million on a same asset basis. Operating margins dropped to 63% compared to 67% in Q3 2015.
The same asset vacancy rate increased year-over-year to 9.5% from 6.7% in Q3 2015. The overall Q3 2016 vacancy rate, which includes vacant units as apartments undergo stabilization, increased year-over-year to 9.2% from 8.0% in Q3 2015. In the third quarter, 859 units, or 9% of the portfolio, remained in the stabilization process.
During Q3 2016 Mainstreet financed one clear title asset with a 10-year long-term CMHC-insured mortgage for $1.2 million at an interest rate of 2.33%. Subsequent to the quarter end, we refinanced $7.1 million of pre-maturity mortgages for $11 million at an average interest rate of 2.26%. We also financed two clear title assets for $17.5 million at an average rate of 2.24% (10-year CMHC-insured fixed-rate mortgages). On average, refinancing was completed at 268 basis points below that of existing mortgages, translating into $197,000 in annual interest expense savings. We also extracted $3 million in additional equity, while at the same time extending our debt maturities and mitigating interest rate risk.
CHALLENGES
Ongoing volatility in commodity prices continues to create economic uncertainty in the Prairies, particularly Alberta. This economic slowdown is further compounded by the overbuilding of condominiums during recent years of higher economic growth. As a result, a large number of investor-owned condominiums are now entering the rental pool. This has also resulted in the re-negotiation of rental rates, increased vacancies, and concessions to tenants. However, economic slowdown also creates a series of opportunities that are discussed at greater length in the Outlook section below.
OUTLOOK
Mainstreet is pushing the reset button on its approach to acquisitions. We believe the current environment of slower GDP growth makes this an ideal time to begin to expand our portfolio on an opportunistic basis in our geographic platforms.
We see this potential surfacing in Alberta in particular. Despite slower in-migration numbers, migration into Alberta is forecasted to remain positive at 37,200 in 2016 and 38,200 in 2017 (Statistics Canada). Commodities markets are gradually showing signs of improvement, with mid-July oil prices rising 57% from their February lows. Moreover, we see the rental market edging closer to equilibrium as plans to construct new condominiums are put on hold. Our acquisition criteria in the province remains conservative, but we nonetheless see significant potential for future acquisitions in the region.
In Saskatchewan we expect economic activity to gradually improve. Our Saskatoon market remains stable, and we experienced a 6% net gain in occupancy over the same quarter last year. Vacancy rates in the east side of the city were 5%. Vancouver/Lower Mainland remains our highest-performing market, where 30% of our portfolio is focused. Vacancy rates remained below 2% due to the robust economic activity in the region, which we expect will continue to place upward pressure on rental rates.
Costs are likely to remain relatively low in our Saskatchewan and Alberta markets. With the easing of labour market pressure, management believes there is 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. In addition to cost cutting, we believe our position in the middle rental market (our price point average rental rate is $1,000) will allow us to take advantage of ongoing economic uncertainty, which tends to be supportive of the rental market as consumers delay major purchases like new homes.
Runway on existing portfolio
- Closing the NOI gap: At the end of Q3 2016, 9% of the Mainstreet portfolio remained unstabilized, and while this is a normal part of the Mainstreet business model, our continued work in renovating and improving properties before releasing them back to the market provides, in our opinion, will create additional avenues to improve NOI performance. Mainstreet believes that its unstabilized portfolio is one of our greatest levers for future growth in NOI and FFO.
- Renegotiating long-term debt: Interest rates are among the lowest Mainstreet has ever experienced and they account for our single largest expense. We expect to cut these expenses by refinancing our remaining mortgage loans maturing in 2016 and 2017 at a significantly lower interest rate for 10-year, CMHC-insured mortgages.
- Leveraging our ample liquidity: Finally, we believe we enjoy a position of strength to capitalize on opportunities for acquisitions and share buy backs while avoiding dilution. We anticipate the availability of approximately $150 million in liquidity by the end of fiscal year 2016 from the refinancing of existing debt, financing of existing clear title assets and our $85 million revolving line of credit. We believe this substantial liquidity position will provide the opportunity to make acquisitions of up to $600 million based on a leverage level of 75%.
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
