CALGARY, May 10 /CNW/ - In the second quarter of 2010(1), Mainstreet Equity Corp. pursued three key objectives, all of them aimed at positioning Mainstreet to accelerate its strategic acquisitions:
- To refinance most of the Company's floating and maturing debt before fiscal year-end - To significantly decrease Mainstreet's average vacancy rate - To continue restructuring operations and building a team capable of taking Mainstreet to the next level of success and growth.
The results of Mainstreet's focus on these objectives are evident in many key metrics and performance indicators during Q2 2010:
Rental Revenue - Up 1% to $13.1 million (vs. $12.9 million in Q2 2009) Net Operating Income (NOI) - Up 6% to $7.6 million (vs. $7.2 - Continuing Operations million in Q2 2009) NOI - Same Assets Properties - Down 2% to $6.8 million (vs. $7.0 million in Q2 2009) Funds from Operations (FFO) - Down 5% to $1.4 million (vs. $1.5 - Continuing Operations million in Q2 2009) Funds from Operations (FFO) - Up 8 % to $0.14 (vs. $0.13 million - Continuing Operations in Q2 2009) Per Basic Share Operating Margin - 58% (vs. 56% in Q2 2009) Total Acquisition and Capital - $20.2 million (vs. $15.2 million in Expenditures Q2 2009) Stabilized Units - 96 properties (4,272 units) out of 131 properties (6,171 units) Acquisitions - 49 units in Saskatoon (average cost: $27,000 per unit), representing a portfolio increase of 1% Floating & Maturing Debt - $64 million (17% of Mainstreet's total mortgage loans) Refinancing Commitments prior to - $58 million (91% of Mainstreet's Year-end total floating and maturing debt) Cash on Balance Sheet - $13 million ($1.28/share) Noteworthy Trends... - `Same Assets' Operating Costs: Down 12% (from $5.7 million in Q2 2009 to $5 million in Q2 2010) - Average Vacancy Rate: Expected to be reduced to 12 % by the end of May from 19.04% in Q1 2010. The vacancy rate as of the date of this report was 14%. (1) This second quarter report is for the three-month period ended March 31, 2010. Mainstreet's current fiscal year ends September 30, 2010.
Q2 IN REVIEW
1. $58 million in Debt Refinancing
To mitigate the risk in anticipated interest rate hikes, minimize the costs of borrowing and increase cash flow, Mainstreet continually refinances as much floating and maturing debt as possible into long-term, CMHC-insured mortgages at lower interest rates. As of the date of this release, Mainstreet's floating and maturing debts totalled $64 million. Of this, Mainstreet has already processed the refinancing of $37 million (58%) and expects to refinance an additional $21 million by the end of the financial year 2010. In so doing, Mainstreet expects to lower interest expenses and increase cash flow.
2. Expect a 7% Decrease in Vacancy during the Non-peak Rental Season
Mainstreet expects the vacancy rate will drop to 12% by the end of May as compared to an average vacancy rate of 19% in Q1 2010, Mainstreet's vacancy rate at the date of this release was approximately 14%. Notably, every 1% decrease in vacancy rate translates to an annualized increase of approximately $680,000 (before rental incentives) in Mainstreet's net operating income. With the high rental season approaching, management is confident the Company can make further significant reductions in its vacancy rate before its financial year-end.
3. A Solidified, Growth-oriented Organizational Structure
Mainstreet continues to restructure and optimize its human resources; and thanks to the team's focused efforts, the Corporation's vacancy rate and operating costs are down significantly .With projected healthy cash reserves (after refinancing anticipated for the balance of the fiscal year), the entire organization has been gearing up for substantial acquisitions in the coming quarters.
Mainstreet's management believes that in recessionary times, the mid-market rental apartment space is consistently more resilient than any other real estate category; however, even Mainstreet's business feels the effects of an economic downturn. While the Company sees several strong signs that the tide is turning, it continues to contend with the following challenges:
1. Vacancy Rates - Mainstreet will maintain its rigorous focus on further decreasing the vacancy rate during the peak rental season.
2. Rental Incentives - During Q2 2010, Mainstreet achieved a significant decrease in its vacancy rate. To attract new tenants (and retain existing ones), the Company employed a variety of incentives - one-time costs that will be phased out as vacancy rates drop further.
3. The Costs of Idle Cash - Until Mainstreet allocates the cash on its balance sheet toward acquisitions, the Company incurs the costs of interest paid on idle cash.
4. Bad Debts and High 'Churn Rates' - Missed rental payments and high rates of turnover continue to impact Mainstreet's performance; however, both challenges have shown significant improvement of late.
Entering the Peak Rental Season on a Strong Upward Trend
Management's ongoing focus on reducing costs resulted in a 12% decrease in same assets operating costs. (20% of this decrease can be attributed to lower natural gas costs. The remaining 80% reflects Mainstreet's diligent efforts to minimize variable costs). Through an ongoing focus on improving margins, management expects to decrease operating expenses further during Q3 and Q4 - the peak rent season when revenues traditionally rise as vacancy rates drop.
The Rental Market Is Ripening
New CMHC guidelines that came into effect on April 19, 2010, have made it more difficult for first-time homebuyers as well as purchasers of `speculative' investment properties to obtain financing, which may increase demand while curtailing competition in the rental marketplace. All new borrowers must now qualify for five-year, fixed-rate mortgages even if they are seeking shorter, variable-rate loans; and revenue property purchasers now require 20% down payments (previously 5%) to obtain CMHC-insured mortgage loans.
The Foundation Is Set for Accelerated Growth
With vacancy rates returning to reasonable levels, improved cash flow, expected healthy cash reserves on hand by the end of financial year 2010 (primarily from refinancing) and a strong, growth-oriented team in place, management believes Mainstreet is perfectly positioned to accelerate acquisitions in pursuit of its vision to become the Western Canadian mid-market multifamily owner/operator. Management believes the Company has largely solved its labour crunch issues, HR issues, vacancy issue and floating debt issue. Now it is time for Mainstreet to grow.
Mainstreet is a Calgary-based, growth-oriented real estate corporation focused on the acquisition, redevelopment, repositioning, and asset and property management of mid-market apartment buildings. The Corporation currently owns and operates residential rental units including apartments and townhouses in Vancouver/Lower Mainland, Calgary, Edmonton, Saskatoon and Greater Toronto Area. Mainstreet's common shares are listed on the Toronto Stock Exchange under the symbol MEQ. As of March 31, 2010, there were 10,352,959 common shares outstanding.
The above disclosure may contain forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond the Corporation's control, including: the impact of general economic conditions in Canada, industry conditions, increased competition, the lack of available qualified personnel or management, equipment failures, stock market volatility, and fluctuations in rental prices, energy costs and foreign exchange or interest rates. The Corporation's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or, if any of them do so, what benefits the Corporation will derive from them.