February 10, 2016 / By: Mainstreet Equity Corp.

Mainstreet announces stable Q1 earnings and plan for growth

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CALGARY, Feb. 10, 2016 /CNW/ - Mainstreet Equity Corp. (TMX: MEQ, "Mainstreet" or the "Corporation"), an add-value, mid-market consolidator of apartments in Western Canada, is pleased to announce stable earnings for Q1 2016 despite economic uncertainty in some of its core markets.

The Corporation believes low commodity prices provide a golden opportunity for Mainstreet, and sees three key factors to support this view. First, acquisition opportunities are emerging in its backyard, particularly in Mainstreet's core markets of Alberta and Saskatchewan. Next, the ongoing capital market sell-off provides an opportunity to buy back shares at significantly below their net asset value ("NAV"). Lastly, there is an opportunity to take advantage of all-time low interest rates to refinance existing debt, which will reduce interest costs and raise additional funds for future growth.

Bob Dhillon, Founder and Chief Executive Officer of Mainstreet, says, "Without question, the current economic situation causes uncertainty for Mainstreet in the short term. However, we see several reasons to be cautiously optimistic in the current market." Dhillon adds, "We enjoy a significant liquidity position to capitalize on strategic acquisitions in our core markets. Mainstreet's diversified business model and ongoing expansion of our portfolio has allowed us to produce stable results over the quarter. Record-high performance in our Vancouver/Lower Mainland portfolio, in British Columbia, where the economy continues to grow, will help to offset slower growth in other markets."

In Q1 2016, FFO remained the same at $7.6 million, compared to results in Q1 2015. FFO per basic share after income tax increased 3% to $0.75 from $0.73 in Q1 2015. NOI increased 2% to $16.6 million, while falling 4% to $15.7 million on a same asset basis. Mainstreet's rental revenue rose 3% to $25.4 million, up from $24.7 million in Q1 2015; this came alongside a 2% fall in same asset rental revenues to $24.0 million, from $24.6 million in Q1 2015. Operating margins from continued operations stayed the same at 66% compared to Q1 2015.

The same asset vacancy rate increased year-over-year to 7.9% from 6.6% in Q1 2015. The overall Q1 2016 vacancy rate, which includes vacant units as apartments undergo stabilization, increased year-over-year to 7.8% from 6.9% in Q1 2015. In the quarter, 1,054 units, or 11% of the portfolio, remained in the stabilization process. As of February 1, Mainstreet's vacancy rate – excluding unrentable units currently undergoing renovations — stood at 7.5%.

During Q1 2016 Mainstreet refinanced $6.7 million in pre-maturity mortgages for $20 million at an average interest rate of 2.5% and financed $35 million in clear title assets at an average interest rate of 2.7% to 10-year CMHC-insured fixed-rate debt. On average, refinancing was completed at 230 basis points below that of existing mortgages, translating into $148,000 in annual interest expense savings. The Corporation also extracted $13.3 million in additional capital, while at the same time extending its debt maturities and mitigating interest rate risk.

Subsequent to Q1 2016, the CMHC has approved the refinancing of $17 million in pre-maturity mortgage loans, with an existing average interest rate of 4.95%, to $42 million in 10-year CMHC-insured mortgages at an average interest rate of 2.43%. These refinancings will raise $25 million in additional funds after payout penalty of $270,000 and will result in annualized interest expense savings of approximately $390,000.

Also in Q1 2016, under its normal-course issuer bid, Mainstreet repurchased and cancelled 138,000 shares at a weighted average price of $31.72 per share or an aggregate amount of $4.4 million. This brings The Corporation buyback total 336,000 shares for $11.7 million since October 1, 2014. Mainstreet continues to monitor its share price to determine whether to increase or decrease the speed and number of further share purchases.

The almost 40% drop in oil prices since Q1 2015 presents uncertainties in cities that are more dependent on the energy industry. Low commodity prices are expected to cause a contraction in Alberta's GDP, according to Statistics Canada. Slower in-migration numbers to Alberta and Saskatchewan could affect operations in the short term. Volatility in energy prices conversely creates a series of opportunities that are discussed at greater length in the Outlook section below. The renovation and repositioning of properties temporarily raises the overall vacancy rate and hampers NOI performance. Stabilized apartments are previously underperforming properties that have been purchased and renovated to Mainstreet standards. However, The Corporation believes that Mainstreet's unstabilized portfolio (11% of the portfolio) is one of its greatest levers for future growth in NOI and FFO.

Mainstreet has created value for shareholders by sticking to a strategy of careful operational management while taking advantage of beneficial growth opportunities. This two-pronged approach continues to serve The Corporation well, and Mainstreet sees several important reasons to remain cautiously optimistic.

Finding promise in uncertain times.
Mainstreet is not immune from broader economic forces. The extent to which The Corporation will be affected by slower GDP growth in the Prairie Provinces and volatility in capital markets is unclear. However, any future impact should be considered against a series of positive counter-factors:

  1. Weak oil prices have coincided with lower natural gas prices for heating and an easing in labour market pressure, both substantial cost areas for Mainstreet;
  2. An uncertain economy tends to be supportive of the rental market, as consumers delay large purchases like new homes. With a price point average rental rate below $1,000, Mainstreet is particularly well-positioned to take advantage of this trend; and,
  3. Weaker economic performance has translated into a drop in interest rates to historically low levels.

Buckle down, then double down.
Mainstreet has become more conservative in its underwriting criteria in Alberta and Saskatchewan due to economic uncertainty in those markets. Despite this, The Corporation sees significant potential to make opportunistic acquisitions in the future. It views these opportunities in Alberta and Saskatchewan as having the added benefit of being in its backyard, where it already enjoys a substantial foothold in those markets.

British Columbia, meanwhile, is among the strongest economic performers in Canada, and vacancy rates in Mainstreet's portfolio there dropped by more than half to 2.9%, compared to 7.2% in Q1 2015. Mainstreet now enjoys a 30% market share in the Abbotsford-Surrey corridor, and expects economic opportunities to continue in the region through 2016.

Finally, The Corporation enjoys a position of strength to capitalize on these opportunities. Mainstreet anticipates approximately $160 million in available liquidity by the end of fiscal year 2016. This includes cash on hand and $70 million in availability on its line of credit secured by clear title assets, in addition, management believes that an estimated $90 million could be raised through refinancing of mortgages maturing in the remaining fiscal year 2016 and 2017.

Plenty of remaining runway.

  1. Value close to home: Stock market volatility has created a buying opportunity in Mainstreet's own shares. Management believes that the current share price, at roughly $28 per share is substantially below the Corporation's Net Asset Value. The Corporation intends to continue to purchase and cancel shares on an opportunistic basis under its normal course issuer bid.
  2. The power of low interest rates: Interest rates are among the lowest Mainstreet has ever experienced (accounting for the single biggest expense). In addition, Mainstreet has successfully negotiated a historically low spread with its major lenders, which has provided a further reduction in borrowing costs. For example, the interest rate obtained in the most recent 10-year, fixed-rate, CMHC-insured mortgage was 2.43%. For the remainder of fiscal 2016, The Corporation plans to refinance the remaining debts with an existing average interest rate of 4.93% maturing in 2016 and 2017 to 10 year CMHC insured debts. With an estimated future interest rate of below 2.5%, Mainstreet believes the refinancing will result in a substantial saving in interest expense and raise additional capital of approximately $90 million.
  3. A golden opportunity for growth: The Mainstreet business model creates value that enables growth through acquisitions without diluting shareholder model. With The Corporation's substantial liquidity position, Mainstreet believes current market circumstances create the ideal platform to grow its portfolio.

Minimizing the NOI gap: At the end of Q1 2016, 11% of the Mainstreet portfolio remained unstabilized, which contributed to higher vacancy rates and lower rental rates. While this is a normal part of the Mainstreet business model, ongoing renovations and pre-rental property improvements provides, in management's opinion, opportunity for a future increase in NOI and FFO.

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