MAINSTREET EQUITY CORP. ANNOUNCES Q1 2022 RESULTS
February 14, 2022 - CALGARY – In Q1 2022, Mainstreet achieved double-digit, year-over-year growth across its three most important operating metrics. Net operating income (“NOI”) and revenues increased 12%, while funds from operations (“FFO”) saw their fourth consecutive quarter of double-digit growth at 10%.
Bob Dhillon, Founder, President & CEO of Mainstreet, said, “Our latest results demonstrate as plainly as ever Mainstreet’s leading ability to generate shareholder value, and they come before an expected upward economic cycle in some of our core markets.” He added, “Mainstreet continues to provide affordable, inner-city housing throughout Western Canada, offering a vital and sustainable service to the Canadian middle class.”
While these results are indicative of Mainstreet’s top-tier performance in their own right, they come ahead of what our management team anticipates will be a period of economic growth in our core markets, driven by a wave of newcomers to the province that we believe will further bolster NOI growth. Our positive results also come despite Q1 being a typically low-activity rental season.
We view our Q1 achievements as a direct result of Mainstreet’s counter cyclical growth strategy, under which we have continued to take advantage of economic downturns by leveraging relatively low interest rates to acquire underperforming assets on an opportunistic basis. Since COVID, we have established our strategy and acquired $300 million in new assets and refinanced $576 million (raised $408 million) in low-cost capital at an average rate of 2.07%. This has allowed Mainstreet to create shareholder value despite rising operating costs (typically due to factors outside of our control) and challenges posed by the global pandemic. We also attribute these solid financial results to the extraordinary resiliency of the mid-market multifamily apartment space, which has avoided much of the disruption seen in other sectors. Mainstreet collection rates during COVID-19 have averaged 98%, roughly equal to pre-2019 levels.
As we continue fiscal 2022, our management team sees substantial opportunities to continue pursuing our 100% organic, non-dilutive growth model to expand and diversify our portfolio. We believe that our strong liquidity position (estimated at approximately $218 million) and ability to refinance 10-year, CMHC-insured mortgages at low rates will provide sufficient funds to aid that growth.
Last year, we expanded beyond our core markets of Alberta, Saskatchewan and Vancouver/Lower Mainland for the first time, and we intend to continue to diversify our portfolio in Winnipeg, Vancouver Island and interior BC in fiscal 2022. We also see immense opportunity to close our NOI gap, as more migrants enter some of our core markets, allowing us to continue to reposition units and lower vacancy rates. Vacancies in Q1 fell to 7.8%, down from 8.6% in Q1 2021.
Rising operating costs continue to create headwinds for Mainstreet. In particular, inflationary pressures will raise our cost of capital and increase every line item of our operations. We believe that the Bank of Canada’s recent decision to gradually raise interest rates will only elevate those pressures. However, interest rates remain low compared with historical averages, and 99% of Mainstreet’s mortgages are locked in at CMHC insured fixed-term low rates at an overall average rate of 2.51%. Our average refinancing in Q1 2022 was set at a 10-year fixed rate of just 2.58%, and our average maturity period is 6.7 years. We have also raised an additional $40 million over the quarter.
Meanwhile, pandemic restrictions continue to suppress Mainstreet’s business velocity. While some international border restrictions have been eased, major impediments to international travel and immigration remain. In addition, classroom limits and online learning in colleges and universities have meaningfully reduced the number of domestic and foreign students, who make up a relevant portion of our customer base, especially in Edmonton.
In addition, rising operating costs pose challenges. Major fixed expenses have increased sharply, including property taxes, insurance, and utilities. Carbon taxes and increased labour costs, which effectively place the financial burden on property owners, have added to these cost increases. Global supply chain constraints have also put further upward pressure on costs for materials and renovations.
Meanwhile, the productivity of Mainstreet’s workforce has been negatively impacted by pandemic protocols. That comes as costs for human resources have also climbed. Paid leave was extended to team members whose children were not able to attend school.
Costs for additional cleaning, sanitizing, human resources, and the purchase of personal protective equipment (“PPE”) likewise increased expenses. Renovation costs have risen due to public emergency orders that restrict on-site work and substantially inflate costs for building materials. More broadly, a tightening labour market has raised costs and introduced new challenges in hiring staff.
Despite difficult operating conditions brought on by the pandemic, we expect to see an improved macroeconomic picture in some of our core markets, particularly in Alberta. Canadian oil production was the highest on record in 2021, and energy companies reaped their largest-ever revenues over the year ($158 billion). US benchmark oil prices were trading above US$90 per barrel based on WTI, the highest since markets collapsed in 2014.
We believe this will help propel an influx of migration to our Alberta and Saskatchewan markets, extending the positive trend we have seen in recent months. In-migration in Alberta reached 16,690 people in the third quarter of 2021, the most in nearly seven years, according to Statistics Canada. Saskatchewan also saw positive in-migration levels.
Both provinces saw those increases even as pandemic-era border controls remain in place. We expect that a gradual easing of those restrictions in 2022 could bring a further increase in immigrants to Western Canada, particularly foreign and domestic students. The Canadian government’s stated goal to attract 1.2 million immigrants over three years should be broadly supportive of that trend.
We also remain optimistic that Alberta’s economic foundation will become increasingly diversified. The province’s technology sector has been rapidly expanding in recent years, with Alberta tech companies raising a record-high $480 million in the year ended Q3 2021, according to the Canadian Venture Capital & Private Equity Association. Major multinational companies like Amazon, Canadian Tire and Nissan have made billions worth of investments in the province as they expand their industrial spaces.
Vancouver/Lower Mainland, meanwhile, is expected to continue to drive performance for Mainstreet, as vacancies in that region remain among the lowest in the country. At the same time, rental rates remain among the highest. British Columbia has become central to Mainstreet’s portfolio, accounting for 44% of our net asset value (“NAV”) based on IFRS value. With an average monthly mark-to-market gap of $365 per suite per month, 90% of our customers in the region are below the average market rent. We believe that this translates into approximately $13.5 million in NOI growth potential after closing the mark-to-market gap, according to our estimates.
Low cost capital continues to propel non-dilutive growth
Despite rising oil prices and inflation, our two biggest expenses (acquisition costs and interest) remain low. This provides our management team with significant opportunities to continue expanding our portfolio through opportunistic acquisitions funded by low cost capital. While the Bank of Canada announced it would be tightening its monetary policy in the face of inflation, its overnight interest rate is still just 0.25%. The majority of Mainstreet debts are set at low rates and over long-term maturities.
Narrowing our NOI gap
As in-migration levels improve, Mainstreet is also presented with opportunities to boost operating income by taking advantage of our unusually high vacancy rates, which are largely a result of the acquisition of unstablilized properties. In Q1 2022, 1,849 units out of a total 15,344 (12% of our portfolio) remain unstabilized and are currently under repositioning process, creating favourable conditions to increase NOI. Moreover, we believe that our strong estimated liquidity reserves will assist Mainstreet in repositioning units and acquiring new assets.
Capturing the middle market
Canada’s housing shortage continues to push home prices to new heights. The average price of a home in Calgary leapt 12% in January, according to the Calgary Real Estate Board, as buyers in BC and Ontario entered the Alberta market.
This reinforces Mainstreet’s conviction that inner-city, workforce affordable rental housing will remain an essential and safe asset class in Canada, particularly as first-time buyers delay home purchases. In 2019, 44.5% of the working Canadian population earned an income of $49,999 or less, according to Statista Research Department. 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 homes in today’s market.
Fortifying our commitment to social responsibility
In the face of the global pandemic, Mainstreet doubled down on its commitment to customer safety and corporate social responsibility. This has included waiving rental payments for struggling tenants; delaying rent increases; halting evictions; and allocating additional financial resources toward safety provisions, among other things. Although these measures sharply increased our operating costs and negatively affected our earnings on a same-asset basis, we strongly believe that the social benefits of our actions will far outweigh any short-term financial losses incurred by Mainstreet.
Growing our inclusive workforce
Ever since Mainstreet listed on the TSX in 2000, diversity has been a key pillar in who we are. We have continued to hold to that belief during the global pandemic, giving Mainstreet a more resilient, dynamic, and unified workforce.
An affordable option for the middle class
Beyond our core mandate of creating shareholder value, Mainstreet also provides affordable, inner-city housing to low and middle-income Canadians. This crucial service forms the bedrock of Mainstreet’s business model, and helps create a stronger and more resilient middle class across Western Canada.
RUNWAY ON EXISTING PORTFOLIO
1. Pursuing our 100% organic, non-dilutive growth model: Using our strong potential liquidity position, estimated at $218 million for fiscal 2022 (including a $130- million line of credit), we believe there is significant opportunity to continue acquiring underperforming assets at attractive valuations.
2. Boosting NOI: As of Q1 2022, 12% 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 boost cash flow in coming quarters. In the B.C. market alone, we estimate that the potential upside for NOI growth is approximately $13.5 million, which mainly represents leveraging our loss-to-lease gaps.
3. Lowering interest costs: The current 10-year, CMHC-insured mortgage rate is currently around 2.7%. We expect interest rates to remain low in the near term, and we believe that our refinancing of $155 million in debts at an average interest rate of 3.18%, maturing in the next two financial years, will result in approximately $1.5 million in annual savings to Mainstreet.
4. 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.
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 Corp.
For further information:
Bob Dhillon, Founder, President & CEO
D: +1 (403) 215-6063
Executive Assistant: +1 (403) 215-6070
100, 305 10 Avenue SE, Calgary, AB T2G 0W2 Canada