CALGARY, AB, Feb. 14, 2022 /CNW/ - 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.
CHALLENGES
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.
OUTLOOK
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
- 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.
- 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.
- 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.
- 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.
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.
https://www.mainst.biz/
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SOURCE Mainstreet Equity Corporation
