CALGARY, AB, June 23, 2020 /CNW/ - As the COVID-19 pandemic
stuck near the end of Q2, Mainstreet shifted its priorities from
financial performance toward social responsibility, in order to
ensure the health and safety of our team and of our tenants. We
deemed this to be the only correct course of action in the face of
a global crisis, and as the provider of an essential service with
tenants spread across 13,375 units year-to-date ("YTD"). Supporting
our client base—including financial assistance for residents
struggling to pay rent—will remain top of mind through coming
quarters.
Bob Dhillon, Founder and Chief
Executive Officer of Mainstreet, said, "The pandemic forced
Mainsteet into truly unprecedented times over this last quarter,
and our management team responded with a conscious decision to put
people first." He added, "Despite economic turmoil, however, we now
see unparalleled opportunities for organic growth in the second
half of fiscal 2020."
Despite this unreserved focus, our management team managed to
achieve its 8th consecutive quarter of double-digit
growth in both revenues and funds from operations ("FFO") in the
second quarter. Mainstreet believes these results speak to the
extraordinarily resilient nature of the mid-market rental industry,
which has remained relatively stable even as other sectors
encounter immense disruption. We achieved a rent collection rate of
95% in Q2, which is close to our quarterly average.
Our management team has always been nimble in its approach to
changing market conditions. In anticipation of the 2015 economic
recession, we implemented a countercyclical growth strategy that
involved aggressively acquiring new assets at low cost, which we
funded through low-interest debt. We will continue this versatile
management approach through the pandemic, which, we believe, now
presents Mainstreet with an even greater opportunity to generate
value for shareholders.
FINANCIAL HIGHLIGHTS:
- Refinancing: $75.8 million in
additional funds raised through the financing of five matured
mortgages and 18 clear-title properties at an average interest rate
of 2.32%. Latest 10-year, CMHC-insured mortgages locked in at
1.66%, a record low for Mainstreet
- Operations: 11% revenue growth (3% on same-asset basis); 10%
increase in FFO; and 8% growth in net operating income ("NOI") (1%
on same-asset basis), despite a high number of unstabilized
acquisitions that would typically drive down operating results
- Occupancy: Vacancy remained low at 7.4%, even with 11% of our
portfolio (1,434 units) unstabilized
- Acquisitions: $40.6 million (279
units) in new acquisitions in Q2 2020 (subsequent: 61 units in
Calgary and Edmonton for total consideration of
$5.4 million)
- Liquidity: $170 million liquidity
position to fund future growth
CHALLENGES
The COVID-19 pandemic has created an
environment of uncertainty in the broader economy that, by some
accounts, is unprecedented in our lifetimes. This is further
complicated by a lack of clarity around when the federal government
might begin to unwind its sizeable social assistance programs,
which have injected substantial capital into the economy. The
Canada Emergency Response Benefit
(CERB) program was recently extended until September. But we
believe the eventual tapering of CERB and other programs could
negatively influence the ability of some Mainstreet tenants to pay
their rent, potentially impacting revenues and increasing expenses
for bad debt.
Rising operating costs continue to pose a challenge. Paid leave
has been extended to team members whose children have not been
attending school, while broader social distancing requirements has
lowered overall workplace productivity. Costs for additional
cleaning, sanitizing, and the purchase of personal protective
equipment ("PPE") also increased expenses. Higher property taxes
(including a 20% rise in Calgary),
a 35% rise in insurance costs, and a carbon tax, which came into
force in Alberta in 2020, added to
these temporary cost incursions. Expenses for materials and human
resources remain high yet we continue to renovate units (even
during these tough times) in an effort to reduce stabilization
cycle times, and get ready for the coming high rental season.
The halt in economic activity in Q2 has delayed what would
typically be a season of high rental activity, which we believe
could now be postponed until August at the earliest. Temporary
closure of the Canadian border has also restricted the inflow of
foreign students and immigrants, potentially diminishing
income.
Finally, management believes negative macro economic forces
could have caused short positions in respect of the trading of
Mainstreet common stock. We believe this is partly responsible for
our share price continuing to trade well below what we believe to
be its true net asset value. As a result, Mainstreet has resumed
our normal course issuer bid ("NCIB") in support of that
belief.
OUTLOOK
Despite challenges, we believe the COVID-19
pandemic could usher in a new era for Mainstreet. Management
expects that lower costs for acquisitions and debt (the two biggest
factors affecting our future growth) will drive unparalleled
opportunities to organically expand our portfolio. We plan to
aggressively accelerate our countercyclical growth strategy, as we
expect a lack of buyers and panic-driven selling in the real estate
market to create favourable buying conditions. These efforts will
be funded by long-term, CMHC-insured financing secured at near
record-low interest rates. Our latest 10-year debts were locked in
at just 1.66%, the lowest ever secured by Mainstreet.
Management expects that these opportunities vastly outweigh any
near-term downside operating risks faced by Mainstreet. Even as the
current pandemic creates deep economic uncertainty, we ultimately
view the current situation as temporary, and expect that price
fluctuations in the real estate market will eventually see a
correction post-pandemic and economic recovery.
We believe the mid-market rental industry will remain an
essential and safe asset class, underpinned by long-term market
fundamentals, like rising populations and relatively low supply of
new rental units. Unlike past recessions, we do not view the
current downturn as structural. The gradual lifting of restrictions
should return the economy to near capacity, even if a full rebound
remains some way off.
Meanwhile, Canada's population
is projected to grow steadily in coming decades, supported by
positive immigration policies and a continued flow of foreign
students. The province of Alberta,
which makes up 54% of Mainstreet's portfolio, could reach 6.6
million by 2046, or an increase of 2.3 million, according to
estimates by the provincial government. That inflow of residents is
expected to come at a time when new supplies in the rental market
remain comparably flat, which should bolster demand for Mainstreet
products.
Unlike the oil collapse of 2014, which occurred a time of
oversupply in the rental market, the current downturn comes at a
time when the market has continued to return to balance. In 2019,
vacancy rates for purpose-built rental units in metropolitan
Edmonton fell to 4.9%, down from
5.3% a year earlier, according to CMHC data. Vacancy rates in
Calgary have fallen as low as
3.9%. Vancouver/Lower Mainland
(which comprises 21% of our portfolio) continues to have among the
lowest vacancy rates in Canada, at
just over 1%.
Lastly, we believe that recent moves by CMHC to tighten lending
requirements for homebuyers, effective July
1, are likely to support the rental market. We also believe
that ongoing employment uncertainty, and the general threat of
continued economic turmoil, will cause would-be homebuyers to delay
major purchases. In our opinion, Mainstreet's mid-market rental
rate, with a price-point average between $900 and $1,000,
are perfectly positioned to attract would-be renters in today's
market.
RUNWAY ON EXISTING PORTFOLIO
- Pursuing our 100% organic, non-dilutive growth model: Using our
strong potential liquidity position of approximately $170 million, we believe there is significant
opportunity to continue acquiring new assets at low cost.
- Closing the NOI gap: In Q2 2020, 11% of the Mainstreet
portfolio was going through the stabilization process. Once
stabilized, we believe same-asset revenue, vacancy rate, NOI and
FFO will be meaningfully improved
- Leveraging our loss-to-lease: We believe our Vancouver/Lower Mainland market, which makes
up 21% of our portfolio (2,799 units), offers a significant
opportunity for future same-store NOI growth. This is partly due to
a continued increase in market rates, combined with rules under the
provincial Tenancy Act that has kept some annual rent rate
increases substantially below the rest of the market, resulting in
loss-to-lease of approximately $257
per unit per month. Currently, over 91% of our tenants in the
region are below the market average. With an average annual
turnover rate of about 25%, we expect our NOI will continue to
improve while we reduce our loss-to-lease over time.
- Lowering interest costs: The current 10-year, CMHC-insured
mortgage rate falls between 1.6% and 1.7%. We expect interest rates
to remain low in the near term, and our refinancing of these
maturing debts will result in a substantial reduction in future
mortgages expenses.
- 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.
SOURCE Mainstreet Equity Corporation