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Mainstreet Equity Corp. Releases Q2 2020 Results

PR Newswire - Tue Jun 23, 6:00AM CDT

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 8 th 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

  1. 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.
  2. 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
  3. 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.
  4. 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.
  5. 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

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