Mainstreet Equity Corp. Releases Q1 2021 Results

CALGARY, AB, Feb. 12, 2021 /CNW/ - Despite extremely challenging operating conditions in Q1 2021, Mainstreet managed to maintain funds from operations ("FFO") at the same level as the previous year, while achieving a slight improvement in FFO per share and 5% growth in rental revenue. A 6% drop in same-asset NOI is well below our typical standards, yet still exceeded our expectations given the current macroeconomic context. In fact, we believe these results are evidence that the multifamily apartment space remains the most resilient asset class across the entire real estate industry—particularly the mid-market, affordable housing segment that Mainstreet occupies.

Bob Dhillon, Founder and Chief Executive Officer of Mainstreet, said, "Our ability to achieve stable results in Q1 demonstrates the fundamental durability of the rental market, and underscores Mainstreet's proven operating model." He added, "The environment in which Mainstreet operates has changed dramatically over the last 12 months. However, our countercyclical growth strategy has not, and will provide our management team with unique opportunities to create shareholder growth in the coming year."

As expected, Mainstreet encountered a rise in operating costs associated with the COVID-19 pandemic in Q1. We also experienced sharp increases in major uncontrollable operating costs including, property taxes (11%), insurance (50%) and utilities (15%). Border closures and other travel restrictions have continued to cut off the inflow of immigrants and foreign and domestic students, which drives up vacancy rates. Further pandemic restrictions during the autumn months of 2020 diminished what is typically Mainstreet's high rental season. Meanwhile, our management team has made the socially responsible decision to refrain from passing these increased costs onto Mainstreet customers, many of whom have suffered financial and mental setbacks during the pandemic.

Mainstreet anticipates that the current volatile operating conditions will persist through the entirety of fiscal 2021, or perhaps longer, until the pandemic is well under control and recovery is underway. However, we strongly believe that any negative financial impacts are strictly short-term, and will not alter the solid long-term foundation of our industry and our countercyclical growth strategy. We believe current market conditions create a greater opportunity than ever for Mainstreet to acquire assets with high value-added potential at low cost, funded by record-low costs of debt and diversify its portfolio in new markets. Year to date, Mainstreet has acquired an additional 210 units at a total value of $22 million. Having successfully entered the Winnipeg market in Q1, we plan to aggressively continue expanding and diversifying our portfolio through 2021.

FINANCIAL HIGHLIGHTS:

• $242M – Strong liquidity position in FY2021; $94M YTD funds raised through long term refinancing at average rate of 1.74%
• 8.6% - Vacancy rate (despite high number of acquisitions,6% of unstabilized units and economic downturn)
• $27.3M – Year to date Acquisitions (including new assets in Winnipeg)
• 5% - Rental revenue growth
• 1% - FFO per share (despite 1% drop in NOI and sizeable cost increases)

CHALLENGES
Pandemic restrictions have impacted Mainstreet on two critical fronts, negatively impacting both costs and revenues. First, the temporary closure of the Canadian border has completely choked off the inflow of foreign students and immigrants. Closures of colleges and universities have also restricted inter-provincial movement of domestic students. This blockage has in turn created higher vacancy rates in Q1. Our management team believes these slowdowns are likely temporary, and we anticipate a V-shaped return to pre-pandemic immigration levels once border restrictions are lifted. 

Second, rising operating costs continue to pose a challenge. Major uncontrollable fixed expenses have increased sharply, including property taxes (11%), insurance (50%), and utilities (15%). Carbon taxes, which effectively place the financial burden on property owners, have added to these temporary incursions. Paid leave was extended to team members whose children were not able to attend school, while broader social distancing requirements lowered overall workplace productivity. Costs for additional cleaning, sanitizing, human resources, and the purchase of personal protective equipment ("PPE") increased expenses. The cost of unit turnover and building improvements—which have occurred with high frequency given our rate of recent acquisitions and aggressive financing schedules—has also risen due to public emergency orders that restrict on-site work.

Despite those challenges, Mainstreet's management team has made the socially responsible decision to refrain from passing these increased costs onto Mainstreet customers, many of whom have suffered financial and mental setbacks during the pandemic.

The timing of the easing of pandemic related restrictions will ultimately determine when and how Mainstreet returns to normal operations. Canadians are gradually receiving vaccinations for COVID-19, which could ease the need for lockdowns come summer, according to public health officials. However, reopening the economy could force the federal government to wind down some of its biggest financial assistance programs, negatively impacting the ability of some Mainstreet tenants to pay their rent.

Lastly, we view the U.S. government's decision in January to revoke permits for the Keystone XL pipeline as broadly negative for Alberta's economic outlook. The energy industry has benefited recently from an increase in commodity prices. Construction on a separate major pipeline project, the Trans Mountain expansion, continues to progress. However, pipeline constraints related to the cancellation of Keystone XL could raise transportation costs for Canadian producers further down the road.

OUTLOOK
We believe Mainstreet's business model is purpose-built for periods of economic volatility, presenting substantial opportunities to create shareholder value in fiscal 2021. Lower costs for acquisitions and debt (the two biggest factors affecting our future growth) will form the basis for these growth plans. Mainstreet intends to pursue further acquisitions of this sort in the rest of the fiscal year, particularly areas of high potential like Vancouver/Lower Mainland and a new market like Winnipeg.

New growth opportunities will also be supported by our strong liquidity position. Our current cash balance is approximately $100 million, and we are confident we can achieve our target liquidity position of $242 million in the fiscal year 2021.

We believe that workforce-affordable rental housing will remain an essential and safe asset class, underpinned by long-term market fundamentals. On the demand side, healthy fundamentals can be seen across our portfolio, including in our core Alberta market. Population growth in Calgary (1.9%) and Edmonton (1.8%) outpaced the national average of 1.1% in 2020, according to Statistics Canada. In addition, the federal government is boosting its immigration targets, totaling 1.2 million newcomers over the next three years. That, combined with Ottawa's recent decision to extend work permits for international students, underpins a positive inflow of people into Western Canada.

Meanwhile, new supply in the market remains flat: according to publicly available data. Calgary added just 6,236 new rental units over the past five years, while Edmonton has introduced just 10,704, public data show. Compare that with the projected population growth in Calgary of 127,895 over the same period, or in Edmonton of 139, 929. While we recognize that many of these newcomers are children or homebuyers, we believe these broad trajectories are overwhelmingly supportive of the long-term rental market.

This fundamental imbalance in supply and demand comes alongside an improved macroeconomic picture in Alberta and Saskatchewan, despite a substantial short-term retraction. Prices for Canadian West Texas Intermediate, a U.S. oil benchmark, climbed steadily through the back half of 2020 and into 2021, closing at US$58.36 per barrel on February 9. While business investment levels will not immediately return to levels before the commodity crash of 2015, we believe an easing of economic restrictions in the tail end of 2021 could boost demand for Canadian oil supplies. The Government of Canada is also readying up to $100 billion in additional stimulus funds over the next three years, which will partly go toward urban transit projects that lay the groundwork for Inner-City Millennial living of the kind that Mainstreet offers.

Vancouver/Lower Mainland, which makes up 21% of our portfolio, will continue to drive performance for Mainstreet as vacancies remain among the lowest in the country, and with an average monthly market-to-market gap of $289 per unit and 91% of our customers in the region are below the market rent.

Finally, we believe ongoing employment uncertainty, and the general threat of continued economic turmoil, will cause people to delay major purchases like homes. In our opinion, Mainstreet's mid-market rental rate, with a price-point average between $900 and $1,000, is 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 which we estimate will be approximately $242 million during fiscal 2021, we believe there is significant opportunity to continue acquiring new assets at low cost and diversifying our portfolio in new markets.
2. Closing the NOI gap: In Q1 2021, 6% 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 (2,817 units), offers a significant opportunity for future same-store NOI growth.
4. Lowering interest costs: The current 10-year, CMHC-insured mortgage rate falls between 1.7% and 1.8%. We expect interest rates to remain low in the near term, and we believe that our refinancing of the debts of $200 million maturing in the next 3 years will result in approximately $3.2 million in annual savings.
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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