Mainstreet Equity Corp. Releases Q3 2021 Results

Calgary, AB, July 27, 2021 /CNW/ - Mainstreet continued to see improvement across all key metrics in Q3 2021, achieving our second consecutive quarter of double-digit growth in funds from operations ("FFO") and a steady increase in rental revenues. We also continued to pursue our countercyclical growth strategy in the quarter, acquiring 918 units for a total consideration of $122 million (year-to-date ("YTD") acquisitions totaled $176 million, or 1,373 units). Our management team continued to leverage low interest rates in Q3, raising $48 million through the refinancing of 10-year, CMHC-insured mortgages at 2.52% to fund future growth.

Bob Dhillon, Founder, President & CEO of Mainstreet, said, "These third quarter results prove the time-tested viability of Mainstreet's countercyclical growth strategy, which has continually allowed us to take advantage of market downturns to provide value to shareholders." He added, "While the global pandemic created especially difficult operating circumstances for Mainstreet over the past 18 months, we see immense opportunity for continued growth in coming quarters."

In addition to these achievements, we are pleased to see our market capitalization reach $1 billion, marking an important milestone in Mainstreet history. That was coupled with a substantial $190 million (approximately $20 per share) increase in the fair market value of our British Columbia portfolio, which we view as a direct result of Mainstreet's long-term diversification strategy in the region. Broadly speaking, we continue to aggressively expand our portfolio, which is now composed of nearly 15,000 units across Western Canada. We reach these landmarks despite operating under difficult circumstances due to the COVID-19 pandemic.

Management believes Q3 results prove, once again, the ability of Mainstreet management to execute on our 100% organic, non-dilutive business model, which has continued to produce long-term value to shareholders. We also believe this demonstrates the remarkable resiliency of the mid-market multifamily apartment space, particularly at a time when other sectors have encountered widespread disruption. Mainstreet collection rates over the past year have averaged 98%, roughly equal to pre-pandemic levels.

Looking forward, we believe the gradual lifting of pandemic restrictions and eventual re-opening of the Canadian border will provide remarkable opportunities for Mainstreet to improve operating results. We also see significant future potential to realize additional value out in respect of our existing assets and to boost net operating income ("NOI"). Lastly, we will continue to prioritize the health, safety, and well-being of our clients and team members, including deferred rental increases and non-payment evictions for residents, in order to support people who have been financially impacted by the pandemic, if so required.

QUARTERLY FINANCIAL HIGHLIGHTS:

• 10% FFO per share growth (despite sizeable cost increases)
• $122M Acquisitions ($176 YTD including $61 million in BC)
• 7% Revenue growth
• $48M Funds raised through long-term refinancing at average rate of 2.52%
• $2.53B Fair market value of MEQ portfolio

CHALLENGES
Despite solid earnings results, COVID-19 restrictions have nonetheless struck Mainstreet on several critical fronts, negatively impacting both costs and revenues. The temporary closure of the Canadian border has halted the inflow of foreign and domestic students and immigrants, while classroom limits in colleges and universities have dramatically reduced domestic student populations, both major client bases for Mainstreet.

Government-imposed lockdowns have caused Mainstreet to miss out on the high rental seasons in both 2020 and 2021, when activity tends to be at its peak. Still, we believe the eventual re-opening of both the border and post-secondary institutions will quickly reverse that trend. Pandemic restrictions, coupled with our high rate of acquisitions of un-stabilized properties in recent years, have also put upward pressure on Mainstreet vacancy rates, which increased to 9.1% in Q3 from 8.0% a year earlier. However, we believe those rates will decline as our management team aggressively restabilizes units.

In addition to revenue challenges, rising operating costs continue to create challenges for Mainstreet. Major fixed expenses have increased sharply, including property taxes, insurance, and utilities. Carbon taxes and labour, as well as general inflationary pressures in our economy, which effectively place the financial burden on property owners, have added to these cost increases.

Pandemic protocols have also temporarily increased operating costs. 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 introduced new challenges in hiring front line staff.

The resiliency of the COVID-19 virus will determine how long many of these restrictions remain in place. Even as vaccination rates improve, new variants threaten to revert the economy back into lockdown.

OUTLOOK
Despite the difficult circumstances created by the pandemic, the Mainstreet business model remains uniquely structured to thrive in times of economic volatility. Relatively low interest rates and costs for acquisitions (our two single-biggest expenses) will continue to provide significant potential for opportunistic growth. Mainstreet has continued to grow and diversify throughout the pandemic. In 2020, we entered the Winnipeg market, extending our portfolio to four provinces, while we also continue to rapidly expand our BC footprint.

That expansion, at the same time, presents opportunities for Mainstreet to boost operating income by decreasing vacancy rates which are currently unusually high, largely as a result of the acquisition of un-stabilized properties. In Q3 2021, 1,808 of our 14,762 units (12% of our portfolio) remain un-stabilized, offering major potential to increase NOI as these properties are stabilized. Moreover, our ample liquidity reserves will assist Mainstreet in both our stabilization and acquisition efforts. After accounting for $176 million in YTD acquisitions, our estimated potential liquidity for the remainder of fiscal year 2021 is approximately $190 million, including available credit facilities of $95 million.

Meanwhile, economic prospects in Alberta and Saskatchewan have improved, supported by strengthened commodity markets and an expectation of stronger immigration levels. Prices for West Texas Intermediate, a U.S. oil benchmark, have increased steadily in 2021, surpassing US$70 per barrel in July for the first time since 2018. Many analysts expect that a busy tourism season this summer will keep oil demand high, while continued geopolitical strife could ensure that prices remain at healthy levels through to the end of fiscal 2021.

Meanwhile, massive stimulus spending plans are expected to keep the broader Canadian economy buoyant. The Government of Canada forecast 5.8% economic growth for fiscal year 2021-22 in its April budget, aided by $143 billion in new spending measures. The U.S. government's US$1.9 trillion infrastructure package is also expected to spur growth that analysts anticipate will spill over into the Canadian economy.

We believe workforce-affordable rental housing will remain an essential and safe asset class, underpinned by favorable long-term market fundamentals that have persisted despite the ongoing pandemic. 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. Ottawa's recent decision to extend work permits for international students should also attract more newcomers to Western Canada.

Meanwhile, new supply in Alberta remains flat: Calgary added just 6,236 new rental units over the past five years, while Edmonton has introduced just 10,704, of which the supply is predominantly higher-end class A products. Compare that with the 127,895 net new migrants who came to Calgary over the same period, or the 139,929 who came to Edmonton. We believe these broad trajectories are overwhelmingly supportive of the long-term rental market.

Vancouver/Lower Mainland - which accounts for approximately 22% of our overall portfolio, 31% of overall NOI and 33% of overall fair market value - will continue to drive performance for Mainstreet, as vacancies remain among the lowest in the country, and rental rates among the highest. With an average monthly market-to-market gap of $367 per suite per month, 95% of our customers in the region are paying below the average market rent.

We believe the robust residential housing market in many urban centers will force young people to remain in the rental market. Roughly 73% of Canadians' annual income (including both working and non-working citizens) is below $50,000, according to Statistic Canada, creating huge demand for affordable housing and low-rent apartments. 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 options in today's market.

RUNWAY ON EXISTING PORTFOLIO

1. Pursuing our 100% organic, non-dilutive growth model: Using our strong potential liquidity position, estimated at $190 million for the remainder of fiscal 2021, we believe there is significant opportunity to continue acquiring new assets at attractive valuations below replacement costs.
2. Closing the NOI gap: In Q3 2021, 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 take advantage of the high rental season in coming quarters to boost cash flow. In the BC market alone, we see significant potential upside for NOI growth, approximately $13.3 million, through leveraging of our loss-to-lease gaps.
3. Lowering interest costs: The current 10-year, CMHC-insured mortgage rate is currently around 2.5%. We expect interest rates to remain low in the near term, and we believe that our refinancing of the debts of $320 million at an average interest rate of 3.29% maturing in the next three financial years will result in approximately $2.5 million in annual savings.
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.

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, future 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, availability of capital and the continuing effects of the current pandemic, 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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