Mainstreet Equity Corp. Releases Q1 2020 Results

CALGARY, Feb. 11, 2020 /CNW/ - Mainstreet's Q1 2020 results mark the 7th consecutive quarter of year-over-year double-digit growth in all of its key metrics, extending a steady improvement in its operational performance that has continued to deliver non-dilutive value to shareholders. Continued growth in rental revenue, net operating income ("NOI"), and funds from operations ("FFO") comes despite the fact that Q1 is typically a low rental season.

Bob Dhillon, Founder and Chief Executive Officer of Mainstreet, said, "Our achievements over the past few years are a testament to Mainstreet's countercyclical growth strategy, which has continued to deliver real value to our shareholders ever since we listed in TSX in 2000." He added, "As we enter the remainder of the fiscal year, we believe that a fundamental and positive shift in the macroeconomic climate, underpinned by healthy population growth in our core markets, will lay the foundation for years of future wealth creation."  

We believe that these achievements are a direct result of Mainstreet's countercyclical growth strategy, which our management team introduced five years ago in anticipation of an economic downturn. They are also partly connected to an ongoing population surge across Canada, including in Alberta, which has driven down vacancy rates and bolstered our value-added growth model. Over the last four years Alberta has added 226,825 new residents, 70,595 of which came in 2019 alone (Statistic Canada). During that same four-year period, rental supply in the province remained flat, adding only 13,736 new units, including townhomes, according to CMHC data. In the Edmonton/Calgary corridor, where 76% of the residents of Alberta reside (roughly 3.32 million people) and where the majority of Mainstreet's properties located. The total purpose-built rental universe, including townhouses, is just 123,134 (CMHC). By 2046, the portion of Albertans living within that corridor is expected to rise to 80% (Government of Alberta).

While we recognize that a sizeable number of these new residents are either would-be homebuyers or children, many others are foreign students, immigrants and young people who will continue to enter, and therefore expand, the broader rental space. We believe these supply-demand figures point to a fundamental robustness in the rental market that, Mainstreet believes will extend well into the future, supporting Mainstreet's 100% organic, non-dilutive growth model.

As we enter fiscal year 2020, we plan to leverage improving market fundamentals by accelerating our countercyclical growth strategy. Our management team will also continue to fine-tune key processes across our operations. This includes anything from identifying underperforming assets for acquisition, creating efficiencies in our supply chain, strengthening internal training and adopting new technologies, shortening cycle times for stabilization, and unlocking future growth by refinancing long-term, CMHC-insured debts at low cost. As of Q1 2020, 12% of our portfolio was unstabilized, and our liquidity position stood at $147 million. Looking to the coming fiscal year, we believe this provides Mainstreet a firm foundation to continue our record of top-tier performance and delivering non-dilutive value to shareholders.

FINANCIAL HIGHLIGHTS:

• Operations: 13% growth in rental revenue, 12% growth in NOI and 18% growth in FFO. On a same-asset basic, both NOI and rental revenue increased 5%. We achieved these results despite a high number of acquisitions that would typically drive down operating results
• Refinancing: $26 million in additional funds raised through the financing of six clear-title properties at an interest rate of 2.47%
• Occupancy: Vacancy rate reduced to 5.9%, compared with 6.7% in Q1 2019
• Acquisitions: $11.3 million (134 units) in new acquisitions in Q1 2020, with $36.2 million (236 units) in Calgary and Edmonton subsequent to end of quarter. Year-to-date acquisitions amounted to $47.5 million (370 units)
• Mortgage: 95% of mortgage portfolio locked in as CMHC-insured mortgages at an average interest rate of 2.98% with an average maturity period of 6 years, substantially lowering exposure to interest rate risks
• Liquidity: $147 million liquidity position to fund future growth

CHALLENGES

Despite our achievements, Mainstreet faces challenges on several fronts. Higher municipal property taxes and other policies have continued to raise operating costs. The federal carbon tax, which targets property owners through higher heating costs, came into force in Alberta in 2020. New federal regulations under the 'Clean Fuel Standard' are anticipated to come into force around 2023, layering new costs onto natural gas consumption. Our efforts to reduce stabilization cycle times have also increased expenses for human resources, materials and other operational necessities. 

Market volatility also remains a challenge. Prices for West Texas Intermediate, an American crude oil benchmark, hovered around US$55 per barrel in 2019, well below prices five years ago. Industry investment has likewise fallen as producers delay major decisions, denting the economic output of oil-dependent provinces like Alberta and Saskatchewan.

Low oil prices have underscored deeper shortfalls in Canada's regulatory and legal regime, which have caused delays in major projects. Two multi-billion dollar developments in B.C., the Trans Mountain pipeline and LNG Canada natural gas facility, have now entered the early construction phase, which we view as positive. However, we believe that the broader uncertainty around project approvals in Canada could yet cause a further cooling in investor appetites, as major investment funds look to other markets, particularly the U.S. The federal government's pending approval of the Frontier oilsands mine in northern Alberta, expected by the end of February, will likely feed into investor sentiments.

Management also 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.

We also see risks in the recent outbreak of the coronavirus, causing global travel restrictions, border closures, factories and businesses closures in China, which could ripple out into the Canadian economy in 2020.

OUTLOOK

Even in the face of some challenges, Mainstreet has benefited over the last four years from a vast improvement in almost every possible macroeconomic measure. We believe that employment levels, population growth, and GDP across Canada appear to be on the upswing. This trend supports our plan to accelerate our acquisition strategy in 2020, funded by low interest, long-term, CMHC-insured financing. We will also continue efforts over the past two years to re-stabilize units at a record pace, boosting NOI and cash flows.

We believe that it appears that positive macroeconomic trends appear poised to continue. According to Statistics Canada, Canada's population could reach 48 million by 2050 under a medium growth scenario. Under a high growth scenario, that could reach as high as 56 million. 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. 

We believe that positive international and inter-provincial migration numbers, coupled with a steady rise in foreign student enrolments, could continue to bolster this trend. More than 720,000 foreign students enrolled in Canadian institutions in 2018 (Immigration, Refugees and Citizenship Canada 2019), higher than many developed nations. International in-migration into Canada reached 437,000 (Statistic Canada) in 2019, nearly on par with the 595,000 people (Census Bureau) who entered the U.S.

We expect that improved population and in-migration levels could translate into economic growth over the long term. At a projected growth rate of 1.6% in 2020, Canada's economy is comparable to that of the U.S. (1.9%), but still below the Bank of Canada's target inflation rate of 2%. Job growth remains robust. Unemployment levels across Canada were 5.6% in December 2019, among the lowest in years. In Alberta, unemployment in December was 7.0%, roughly in line with its five-year average. British Columbia, which makes up 21% of our portfolio, has continued to outperform the national average, with an unemployment rate of 4.8% in December 2019 (Statistics Canada and Bank of Canada) .

Mainstreet believes these positive indicators will continue to return the rental market to balance. Rental markets have been oversupplied following a rapid build out of condominiums during years of high economic growth, which then spilled over into the broader rental space. But we believe that recent data suggests absorption of that oversupply is already underway. Vacancy rates for purpose-built rental units in metropolitan Edmonton fell to 4.9% in 2019, down from 5.3% a year earlier, according to CMHC data. Vacancies in Calgary have fallen as low as 3.9%, directly in line with a year earlier. Vancouver remained among the lowest vacancy rates in Canada (1.1%), while vacancies fell sharply in Saskatoon (down to 5.7% from 8.3%) and remained unchanged in Regina (7.7%).

We also believe that expected increases in housing prices will continue to push more young people into the rental market. 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. We believe that renters, which often include millennials, foreign students and new migrants, tend to favour mid-market prices as they defer major investments like new homes. We believe we are uniquely positioned to capture renters who fall within this bracket.

This trend among first-time buyers (who usually come out of the overall rental pool) are underscored by tighter borrowing requirements under the Office of the Superintendent of Financial Institutions, announced in 2017, which we believe will make it more difficult for first-time homebuyers to secure financing. We see this trend as generally supportive of the rental market. The Bank of Canada estimates the new rules could disqualify as much as 10% of new buyers every year.

RUNWAY ON EXISTING PORTFOLIO

1. Pursuing our 100% organic, non-dilutive growth model: Using our strong potential liquidity position of approximately $147 million, we believe there is significant opportunity to continue acquiring new assets at low cost.
2. Closing the NOI gap: In Q1 2020, 12% 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 $258 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: Approximately $130 million of Mainstreet mortgage loans with an average interest rate of 4.1% are maturing in 2020 and 2021. The current 10-year, CMHC-insured mortgage rate is about 2.5%. We expect interest rates to remain low, 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

Bob Dhillon, President and CEO, [phone], www.mainst.biz, www.sedar.com

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