CALGARY, Feb. 12, 2015 /CNW/ – Mainstreet Equity Corp. (“Mainstreet” or “Corporation” TSX: MEQ) is pleased to announce its 17th consecutive quarter of year-over-year double-digit growth in funds from operations (“FFO” â up 28%) and net operating income (“NOI” â up 14%). Mainstreet believes that its sizeable liquidity position (over $100 million), access to record-low financing costs and ability to make opportunistic acquisitions positions it well for continued strong performance despite the uncertainty caused by the fall in oil prices. Mainstreet continues to see substantial potential to improve NOI performance by stabilizing properties, decreasing the vacancy rate, reducing rental concessions and improving market rents on our existing portfolio. It has also taken advantage of the current market environment to begin share buyback program, in accordance with the previously-announced normal course issuer bid.
“Mortgage rates have never been lower and Mainstreet has the liquidity to move decisively when we find the right acquisition properties. In the current environment, we see possibilities for strong expansion,” says Bob Dhillon, Chief Executive Officer and founder of Mainstreet. “While the fall in oil prices presents some uncertainties in Western Canada,it has also created substantial opportunities. We believe that refinancing mortgages at low interest rates will allow us to generate significant cash for new acquisitions. We also hope to achieve operational savings since interest expenses are our number one cost. As our recent $33.7 million purchase in Surrey shows, Mainstreet continues to find ways to grow at a large-scale in valuable Western Canadian markets.”
In Q1 2015, Mainstreet’s revenue from continuing operations rose 15% to $24.7 million compared to Q1 2014, while same asset rental revenues climbed 9% to $23.4 million. NOI from continuing operations increased 14% to $16.4 million. Funds from continuing operations were up 28% to $7.6 million, an increase over $6.0 million in the year-ago quarter. Funds from continuing operations per basic share increased 28% to $0.73 from $0.57 in Q1, 2014. The same asset vacancy rate fell to 6.2% from 7.3% in Q1 2014.
In Q1 2015, Mainstreet acquired 48 residential apartment units in a cluster in Saskatoon for $4.6 million. Subsequent to the quarter end, Mainstreet added a further 331 units in Surrey, B.C. for $33.7 million. Together, the acquisitions grow the portfolio by 5%.
During Q1 2015, Mainstreet refinanced $6.8 million in matured mortgage to long-term 10-year, CMHC-insured mortgages at an average interest rate of 3.07%, reducing annualized interest expenses by approximately $84,000 and raising an additional $3.3 million in cash. Mainstreet also financed one clear title asset for $3.6 million at an interest rate of 2.95%. At 2.18%, the latest 10-year CMHC insured mortgage rate, it has secured stands as the lowest in our history.
The greater than 50% drop in oil prices presents new uncertainties in cities that are more dependent upon the energy industry. The impact on market conditions is unclear, although recent experience during the 2009 financial crisis showed that in-migration continued to Alberta, and rental demand remained supportive as instability kept some residents from property purchases. Calgary and Edmonton have also changed from previous oil price downturns as both cities now feature more diversified economies and have evolved into lifestyle centres less vulnerable to commodity price volatility. Mainstreet is, however, mindful of the current uncertainty, and are monitoring the economic environment while keeping a close watch on costs, operating margins and marketplace conditions.
Mainstreet’s record of double-digit growth over more than four years has been built by paying careful attention to operational performance while aggressively expanding at the right moments. The Corporation believes this approach is as effective when markets are rough as it is when they are robust, and remain confident that itsexperience and business model will continue to serve us well in the current context.
The savings in lower oil prices
Management believes that the fall in oil prices will bring with it declines in other costs that positively affect Mainstreet. Long-term bond yields have come down 135 basis points year-over-year, and the Bank of Canada has signalled the possibility of another rate cut later this year. Mainstreet plans to refinance approximately $48 million of maturing mortgages over the remainder of the year. At current rates, Mainstreet expects the refinancing to achieve approximately $1.1 million in annual interest savings, while generating approximately $32 million in additional cash.
The upside of the slowdown
Mainstreet believes that a slowing economy yields at least three significant advantages for Mainstreet’s growth. Weakness in the housing market is supportive of rental demand. First, recent experience has shown rental and vacancy rates remain solid even in times of significant market uncertainty. Second, it sees the current environment as favourable for labour availability and costs, which had been outpacing inflation. And third, Mainstreet expects economic uncertainty to support improved acquisition costs across western Canada.
With its expectation of approximately $100 million in liquidity available in the remaining financial year, Mainstreet can move quickly when acquisition opportunities arise.
The benefits of a multi-province portfolio
With the acquisition of 331 additional units in Surrey, Mainstreet now manages 42% of its portfolio in markets outside Alberta, and 30% of the total in the British Columbia Lower Mainland. This ensures a significant portion of rental revenues come from cities where the fall in oil prices weighs less heavily on the local economy.
Finding opportunities in MEQ
Market turmoil has created a buying opportunity in Mainstreet’s own shares. The current MEQ market capitalization of roughly $350-million stands in sharp contrast to Mainstreet’s IFRS net asset value at $655 million. Mainstreet believes this significant valuation gap presents a buying opportunity.
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, reduction of vacancy rates, increase of rental rates and rental revenue, future income and profitability, timing of refinancing of debt and completion, timing and costs of renovations, increased 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 of labour and costs of renovations, but without limitation, 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 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.
Management closely monitors factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements and will update those forward-looking statements where appropriate in its quarterly financial reports.
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