CALGARY, Dec. 9, 2019 /CNW/ - Mainstreet's 2019 results
mark the sixth consecutive quarter of year-over-year double-digit
growth in all of our key metrics, solidifying a steady improvement
in our operational performance that has continued to deliver
non-dilutive value to our shareholders.
Bob Dhillon, Founder and Chief
Executive Officer of Mainstreet, said, "Our ability to achieve
double-digit growth over the past 18 months is a clear signal that
our long-term countercyclical strategy is working, and follows a
long precedent at Mainstreet of delivering real value." He added,
"As we enter 2020, our management team sees substantial
opportunities to continue improving our operations and non-dilutive
growth on an opportunistic basis."
FINANCIAL ACHIEVEMENTS OF 2019:
- Boosted same-asset revenue growth by 8% and same -asset NOI
growth by 9% while sharply increasing overall rental revenue (19%),
NOI (20%) and FFO (33%), despite a high number of acquisition of
unstabilized assets (18% of total portfolio) that would typically
lower operational performance
- Increased in stock value by 33% to $63.62 per share, up from $48 per share as of the year ended September 30, 2018. Mainstreet stock increased to
a record high of nearly $71 per share
as of the end of November 2019
- Acquired $129 million in new
assets in fiscal 2019 ($114,000 per
door), complementing our 100% organic, non-dilutive growth model.
Total apartment units increased to 12,901 in fiscal year 2019, up
10% from 11,776 in fiscal 2018 (rising to 13,034 units as of
December 5, 2019)
- Raised approximately $84 million
in 10-year, long-term CMHC-insured mortgages at an average interest
rate of 3.02% to fund future growth. Recent finance rates were just
2.45%, providing cheaper financing opportunities going forward
- Improved operations by increasing operation margin to 63% in
2019 from 62% in 2018 and driving down vacancy rates, which fell
from 10.1% to 5.7% in fiscal 2019 from 10.1% in 2018, despite an
aggressive level of acquisitions of underperforming assets over the
past four years
- Reduced cycle times in stabilization and renovation, in turn
improving the appeal of our apartment units and quality of living
for our tenants
- Maintained sizeable liquidity level of approximately
$150 million in fiscal year 2019,
providing plenty of room for future opportunistic acquisitions and
non-dilutive organic growth
We believe these achievements are a direct result of
Mainstreet's aggressive countercyclical growth strategy and
value-added business model as well as a gradual economic
improvement in our core markets. In anticipation of an economic
downturn more than four years ago, our management team put in place
a strategic plan that included aggressively acquiring
underperforming properties, strengthening our internal resources to
improve the cycle time of stabilization, and capitalizing on
low-cost long-term CMHC insured debt financing, which both reduces
our interest costs (Mainstreet's single-largest expense) and
provides capital to fund future non-dilutive organic growth.
OUTLOOK
As we enter 2020, management believes that our
countercyclical growth strategy and value-added business model will
continue to improve our financial performance and create
non-dilutive value for shareholders. We have identified the
following areas as a way to achieve future growth:
Runway on Existing Portfolio
- Closing the NOI gap: In fiscal year 2019, 18% of the Mainstreet
apartment portfolio was going through the stabilization process due
to a high level of recent acquisitions of unstabilized assets. Once
they are stabilized, we believe that our same-store revenue,
vacancy rate, NOI and FFO will see further improvement.
- Loss to Lease: We believe our Vancouver/Lower Mainland market, which makes
up 21% of our portfolio (2,751 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 $249
per unit per month. Currently, over 95% 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.
- Lowing interest cost: Approximately $156
million of mortgage loans with an average interest rate of
3.9% are maturing in 2020 and 2021. The current 10-year,
CMHC-insured mortgage rate is about 2.5%. We expected that the
interest cost will remain low and the refinancing of these maturing
mortgages will result in substantial reduction in future
expenses.
- Pursuing our 100% organic, non-dilutive growth model: With our
strong potential liquidity position of approximately $150 million, through expected financing of clear
titled properties after stabilization, and our proven ability to
identify and acquire underperforming assets, particularly in during
periods of recession, we believe there will be significant
opportunity to continue acquiring new assets at low cost that, we
believe, will allow us to continue create new value.
- Buying back our common shares: We believe MEQ shares continue
to be traded below their NAV, we will continue to buy back our own
common shares on an opportunistic basis under our normal course
issuer bid (NCIB).
Continued improvement in the rental market
Management
believes demand for rental properties will continue to increase due
to a steady rise in population and a limited increase in the new
supply of purpose-built rental properties. Over the last 10 years,
the Canadian population has grown by nearly 4 million, yet the
number of new purpose-built rental units has only increased by
approximately 200,000, creating a huge gap between supply and
demand in the rental market. This trend of rising populations is
evident in Mainstreet's core markets. Alberta added 70,595 new residents in the year
ended June 2019 alone. In-migration
into Alberta was 12,899 in Q2
2019, up from 9,189 a year earlier (Statistics Canada). In
addition, the population of foreign students has also increased
substantially over the past 10 years, reaching a record high of
721,205 international students in 2018, according to Government of
Canada data.
Higher immigration levels and steady population growth are
further supported by gradually improved labour markets in
Western Canada. Alberta's unemployment rate was 6.7% in
October 2019—a 0.5% decrease from a year earlier (Statistics
Canada). Saskatchewan has remained
largely constant at 5.1% in October
2019. British Columbia
added 15,000 new jobs in the month of October alone, and remains
among the lowest unemployment rates in Canada at 4.7%. Management believes that the
apparent improvement in labour market conditions will likely result
in stronger interprovincial in-migration.
Furthermore, we believe gradual population growth will continue
to absorb the ongoing oversupply of condominium units, bringing
better balance to the rental market. That oversupply was the result
of the rapid construction of condominiums during the last period of
high economic growth, which caused roughly 30% of new units to be
brought into the rental market, according to CMHC data.
That trend is now showing signs of subsiding. Edmonton's rental market vacancy rate is
expected to fall to 3.9% in 2019, down from 5.3% in 2018, according
to CMHC data as of October 2019.
Calgary's vacancy rate is expected
to fall to 3.6%, down from 3.9% over the same period. Saskatoon is expected to fall from 8.3% down
to 7.3%, while Regina is expected to increase slightly from 7.7% up
to 8.2%. Vancouver is expected to
remain among the lowest in the country at 1.1% vacancy.
Driving down costs
Amid ever-rising costs due to
public policy, Mainstreet believes it has kept its operating costs
at competitive levels, in part by implementing new technological
systems and leveraging our management team. Our five-year,
$3 million investment in a leading
software technology from Yardi System Inc., which automates our
management platform, is just one example of our dedication to
future cost savings and increased efficiencies.
We believe these efforts should be helped along by new policies
under the Alberta government,
whose proposed corporate tax cuts would put the province back among
the most competitive rates in the country.
During 2019, we have also successfully expanded our warehousing
capacity through development of on-site warehouse spaces at our
existing residual land in all cities. This has streamlined our
supply chain and enabled us to increase factory-direct sources for
materials from China, which will
further reduce our cost and improve the cycle time for
renovations.
While coming decisions regarding interest rates by the Bank of
Canada remain uncertain, interest
rates nonetheless remain at low levels. Canadian GDP growth remains
below the BoC's target growth rate of 2%, which many analysts
believe will keep the bank from pursuing aggressive hikes in the
near future.
Capturing the mid-market
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 customers. We believe the majority of customers, including
millennials and "generation Z" (which comprise roughly 45% of the
total population), and immigrants, students, and foreign students
will continue to favour mid-market prices as they defer major
investments like new homes during times of economic uncertainty. We
believe we are uniquely positioned to capture the growing market
within this lower bracket.
Management believes this trend among first-time buyers (who
usually come out of the overall rental pool) are further supported
by tighter borrowing requirements under the Office of the
Superintendent of Financial Institutions, announced in 2017, which
will make it more difficult for first-time homebuyers to secure
financing. We believe this trend as generally supportive of the
rental market. The Bank of Canada
estimates the new rules could disqualify as many as 10% of new
buyers every year.
CHALLENGES
As we enter fiscal year 2020, oil market
volatility and an uncertain political climate remain our biggest
obstacles. Prices for U.S. benchmark West Texas Intermediate (WTI)
hovered around the US$55 range for
most of 2019, remaining well below prices five years ago. A lack of
available pipeline capacity has weighed on Canadian oil prices in
particular, and has widened the differential with WTI, despite
efforts by the provincial government to raise prices via a cap on
production. The result has been a continued hesitancy among
investors, particularly in the U.S., to invest in the Canadian
energy sector.
Lower Canadian oil prices have also underscored deeper
complications in the country's regulatory and legal regime, which
have caused delays in large projects like oil pipelines and hydro
transmission lines. While we believe the federal government's
June 2019 approval of the Trans
Mountain pipeline sent a positive signal, broader uncertainty in
our regulatory regime could cause a further cooling in investment
levels.
Meanwhile, ongoing trade disputes between the U.S. and
China could spill over into the
Canadian economy, restricting exports and shrinking GDP growth.
While a trade spat between Canada
and China over pork exports
softened around the end of 2019, tensions between the two countries
seem to remain high.
Management believes negative macro-economic forces have likewise
caused the ongoing 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.
Lastly, rising operating costs also pose a challenge. The
federal carbon tax will be enforced in Alberta beginning in 2020, which in turn
raises costs for property owners. Additionally, new federal
regulations under the Clean Fuel Standard targeting natural gas
emissions are anticipated to come into force around 2023, likely
raising home heating costs. Various municipalities, for their part,
have continued to increase property taxes. Our efforts to stabilize
a record 18% of unstabilized assets have likewise raised costs for
human resources, materials, and other operational expenses.
Mainstreet management will continue to monitor any changes in
business and market conditions, and take necessary proactive
actions to minimize risk and maximize value to shareholders.
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
