CALGARY, AB, Dec. 7, 2021 /CNW/ - Mainstreet continued to
see highly positive results in Q4 2021, achieving double-digit
growth across all key metrics, including a 14% increase in funds
from operations ("FFO"), a 12% rise in net operating income
("NOI"), and a 10% increase in rental revenues compared with Q4
last year.
We also posted remarkable results on an annual basis, achieving
9% growth in FFO, 7% growth in rental revenues, and a 5% increase
in NOI.
Bob Dhillon, Founder, President
and CEO of Mainstreet, said, "Our steady performance over the last
two years, despite difficult operating circumstances, points to the
success of our value-added growth model." He added, "While the
global pandemic created especially difficult operating
circumstances for Mainstreet, we see immense opportunity to
continue diversifying our portfolio and creating shareholder value
in coming months."
Fiscal 2021 was also a milestone year for Mainstreet on several
fronts, as the Corporation successfully:
- Acquired $216 million (1,625
units) in new assets, the largest in Mainstreet history (YTD
acquisitions total $239 million
(1,884 units) as of Dec.6, 2021)
- Refinanced $292 million in
10-year, CMHC-insured mortgages, raising $191 million in low-cost capital at averaged
interest rate of 2.07% for growth (including subsequent financing
activities, Mainstreet refinanced YTD $334
million, raising $230
million)
- Diversified our portfolio through $75
million (538 units) in acquisitions, including new markets
in Winnipeg, interior British Columbia, and Vancouver Island
- Reached over $1 billion in market
capitalization; Mainstreet portfolio now totals 15,465 apartment
units including 5 vacant lands and 4 commercial buildings as of
Dec.6, 2021
These positive results come despite a highly challenging
business environment in 2021, due to the global pandemic and a
sharp rise in operating costs. Pandemic realities in particular
required Mainstreet to double down on our commitment to a healthy
and safe work environment, and to adhere to our corporate social
responsibilities. This involved: waiving rental payments for
struggling tenants; delaying rent increases; halting evictions; and
allocating additional financial resources toward safety provisions,
among other things. Although these measures sharply increased our
operating costs and negatively affected our earnings on a
same-store basis, we strongly believe that the social benefits of
our actions will far outweigh any short-term financial losses
incurred by Mainstreet.
We view our strong performance in 2021 as largely due to the
success of Mainstreet's countercyclical growth strategy, where we
have continued to take advantage of economic downturns by
leveraging ultra-low interest rates while aggressively acquiring
underperforming assets on an opportunistic basis. We also view our
solid financial results as evidence of the extraordinary resiliency
of the mid-market multifamily apartment space, which has avoided
much of the disruption seen in other sectors during the pandemic.
Mainstreet collection rates during COVID-19 have averaged 98%,
roughly equal to pre-pandemic levels.
Heading into fiscal 2022, Mainstreet sees major opportunity to
continue pursuing our 100% organic, non-dilutive growth model to
expand and diversify our portfolio. We believe higher economic
growth in our core Alberta,
British Columbia, and Saskatchewan markets, driven by rising
commodity prices, will boost revenues, FFO and NOI, which can be
diverted toward such strategic efforts. We enjoy a substantial
estimated liquidity position of $223
million to fund our value-added growth plans.
Last year, we entered the Winnipeg market for the first time, and
widened our position in Vancouver/Lower Mainland, Vancouver Island,
and interior British Columbia,
which has become a core market for Mainstreet as we continue to
expand, reinforcing our fully diversified position across
Western Canada. We plan to
continue this diversification strategy in fiscal 2022, as we
believe it will lower our overall risk profile and contribute to
long-term financial growth. The performance of our B.C. portfolio
has continued to outperform other regions, contributing 30% of
Mainstreet NOI and 33% of our total value of investment properties
in 2021. Fortunately, our Abbotsford, Chilliwack, and Kamloops's properties have not been impacted
by recent severe flooding across the Lower Mainland.
CHALLENGES
Despite promising results in 2021, inflationary pressures continue
to put pressure on Mainstreet earnings, raising costs of both
capital and of every line item of our operating cost. Still,
interest rates currently remain low: our average refinancing in
2021 was locked in at a 10-year fixed rate of just 2.07%, well
below current inflation levels. Moreover, the vast majority of
Mainstreet debts are set in long-term yields, with an average
maturity period of 6.6 years.
Meanwhile, government-imposed lockdowns have seriously
diminished Mainstreet's business velocity for 2 years, in
particular causing us to miss out on the high rental seasons in
summer and fall. Despite the partial re-opening of the Canada-U.S. border in November, other
restrictions on international travel have halted the inflow of
foreign students and immigrants. Classroom limits in colleges and
universities have meaningfully reduced the number of domestic and
foreign students, who make up a portion of our Edmonton customer base. Still, we believe the
eventual re-opening of both the border and post-secondary
institutions will quickly reverse that trend.
That has likewise put upward pressure on Mainstreet vacancy
rates, which increased to 8.9% in 2021 from 7.3% in 2020.Our record
year of acquisitions of unstabilized properties (1,884 units in YTD
2021) has added to those pressures. However, we believe those rates
will decline as our management team aggressively restabilizes units
and as COVID-19 restrictions are gradually eased.
In addition to revenue challenges, rising operating costs
continue to pose headwinds. Major fixed expenses have increased
sharply, including property taxes, insurance, and utilities.
Carbon taxes and labour, which
effectively place the financial burden on property owners, have
added to these cost increases. Global supply chain constraints have
put further upward pressure on labour and materials
costs.
Meanwhile, the productivity of Mainstreet's workforce has been
negatively impacted by pandemic protocols. That comes as costs for
human resources have also climbed. 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 raised costs and introduced new challenges in hiring
staff.
The continuation of the COVID-19 virus will determine how long
many of these restrictions remain in place. Even with the majority
of the Canadian population vaccinated, the recent spread of the new
Omicron variant could lead to the re-introduction of some lockdown
measures. In early December, various nations including Canada began restricting international travel
to slow the spread of Omicron.
OUTLOOK
Despite difficult circumstances created by the pandemic, Mainstreet
continues to see significant opportunity to grow and diversify our
portfolio and drive shareholder value. Chiefly, relatively low
interest rates and costs for acquisitions (our two single-biggest
expenses) will continue to provide unprecedented potential for
opportunistic growth. We expect that continued economic growth in
the Prairie and BC provinces in particular could provide a revenue
boost that can be ploughed into other Mainstreet markets.
We believe that rising oil prices, which in November reached
their highest level since markets collapsed in 2014, will support
continued economic growth in Alberta and Saskatchewan. December contracts for West
Texas Intermediate, a U.S. benchmark, reached US$75 in November. Prices for natural gas have
spiked to their highest level since late-2018, driven by frigid
temperatures and rising demand for alternatives to heavier fossil
fuels like coal.
Alberta has attracted billions
in private investment over the past 12 months, highlighting a
strong push to diversify the economy. There has been over
$17 billion in investments announced
in various sectors such as financial technology, petrochemicals,
green hydrogen and Amazon's operating hub, according to Invest
Alberta Corporation.
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 tens
of billions in new spending measures. U.S. Congress' recent passage
of its US$1 trillion infrastructure
package is also expected to spur growth that analysts say will
spill over into the Canadian economy.
High commodity prices and global supply chain constraints have
helped push inflation to reach nearly 20-year highs, with the
consumer price index (CPI) spiking to 4.7% in November, according
to StatsCan. Mainstreet has for years sought to shield itself from
inflationary pressures by locking our debt into long-term
maturities. Economists remain divided over whether inflation is
transitory, but current trends nonetheless appear set to continue
at least in the short-term.
That expansion, at the same time, presents opportunities for
Mainstreet to boost operating income by taking advantage of our
unusually high vacancy rates, which are largely a result of the
acquisition of unstablilized properties. As of the year-ended 2021,
1,822 of our 15,074 units (12% of our portfolio) remain
unstabilized, creating favourable conditions to increase NOI.
Moreover, our strong estimated liquidity reserves will assist
Mainstreet in both our stabilization and opportunistic acquisition
efforts.
Meanwhile, new supply in Alberta remains flat: Calgary added just 6,695 new rental units over
the past five years, while Edmonton has introduced just 10,722. Compare
that with population growth of 129,273 in Calgary over the same period, or the
population growth of 130,834 in Edmonton. We believe these broad trajectories
are overwhelmingly supportive of our macro thesis on the long-term
rental market.
Vancouver/Lower Mainland—which
accounts for approximately 22% of our overall portfolio, 30% 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 mark-to-market gap of $376 per suite per month, 92% of our customers in
the region are below the average market rent. That translates into
approximately $13.9 million in NOI
growth potential after closing the mark-to-market gap, according to
our estimates.
We believe workforce-affordable rental housing will remain an
essential and safe asset class, underpinned by favourable 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, British
Columbia, and Saskatchewan
markets. The federal government is boosting its immigration
targets, totalling 1.2 million newcomers over the next three years.
Ottawa's decision earlier this
year to extend work permits for international students should also
attract more newcomers to Western Canada.
Lastly, we believe the robust residential housing market in many
urban centres will force young people to remain in the rental
market. In 2019, 73% of Canadians (including both working and
non-working citizens), or 44.5% of the working Canadian population,
earned an income of $49,999 or less,
according to Statista Research Department. 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 homes in today's market.
RUNWAY ON EXISTING PORTFOLIO
- Pursuing our 100% organic, non-dilutive growth model: Using our
strong potential liquidity position, estimated at $223 million for fiscal 2022 (including a
$135 million line of credit), we
believe there is significant opportunity to continue acquiring
underperforming assets at attractive valuations.
- Closing the NOI gap: As at year-ended 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 boost cash flow in coming quarters. In the
B.C. market alone, we estimate that the potential upside for NOI
growth is approximately $13.8
million, which mainly represents leveraging our
loss-to-lease gaps.
- Lowering interest costs: The current 10-year, CMHC-insured
mortgage rate is currently around 2.7%. We expect interest rates to
remain low in the near term, and we believe that our debt
refinancing of $293 million at an
average interest rate of 3.26%, maturing in the next three
financial years, will result in approximately $1.6 million in annual savings to
Mainstreet.
- 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