Mainstreet Equity Corp., an add-value, mid-market consolidator of apartments in Western Canada, announced its 19th consecutive quarter of year-over-year double-digit growth in pre-tax funds from operations and net operating income.
Management attributes this success to a combination of factors, particularly the weak Western Canadian economy, which supports demand for rental housing by creating uncertainty for homebuyers. By easing competition for acquisitions, this also contributes to lower interest rates, reduced demand for labour and weakening prices for energy and construction materials—each providing a unique opportunity for expansion in ways that would be difficult in times of robust growth.
“The economy looks tough, but we have found great things behind the headlines. We believe we are a counter-cyclical company, a defensive asset class – and down times are helping us cut costs while offering up chances to expand our portfolio that we could not have imagined even a year ago,” said Mainstreet Founder and CEO, Bob Dhillon. “We built our company with the idea that we could make a real difference in the quality and living standards in Western Canadian apartments, while at the same time consistently creating value for our shareholders. We are proud of what we have accomplished, and pleased at the opportunity to pursue even greater opportunities in the current economic environment.”
Results
In Q3 2015, pre-tax FFO was up 19 per cent to $7.9 million, an increase from $6.6 million in Q3 2014. FFO per basic share after income tax increased 16 per cent to $0.73 from $0.63 in Q3 2014. NOI from continuing operations increased 10 per cent to $16.8 million, while growing seven per cent to $15.8 million on a same asset basis. Mainstreet’s revenue from continuing operations rose nine per cent to $25.1 million, up from $23 million in Q3 2014; this included a four per cent rise in same asset rental revenues to $23.2 million, from $22.2 million in Q3 2014. The same asset operating margins improved to 68 per cent, from 67% in the same period last year.
The same asset vacancy rate decreased year-over-year to 6.7 per cent from 7.6 per cent in Q3 2014. As of July 1, the vacancy rate – excluding unrentable units due to renovations — stood at 7.3 per cent.
During the quarter, Mainstreet acquired a 156-unit townhouse complex in Lethbridge, Alberta for $13.4 million, seizing an opportunity to expand in a new market at attractive metrics and bringing the growth of the portfolio to 6 per cent since the last financial year. During Q3 2015 Mainstreet refinanced $22.5 million in maturing mortgages and clear title assets to 10-year CMHC-insured fixed-rate debt at 140 basis points below that of maturing mortgages. This translated into $25,000 in annual interest expense savings, while also extracting $20.9 million in additional equity.
Also in Q3 2015, under the normal-course issuer, bid Mainstreet repurchased and cancelled 57,900 shares at a weighted average price of $37.90 per share or an aggregate amount of $2.2 million. As of the day of this report, Mainstreet has repurchased and cancelled 172,830 shares at a weighted average price of $37.33 per share or an aggregate amount of $6.5 million.
Challenges
Though British Columbia is now Canada’s strongest economic performer (Statistics Canada), Mainstreet faces an uncertain economic outlook in the Provinces of Alberta and Saskatchewan, which together account for 71 per cent of its total rental portfolio. Rental markets in these provinces are being impacted by continued weakness in petroleum and natural gas commodity prices, slowing in-migration figures, and weakened Canadian economic performance.
Management is mindful of the unpredictability of this current situation, and is keeping a close watch on costs, operating margins and marketplace conditions. Current challenges are in addition to hurdles inherent to the Mainstreet add-value business model. The renovation and repositioning of properties temporarily raises the overall vacancy rate and hampers NOI performance. Stabilized apartments are previously underperforming properties that Mainstreet has purchased and renovated to Mainstreet standards. However, Management believes that Mainstreet’s unstabilized portfolio (13 per cent of the portfolio) is one of its greatest levers for future growth in NOI and FFO.
Outlook
Mainstreet has produced consistent growth by sticking to a strategy of careful operational management, while creating new value through opportunistic acquisitions. This two-pronged approach continues to serve the corporation well, particularly in light of the current economic uncertainty
The economic impact of falling energy prices in its core markets remains uncertain and, if it persists, may negatively affect vacancy rates and rental concessions. Mainstreet is not immune from broader economic forces, however the company says it believes any future impact should be considered against the slate of opportunities the downturn has provided.
According to the press release, the downturn is providing significant opportunity for acquisitions in the provinces of Alberta and Saskatchewan, as can be seen with its Lethbridge townhouse acquisition, which boasted metrics that were difficult to match in recent years.
British Columbia, meanwhile, is enjoying the strongest economic performance in Canada, according to Statistics Canada. Buoyant conditions there have lowered vacancy rates, while operating costs have remained low. Mainstreet now enjoys greater than 30 per cent market share in the Abbotsford-Surrey corridor, and conditions continue to support further expansion in the Lower Mainland.
Mainstreet anticipates approximately $120 million in potential available liquidity by the end of fiscal year 2016. This includes cash on hand and availability in the line of credit of $37 million, in addition to an estimated $83 million that we believe could be raised through refinancing of mortgages maturing in the remaining fiscal year 2015 and fiscal year 2016. Based on a leverage level of 75 per cent, this large liquidity position equates to roughly $500 million in buying capacity at a time of low mortgage interest rates, and positions Mainstreet to act decisively when acquisition opportunities arise, while upholding the commitment to not dilute shareholder value.
