CALGARY, AB, Dec. 7, 2020 /CNW/ - Despite the global pandemic
persisting for much of fiscal 2020, Mainstreet still managed to
achieve year-over-year double-digit growth in funds from operations
("FFO") in 2020, increasing 11% from the previous year. Revenues
rose 9% and net operating income ("NOI") increased 8%. We believe
these results demonstrate the extraordinarily resilient nature of
the mid-market rental industry (with a price-point average between
$900 and $1,000), which has remained stable even as other
sectors face widespread disruption. Mainstreet collection rates,
for example, remained comparable to pre-pandemic levels of about
98% throughout the fiscal year.
Bob Dhillon, Founder and Chief
Executive Officer of Mainstreet, said, "The global pandemic in 2020
introduced unprecedented challenges for Mainstreet, forcing our
management team to adopt a socially-minded internal policy that
prioritized health and safety." He added, "Even so, we have
continued to prove that the mid-market rental space remains a
highly resilient asset class, and to demonstrate growth in our key
financial metrics."
Our policy of prioritizing health and safety over revenues,
while necessary, did have some impacts on our financial performance
in the 4th quarter of 2020, particularly on same-asset earnings.
Rental revenues on a same-asset basis remained flat at 0.5%, while
same-asset NOI growth declined to 3% in Q4 2020 compared with Q4
2019. Mainstreet's annual vacancy rate increased to 7.3% in 2020,
from 6.4% in 2019, due to a high level of acquisitions of
unstabilized assets in recent quarters. Meanwhile, pandemic
retrains that eliminated the flow of new immigrants and foreign and
domestic students into Canada
substantially weakened the summer rental market, causing Mainstreet
to miss what is typically the peak of its rental cycle.
Notwithstanding temporary adjustments to earnings, Mainstreet
has for decades remained one of the leaders in the affordable
housing space, generating real value for shareholders through the
smart deployment of capital. We will continue this model of
acquiring assets with high value-added potential at low cost,
funded by record-low costs of debt and a sizeable estimated
liquidity position of $240 million.
As we enter fiscal 2021, we see unprecedented growth opportunities
under our countercyclical strategy that, we believe, vastly
outweigh any near-term operating risk faced by Mainstreet (see
Outlook section below).
FINANCIAL HIGHLIGHTS:
- $240M - Estimated liquidly
position for FY 2021 (excluding $85
million credit line)
- $200M - Funds raised through long
term refinancing at average rate of 2.1%
- 1.58% - Latest long-rate interest rate on 10-year Mainstreet
debt comprising $38 million
(subsequent to 2020)
- 11% - Growth in funds from operations (FFO)
- 7.3% - Vacancy rate (despite a high number of acquisitions and
limits to immigration inflows)
- $100M - Value of acquisitions in
2020 (including subsequent purchases)
- 2,077 units - Stabilized underperforming suites through
renovation and reposition in FY2020
CHALLENGES
Rising operating costs continue to pose a
challenge to Mainstreet. Paid leave was extended to team members
who could not work due to family health concerns or to look after
their children, who were not able to attend school earlier in the
pandemic. Social distancing requirements also restricted the number
of team members working in the field, lowering overall workplace
productivity. Human resources costs more broadly increased as a
result of those restraints.
Additional cleaning, sanitizing, and the purchase of PPE also
increased operating expenses for Mainstreet. We expect that
property taxes, insurance costs, carbon taxes, and other
government-imposed costs which had increased substantially this
year will continue to increase due to economic uncertainty. Further
costs increases could be passed down to private-sector operators
like Mainstreet by various orders of government facing weakened
financial positions.
Higher operating costs come at a time of lower overall activity
in the rental market. Mainstreet typically invests heavily in the
first three months of the fiscal year to restabilize units in
preparation for the summer high season. Economic restrictions in
2020 diminished that peak in the Mainstreet rental cycle, which
negatively impacted performance.
Pandemic restraints also increased vacancy rates in the last two
quarters of 2020. Management expects this trend to continue at
least in the first two quarters of 2021 until lockdowns and travel
restrictions are fully lifted.
Finally, high levels of uncertainty persist around the future
health of the broader economy. The federal government has extended
its two main COVID-19 support programs until June 2021, which will provide necessary capital
to businesses and to renters, including Mainstreet clients. It
remains unclear whether emergency programs will be extended into
the second half of fiscal 2021; new economic restrictions could be
imposed if cases of COVID-19 grow rapidly.
OUTLOOK
With these challenges come considerable
opportunities to augment our countercyclical growth model. In
fiscal 2021, this may involve the rollout of diversification
efforts, including potential asset purchases in Vancouver/Lower Mainland (currently accounting
for 21% of our assets); mainland British
Columbia; and other locations outside Alberta and Saskatchewan.
Current market conditions have meanwhile created highly
favourable conditions to expand our portfolio. Costs for
acquisitions, our single-biggest expense, have also fallen as the
pandemic dampens buying activity. Interest expenses on debt,
Mainstreet's second-largest cost, are also at a record low.
The low cost of debt in particular will help fund Mainstreet
acquisitions (our latest pool of 10-year, CMHC-insured debt was
locked in at just 1.58%). In the next three years, Mainstreet has
$244 million in maturing debts at
3.41% interest. We are hopeful that if the current interest rate
environment persists, we may be able to lock in those much lower
rates upon renewal. Additionally, we estimate that Mainstreet will
have access to approximately $240
million in available liquidity in the next 12 months
(assuming current lending criteria and continuing low interest
rates) that can also be deployed for the purpose of
acquisitions.
We believe the mid-market rental industry will remain an
essential and safe asset class, underpinned by long-term market
fundamentals, like rising populations and relatively low supply of
new rental units. As one of the leading providers of inner-city
Millennial living, Mainstreet is well positioned to be one of the
leading providers of the affordable housing space and continue to
improve the quality of living for Canadians.
The Canadian population, meanwhile, is projected to continue
grow in the long term even as migration inflows temporarily
decline. In November, the Government of Canada announced it would increase immigration
targets to 1.2 million people over the next three years — an annual
increase of 60,000 new immigrants to 400,000 compared with 340,000
pre-pandemic levels. On October 20,
the federal government relaxed restrictions on the inflow of
foreign students, one of our target markets, which we believe could
positively impact the mid-market rental space. The federal
government has also detailed plans to absorb a large influx of
Hong Kong residents should unrest
in the city continue to worsen. Taken together, we believe the
eventual flow of newcomers to Canada will be highly supportive of a sharp
economic rebound.
Our financial position is further bolstered by Mainstreet's
considerable residual land base, which is not represented on our
balance sheet.
RUNWAY ON EXISTING PORTFOLIO
Pursuing our 100% organic, non-dilutive growth model: Using our
strong potential liquidity position which we estimate will be
approximately
$240 million, we
believe there is significant opportunity to continue acquiring new
assets at low cost.
- Closing the NOI gap: In Q4 2020, 7% 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.
- Leveraging our loss-to-lease: We believe our Vancouver/Lower Mainland market offers a
significant opportunity for future same-asset NOI growth. This is
partly due to a continued increase in market rates, resulting in
loss-to-lease of approximately $264
per unit per month. Currently, over 95% of our customers 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.
- Lowering interest costs: The current 10-year, CMHC-insured
mortgage rate falls between 1.6% and 1.7%. We expect interest rates
to remain low in the near term, and we believe that our refinancing
of these maturing debts amounted to $244
million at averaged interest rate of 3.41% in the next three
years will result in a substantial reduction in future mortgages
expenses.
- 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