CALGARY, Dec. 19 /CNW/ - Mainstreet Equity Corp. ("Mainstreet" or the "Corporation") (TSX:MEQ) today released its financial results for its fiscal year ended September 30, 2008. Mainstreet achieved a strong cash position as a result of refinancing activities in 2008, and posted increases in rental revenues, net operating income and the size of its portfolio.
2008 HIGHLIGHTS
Strong cash position achieved. Subsequent to 2008 year-end, as a result of financing activities in 2008, Mainstreet achieved a $50 million cash position and mitigated risk by refinancing 32% of its floating rate and matured debt (about $85 million) under fixed five-year to 10-year terms. The last $16 million of financing was secured at an average interest rate of 3.9% for a five-year term. The new financing is insured by Canada Mortgage and Housing Corporation (CMHC), with a reduced average interest rate of 4.84% as compared to 5.42% before refinancing. Despite the significant drop in real estate valuation, Mainstreet's debt to market value ratio of only 49% for the total portfolio provides an opportunity to leverage more of its properties through refinancing, and extract cash to support growth.
Market Value. The value of the Corporation's portfolio is estimated at $625 million, as determined by five qualified appraisers (AACI - Accredited Appraiser Canadian Institute) based on properties held by Mainstreet on September 30, 2008.
Growth in portfolio. Mainstreet's portfolio grew to 5,562 units in 2008, a 6% increase compared to fiscal year-end 2007. Subsequent to year-end, Mainstreet acquired two properties, consisting of 84 units of residential apartments in Abbotsford, B.C. and Saskatoon, Saskatchewan for consideration of $7.2 million.
B.C. Lower Mainland
- Mainstreet's British Columbia portfolio grew by 16% in 2008 to 1,281
units from 1,108 units in 2007.
- Two properties were acquired in Abbotsford - one with 84 units and
one with 89 units - for an average cost per door of just over
$100,000, which is below estimated market value and replacement
cost; 89 of these units have condominium title.
- Approximately 12% of Mainstreet's B.C. properties have condominium
title, which is very difficult to acquire, and make the properties
more valuable.
- Most of these properties are condo-quality buildings, in which
tenants are responsible for paying all utilities, including heat,
which reduces energy price risk for Mainstreet.
- As Mainstreet has grown in Surrey and Abbotsford, properties have
been clustered to achieve greater operational efficiencies.
- Subsequent to year-end, Mainstreet acquired 60 units residential
apartments in Abbotsford for $5.4 million. The new properties
acquired were clustered with existing Mainstreet properties to
achieve better operational efficiencies.
Alberta
- The Corporation acquired an additional 42 units in picturesque
Cochrane, Alberta, 18 kilometres northwest of Calgary, for an
average cost per door of $86,000 - below estimated market value and
replacement cost.
- With this acquisition, the Alberta portfolio grew slightly to 3,066
rental units, a 1% increase from 3,024 units at fiscal year-end
2007.
Saskatchewan
- Mainstreet acquired an additional 97 units in Saskatoon for an
average cost per door of $44,000 - below estimated market value and
replacement cost. This acquisition brings the Saskatchewan portfolio
to a total of 551 rental units, a 21% increase compared to 454 at
fiscal year-end 2007.
- Subsequent to the year-end date, Mainstreet acquired 24 units of
residential apartments in Saskatoon for $1.8 million. The new
properties acquired were clustered with existing Mainstreet
properties to achieve better operational efficiencies.
REVENUE AND OPERATING INCOME INCREASED DESPITE VACANCY DUE TO
STABILIZATION
- Rental revenues increased. Mainstreet's rental revenues rose by 14%
to $46 million in 2008 from $40 million in 2007, due to growth in
the portfolio and increased rental rates.
- "Same assets" rental revenue rose. This increased by 6% to
$39.9 million in 2008 compared to $37.8 million in 2007. The
increase was the result of newly renovated rental units being
reintroduced into the market at higher rental rates - mainly in
Alberta - and was offset by rental loss due to high vacancy during
renovations.
- Net operating income was up. NOI from continuing operations rose by
8% to $26.6 million compared to $24.7 million in 2007.
- "Same assets" NOI increased. This increased by 2% to $24 million in
2008 compared to $23.6 million in 2007.
Funds from operations declined. Total FFO was down 10% to $4.5 million ($31 per basic share) from $5.0 million ($0.46 per basic share) in 2007. FFO from stabilized properties in 2008 was $5.8 million ($0.40 per basic share). The decline in FFO is due mainly to increased one-time financing costs for refinancing short-term and matured mortgages, to increased G&A expenses, and to high vacancy due to stabilization in Edmonton (33% vacancy) and Saskatoon (40% vacancy).
CHALLENGES
Stabilization. As of mid-December 2008, Mainstreet did not achieve its goal of 95% stabilization of Edmonton and Saskatoon properties. This was because the Corporation did not have suites renovated in time for the peak rental season in July and August. However, 90% of renovations in Edmonton and 85% of renovations in Saskatoon were completed by December 15, 2008. These units are ready for the next rental season. At fiscal year-end, 36% of Mainstreet's portfolio remained non-stabilized.
Labour availability. The human resource shortage faced by the Corporation in the past two years is easing, due to the slowdown of the economy and increase in unemployment rate. In addition, Mainstreet has brought in 18 foreign contract laborers, and has begun their training program. The Corporation also plans to take advantage of the economic downturn and add more senior-level resources to our management team in preparation for future growth.
POSITIONING FOR 2009
With renovations substantially complete now for non-stabilized properties in Saskatoon and Edmonton, in 2009 Mainstreet will focus on marketing and leasing the suites. Once stabilization of these properties is achieved, a significant increase in revenues is expected in 2009. The Corporation also expects increased revenues from its B.C. properties after they have been stabilized, which is expected within the next 6-24 months. Because it is a fixed-cost business, all additional income resulting from each percentage point drop in vacancy rate is expected to flow through to the bottom line.
Cash. With a current debt to market value ratio of only 54% in B.C. (as determined by Colliers International Realty Advisors Inc.), Mainstreet believes it has the ability to raise more cash in 2009 by refinancing its B.C. portfolio, which is believed to be currently under-leveraged. Refinancing of these properties in 2009 under long-term, fixed mortgages at reduced interest rates is expected to reduce financing costs and generate more capital to expand. As well, Mainstreet's overall portfolio includes ten clear-title assets, which can be leveraged to raise cash for continued expansion. The Corporation will also continue working to mitigate risk and reduce the cost of debt through refinancing. Management's goal is to convert all floating rate debt in the existing portfolio to fixed rate, long-term CMHC debt. At year-end, Mainstreet's floating rate debt stood at $53 million. Subsequent to year-end, $11.3 million or 21% of that has been refinanced at an average interest rate of 3.9% under long-term, CMHC-insured debt. As of the publication date of this report, our remaining floating rate debt was $41.7 million.
Fundamentals. Mainstreet will continue to pursue accretive acquisitions in this opportunistic environment, focusing on distressed, mid-market, multi-family buildings that the Corporation believes it can add value to through its Value Chain process. The Corporation believes the fundamentals of the business remain strong, with apartment rentals, historically, in the greatest demand during tough economic times. As well, 88% of Mainstreet's portfolio is situated in Western Canada, which is expected to weather the recession better than other provinces (International Monetary Fund). As well, strong immigration to Canada continues, with Alberta reporting the highest provincial growth rate so far in 2008 (Statistics Canada). Saskatchewan - where Mainstreet has an established market position - is expected to lead the country in economic growth in 2009 (International Monetary Fund).
Opportunity. Mainstreet's primary competitors for property acquisition over the past three years - condo converters and speculative investors - seem to be disappearing in some markets due to the tight debt market and economic downturn. As well, CMHC forecasts a decline in new construction of affordable housing. In these turbulent times, Management expects Mainstreet will have opportunities to acquire real estate at reduced prices. At the same time, Management believes the Corporation's stock is extremely undervalued, and has bought back 700,000 shares during August and November, 2008 through a normal course issuer bid at an average price of $7.18 per share. Mainstreet has also made a substantial issuer bid to purchase four million Mainstreet shares at $6.25 per share by a closing date of January 20, 2009.
In addition to the Corporation's solid cash position and strong market fundamentals, Mainstreet has a successful 10-year record of acquiring distressed properties and adding value. The Corporation also has the systems and people in place to operate its business efficiently and keep costs down. 2009 will be a turbulent year for the global economy, and yet Management believes it will be a year of opportunity for Mainstreet.
About Mainstreet
Established in 1997, Mainstreet is a Calgary-based, growth-oriented real estate corporation focused on the acquisition, redevelopment, repositioning, and asset and property management of mid-market apartment buildings. The Corporation currently owns and operates residential rental units, including apartments and townhouses, in Vancouver/Lower Mainland (Abbotsford and Surrey), Calgary, Edmonton, Saskatoon and the Greater Toronto Area. Mainstreet's common shares are listed on the Toronto Stock Exchange under the symbol "MEQ". As of December 12, 2008, there were 13,873,473 common shares outstanding.
Forward-Looking Information
Certain statements contained in this news release constitute "forward-looking statements" as such term is used in applicable Canadian securities laws. These statements relate to analysis and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. In particular, statements concerning plans to add senior management, increasing marketing efforts and estimates related to future revenues and profitability, timing of re-financing of debt, the Corporation's funding sources to meet various 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 or future events or performance (often, but not always, using words or phrases such 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 involve known and unknown risks, uncertainties and other factors which 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 marketing and stabilization programs, other issues associated with the real estate industry including, but without limitation, fluctuations in vacancy rates, unoccupation of units during renovations, fluctuations in utility and energy costs, credit risks of tenants, fluctuations in interest rates, availability of capital, the effects of a recessionary economy and such other business risks as discussed herein and other publicly filed disclosure documents. 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 there may be other factors that cause actions events or results not to be 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 in this news release.
Forward-looking statements are made 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 and if these beliefs, estimates and opinions or other circumstances should change, except as required by applicable law.
This news release contains forward-looking statements based on assumptions, uncertainties and management's best estimates of future events. When used herein, words such as "intended" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on assumptions by and information available to the Corporation. Investors are cautioned that such forward-looking statements involve risks and uncertainties. Actual results may differ materially from those currently anticipated. The forward-looking statements contained herein are expressed qualified by this cautionary statement.
The Toronto Stock Exchange does not accept responsibility for the adequacy or accuracy of this release.
Members of Mainstreet's Board of Directors have reviewed this news release prior to distribution.