CALGARY, July 29 /CNW/ - In the third quarter of 2009(1), Mainstreet Equity Corp. persisted in its efforts to maximize margins by minimizing variable costs such as G&A, maintenance and repair, and marketing expenses. Further, with nearly 80% of Mainstreet's existing properties (prior to Q3 2009 acquisitions) now stabilized, and with the Corporation's capital-intensive renovations largely complete, every incremental increase in revenue now flows to Mainstreet's bottom line. As a result, Mainstreet has posted a significant improvement in operating margins: 64% in Q3 2009 compared to 58% a year previous.
Additionally, notwithstanding the prevailing economic challenges, Mainstreet achieved positive results on all key metrics in Q3 2009:
Rental Revenue - Up 10% to $13.0 million (vs.
$11.8 million in Q3 2008)
Rental Revenue - Same Assets - Up 4% to $12.1 million (vs.
Properties $11.6 million in Q3 2008)
Net Operating Income (NOI) - Up 22% to $8.3 million (vs.
$6.8 million in Q3 2008)
NOI - Same Assets Properties - Up 16% to $7.8 million (vs.
$6.7 million in Q3 2008)
Funds from Operations (FFO) - Up 54% to $2.3 million (vs.
$1.5 million in Q3 2008)
Increase in Portfolio - 8.4% (to 5,838 units versus 5,389
units in Q3 2008) (including 22 units
hold for resale)
Acquisitions in Q3 2009 - 157 units (Saskatoon, SK & Surrey,
BC)(average unit cost: $76,000)
Acquisitions subsequent to - 159 units (Saskatoon, SK)(average
Q3 2009 unit cost: $63,000)
Total portfolio(x) - 5,997 units including 22 units held
for resale
Stabilized Units - 93 properties (4,259 units) out of
122 properties (5,816 units)
Refinancing - $11 million refinanced to long-term
CMHC-insured mortgages (average
interest rate (equal sign) 3.38%)
Refinancing subsequent to Q3 - $10 million approved for refinancing
to long-term CMHC-insured mortgages
(expected average interest
rate (equal sign) 3.4%)
Floating Debt - $32 million (9% of Mainstreet's total
mortgage loans)
Normal and Substantial Course - 4.1 million shares at an average
Issuer Bid price of $6.35/share (year to date
2009)
Newly acquired line of credit - $22 million (for acquisitions and
operating line of credit)
(x) including acquisitions subsequent to Q3 2009
Q3 IN REVIEW - Continued Growth, even amid Economic Adversity
Across the board, Mainstreet's key metrics surged positively forward in Q3 2009. These positive results and Mainstreet's continued growth reflect, in large part, the Corporation's adherence to the four mantras it has adopted for 2009:
1. LOWER OPERATING COSTS Mainstreet persisted through Q3 in its efforts to manage and minimize variable operating costs and to leverage its strong financial position to renegotiate supplier contracts and restructure operations, all of which is showing a positive impact on the Corporation's operating margins. 2. REFINANCING TO LOWER FIXED INTEREST RATES A keystone of Mainstreet's proven business model is the continued refinancing of floating conventional debt (which bears significantly higher interest rates than CMHC-insured debt) into lower interest, long- term CMHC-insured debt. In addition to freeing up funds for growth, this refinancing strategy significantly reduces Mainstreet's cost of borrowing and mitigates its debt risk. During Q3 2009, Mainstreet refinanced $11 million to long-term CMHC- insured mortgages at an average interest rate of 3.38%, which added approximately $4.8 million to the Corporation's funds for growth. Subsequent to Q3 2009, Mainstreet obtained approval from CMHC to refinance approximately $10 million at an expected average interest rate of 3.4%. From this refinancing, Mainstreet expects to raise approximately $7 million. Through refinancing, the Corporation has reduced the balance of its floating debt as of June 30, 2009, to less than $32 million - just 9% of its total mortgage loans. 3. CASH FLOW Another keystone of Mainstreet's business model is property stabilization, which involves renovating and improving the operating efficiencies of acquired properties and repositioning them in the market for higher rents and improved asset value. In Q3 2009, Mainstreet spent $2.5 million on property improvements. As of June 30, 2009, only 20% of the Corporation's portfolio had not been renovated. With each renter that take possession of a stabilized Mainstreet unit, the Corporation's cash flow will improve; and with every percentage point decrease in the overall vacancy rate, it is anticipated that Mainstreet's bottom-line profits will grow by $650,000 per annum (based on current rental rates). As of June 30, 2009, Mainstreet had a cash balance of $14 million - a very positive indicator in an economy that has precipitated cash flow challenges for companies across the globe. 4. CASH TO GROW With $14 million cash in hand, Mainstreet is in a strong position to pursue opportunities that align with its strategy for growth and its emphasis on fiscal prudence. Mainstreet's financial strength is further reinforced by the Corporation's ability to borrow funds against 15 clear- title properties and by its overall debt-to-market value ratio of 57% (based on AACI appraisals). MAINSTREET'S STRATEGY FOR GROWTH - The Right Asset Class, the Right Locations
Mainstreet's vision is to consolidate and add value to mid-market multi-family rental properties. Within this asset class, the Corporation strategically zeroes in on geographic locations that combine exceptional value with promising growth dynamics. In Q3 2009, Mainstreet acquired 157 apartment units in Saskatoon and Surrey for $12 million. The average price per unit of $76,000 (not including the cost of significant capital improvements) was well below the estimated market value and replacement cost. Subsequent to Q3 2009, Mainstreet acquired another 159 units in Saskatoon at an average unit cost of $63,000.
Why Saskatoon? Beyond the relative affordability of real estate compared to other Western Canadian CMAs, Saskatoon shows strong growth dynamics that support Mainstreet's aim of consolidating and adding value to the city's mid-market apartment space. According to the Conference Board of Canada's Metropolitan Outlook (Spring 2009), Saskatoon - with real GDP growth of 1.7% - will lead the way in 2009 among the 13 Canadian CMAs covered in the study.
Why Vancouver's Lower Mainland? The future growth dynamics of the Lower Mainland of Vancouver dovetail perfectly with Mainstreet's 'consolidate and add value' strategy. Additionally, the current lack of supply in such centres as Surrey and Abbotsford is expected to have a significant positive impact for Mainstreet when the economy turns and demand for rental properties increases.
Moving forward, Mainstreet will continue to facilitate the consolidation of mid-market rental properties and enlarge its brand as the Western Canadian mid-market multifamily owner/operator.
CHALLENGES
No company is immune to the forces of an economic recession, Mainstreet included. The Corporation feels its impact on the mid-market apartment rental business and on the credit marketplace, where it has presented the following challenges:
1. A higher 'churn rate': Such recessionary forces as increased
unemployment create a more rapidly 'revolving door' in mid-market
apartment rentals; and in Q3 2009, Mainstreet experienced a
significantly higher tenant turnover rate than in the past.
2. More bad debts: Another direct repercussion of economic recession is
an increase in the number of tenants who default on rent payments - a
challenge that negatively impacted Mainstreet's rental revenue in Q3
2009.
3. Softening in the rental market: Negative GDP and higher unemployment
have been known to precipitate higher vacancy rates - a trend being
borne out during the present economic recession. As a result, while
Mainstreet has not lowered rental rents, the Corporation has been
impelled to install rental incentives in some key locations.
4. The ongoing credit crunch: While the Canadian debt market appears to
be easing, it presents an ongoing challenge for Mainstreet as the
increased difficulty in obtaining mortgages could adversely affect
the Corporation's vision for continued growth.
5. Uncertainty in the capital markets: Continued volatility in the
capital markets poses ongoing challenges for Mainstreet and its
shareholders.
OUTLOOK
Moving into the fourth quarter of 2009, Mainstreet is poised and well
positioned to take advantage of the many benefits the recession has brought to
the Corporation's business - most notably:
- lower costs for property acquisitions
- lower costs of borrowing (lower CMHC interest rates).
With its usual discipline, Mainstreet is closely monitoring market conditions and seeking opportunities for growth that align with the Corporation's Value Chain business model.
Mainstreet management remains steadfast in its belief that multi-family rental housing is among the safest investments in any economic condition and that Western Canada is the ideal geographical location for Mainstreet to operate. Through 2008, according to Statistics Canada, the western provinces all posted growth rates higher than the national average. And in the first three months of 2009 (the latest period for which projections are available), the four provinces in which Mainstreet operates surpassed all other provinces in anticipated in-migration. Management believes this ongoing trend bodes well for Mainstreet's future.
Through a continued focus on strategic growth and unwavering adherence to its mantras for 2009 - lower costs, refinancing to lower interest rates, cash flow and cash to grow - management remains confident in Mainstreet's ability to continue delivering value to shareholders.
(1) This third quarter report is for the three-month period ended June
30, 2009. Mainstreet's current fiscal year ends September 30, 2009.
About Mainstreet
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, Calgary, Edmonton, Saskatoon and Greater Toronto Area. Mainstreet's common shares are listed on the Toronto Stock Exchange under the symbol MEQ. As of June 20, 2009, there were 10,355,827 common shares outstanding.
The above disclosure may contain forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond the Corporation's control, including: the impact of general economic conditions in Canada, industry conditions, increased competition, the lack of available qualified personnel or management, equipment failures, stock market volatility, and fluctuations in rental prices, energy costs and foreign exchange or interest rates. The Corporation's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or, if any of them do so, what benefits the Corporation will derive from them.