CALGARY, Aug. 3 /CNW/ - Mainstreet Equity Corp. ("Mainstreet" or "the Corporation") delivered continued financial and portfolio growth in Q3 2007(1). All key performance metrics increased compared to Q3 2006, including revenues, net operating income, and a significant increase in funds from operations. As well, the Corporation is effectively managing the substantial growth of its business, with a total of 264 units (eight buildings) acquired in Q3. It is significant to note that this growth has been achieved with very little equity dilution. Except for a $33 million convertible debenture issuance in October 2004, Mainstreet has financed acquisitions with its cash flow.
THIRD QUARTER HIGHLIGHTS
1. Funds from operations increased 585%
- Funds from operations (FFO) from continued operations in
Q3 2007 rose to $1.4 million ($0.12 per share), compared to
$202,000 ($0.02 per share) in Q3 of 2006.
- FFO for stabilized properties in Q3 2007 was $2 million ($0.18
per share).
- This improvement is due mainly to added value achieved through
Mainstreet's ongoing stabilization efforts, which increased
rental rates for renovated units, and to an overall increase in
rental rates, especially in Alberta.
2. Total revenues up 27% in Q3
- Total revenues from continuing operations were $10.4 million in
Q3 2007 compared to $8.2 million in Q3 2006.
3. "Same assets" rental revenues increased 16%
- "Same assets" rental revenues increased by 16% to $8.3 million
in Q3 2007 from $7.2 million in Q3 2006.
4. Net operating income rose 26%
- Net operating income (NOI) in Q3 2007 reached $6.2 million,
compared to $4.9 million in Q3 2006.
5. "Same assets" NOI up 18%
- "Same assets" NOI increased to $5.3 million in Q3 2007, compared
to $4.5 million in the same period of 2006.
6. Lowered mortgage costs and generated capital through refinancing
- In Q3 2007, $2.7 million of mortgage loans matured and were
refinanced, and additional funds of $3.8 million were raised.
The average interest rate on these mortgages dropped to 4.82%
from 5.5%.
- Mainstreet obtained approval from Canada Mortgage and Housing
Corporation (CMHC) to refinance about $12.2 million of short-term
mortgages. Additional funds of approximately $9 million, to be
raised from the refinancing, will be used to fund the
Corporation's future expansion. The average interest rate on
these mortgages decreased to 4.97% from 7.79%.
7. Portfolio grew by 21%
- As of June 30, 2007, Mainstreet's portfolio of properties had
grown to 5,065 rental units - an increase of 21% compared to
June 30, 2006.
8. Q3 acquisitions - Calgary, Edmonton, Saskatoon and Mississauga
- Calgary, Alberta: Mainstreet acquired 22 units at an average
cost per door of $89,000, increasing the Calgary portfolio to a
total of 1,256 rental units at the end of Q3.
- Edmonton, Alberta: The Corporation purchased 71 units at an
average cost per door of $55,000, bringing the total Edmonton
portfolio to 1,789 units at the end of the quarter.
- Saskatoon, Saskatchewan: Mainstreet acquired an additional 89
units in Saskatoon at an average cost per door of $39,000. With
this acquisition, the Saskatoon portfolio had grown to 308
rental units at the end of Q3 2007.
- Mississauga, Ontario: The Corporation acquired an additional 82
units in Mississauga at an average cost per door of $71,000.
With this acquisition, the Ontario portfolio had grown to 664
rental units at the end of Q3 2007.
9. Subsequent acquisitions
- Subsequent to Q3, Mainstreet acquired 84 units in Saskatoon,
Saskatchewan and 86 units in Brooks, Alberta, which increased
the Company's portfolio to 5,235 units. This is noteworthy
because it demonstrates the Corporation's continued ability to
make accretive deals in high-valued markets.
CHALLENGES
Mainstreet was able to produce strong financial results and continued growth in assets despite an adverse operating environment. Challenges faced in Q3 2007, and expected to continue for the foreseeable future, include:
1. Increasing costs and cycle time for renovations
The severe labour shortage in western Canada is worsening - especially in Edmonton. This is having an impact on the speed of Mainstreet's stabilization process as well as operations. Because the stabilization process is not moving as quickly as desired, the Corporation is experiencing slow turnover of existing suites to new tenants and operational inefficiency. In turn, this causes a high vacancy rate, higher level of bad debts, poor customer service and increased operating costs.
To help address the labour shortage, the Corporation is in the process of applying to the federal government to recruit more than 100 foreign workers. The application process is expected to take approximately three to six months.
2. Temporary higher vacancy rates and operating costs
Mainstreet's substantial and rapid growth in 2007 has resulted in a high proportion of properties undergoing stabilization. This necessitates temporary high vacancy rates, an increase in operational costs and reduced rental revenues, particularly in Edmonton where 500 units are under renovation. This short-term condition lasts only as long as the stabilization process - typically 12 to 18 months per building. With help from foreign workers, it is expected the stabilization process will be back on track.
3. Increased short-term financing costs
Higher interest rates are incurred on short-term financing for properties undergoing stabilization. The longer it takes to stabilize a property, the longer Mainstreet pays higher interest rates for the interim financing. Once properties are stabilized, they are refinanced under long-term mortgages insured by CMHC at lower interest rates.
4. Higher G&A expense
Due to the expansion of Mainstreet's overall portfolio, general and administrative (G&A) expenses are high relative to the small size of the existing portfolio.
5. Weather-related damages
In Alberta, unusually cold weather in April and thunderstorms causing severe flooding and damages in early June, increased utility costs and repair and maintenance costs substantially in Q3 2007.
OUTLOOK
Mainstreet will continue to look for opportunities to expand in all of its core market areas - Alberta, British Columbia, Ontario, and especially in its newest market in Saskatoon, Saskatchewan. Management is optimistic that, over time, application of the Mainstreet Value Chain business model in Saskatoon will deliver successful results similar to what has achieved in Alberta. Saskatoon is a market with robust employment growth, strong in-migration, diminishing home affordability, and low vacancy rates. CMHC forecasts vacancy rates will decline further by 70 basis points to 2.5% in 2007, and the average two-bedroom rent is expected to increase by about 7% to $650 per month.
As interest rates edge upward, Mainstreet may be faced with higher interest risk exposure in the future. Approximately $82 million of mortgages are floating debts with an average interest rate of 7.2%. The Corporation will continuously monitor its mortgage portfolio closely and look for opportunities to lower interest rates by locking into long-term, CMHC-insured mortgages.
The Corporation has announced a normal course issuer bid, commencing July 3, 2007 and ending July 2, 2008. The maximum number of common shares of the Corporation that may be acquired by way of the bid is 500,000, representing approximately 6.5% of the outstanding common shares in the public float and 4.3% of the outstanding common shares. Mainstreet intends to acquire common shares periodically in amounts and prices it considers to be favourable.
To reduce its exposure to energy price risk, Mainstreet has entered into a contract to lock in its natural gas price in Alberta for the next five years. The Corporation also closely monitors the natural gas prices of other provinces and looks for opportunities to lock in long-term prices when they are favourable.
The Corporation's chief focus for fiscal years 2007 and 2008 is to ensure that the stabilization of its current portfolio comes to a successful conclusion. Management expects that 12 more properties (303 units) in Edmonton will be completely renovated and stabilized by the end of July 2007. Despite the short-term challenges of aggressive growth, Mainstreet has achieved measurable results. The Corporation is clearly moving forward in terms of stabilization activity and effectively managing the operation of its growing business.
About Mainstreet
Mainstreet is a Calgary-based, growth-oriented real estate corporation focused on the acquisition, redevelopment, repositioning, 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 (Surrey), Calgary, Edmonton, Saskatoon and Greater Toronto Area. Mainstreet's common shares are listed on the Toronto Stock Exchange under the symbol MEQ. There are currently 11,696,893 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.