CALGARY, Dec. 15 /CNW/ - Mainstreet Equity Corp. ("Mainstreet" or the "Corporation") (TSX:MEQ) today released its 2006 annual report to shareholders and financial results for its fiscal year ended September 30, 2006.
In the past eight years Mainstreet has grown its portfolio from 272 to 4,286 apartment units, raised the portfolio's gross book value from $11 million to $250 million, and increased the portfolio's appraised market value from $17 to $520 million(1). This represents an average compound annual growth in value of 53%.
Performance Highlights for 2006(2)
- Strong growth continues. Mainstreet's portfolio grew by 21% to 4,286
units at the end of fiscal 2006 from 3,550 units at fiscal year-end
2005. This represents 802 additional rental units acquired in
Edmonton, Alberta and Surrey, British Columbia, and a disposal of 66
non-strategic rental units in Red Deer, Alberta. The Edmonton
portfolio grew by 61% with 652 units acquired at an average price of
$46,000 per door.
- Rental revenues up. Total rental revenues were up 32% to $30.9
million in 2006 from $23.5 in 2005. The vibrant Alberta economy
contributed a 22% increase in Mainstreet's rental income from Alberta
properties - $19.7 million in 2006 compared to $16.1 million in 2005.
At the same time, the Alberta vacancy rate dropped to 6.3% in 2006
from 7.4% in 2005, while Calgary vacancies fell to an all-time low of
2% in 2006 compared to 6.4% in 2005.
- "Same assets" rental revenue increased by 9% to $22.2 million in 2006
from $20.4 million in 2005.
- Net operating income rises. Net operating income from continuing
operations jumped 32% to $18.3 million in 2006 from $13.8 million in
2005. Increases in NOI were reported across all operating regions.
- "Same assets" net operating income increased by 15% to $3.9 million
in 2006 from $12.1 million in 2005.
- Funds from operations improve. In 2006, FFO from continued operations
before gain on disposition was $1.3 million ($0.14 per share), an
increase of 32% compared to $1 million ($0.11 per basic share) in
2005. Total FFO was $1.8 million ($0.20 per basic share), an increase
of 75% compared to $1 million ($0.11 per basic share) in 2005. Funds
from operations generated from stabilized properties, excluding the
cost of refinancing, amounted to $4.9 million ($0.53 per basic
share).
- Refinancing benefits. In 2006, Mainstreet refinanced $30-million of
pre-matured CMHC-insured mortgage loans with an average interest rate
of 5.36% to 4.9%, which will result in annual savings of
approximately $200,000 over the next 10 years. This also generated
additional funds of $11 million, which will be used to fund future
growth. The refinancing also increased the average maturity term of
the Corporation's loan portfolio to 4.43 years from 3.11 years, which
may help reduce interest risk exposure over the next 10 years.
- Share price climbs. On the strength of past performance, valuation of
the business and optimism for continued growth, Mainstreet's share
price rose from $5.23 at the opening of the fiscal year to $9.91 at
fiscal year-end. Market capitalization rose from $48 million at the
opening of the fiscal year to $94 million at closing. In December,
one of the industry analysts following the Corporation published a
"Top Pick-Average Risk Rating" and forecasted a 12-month target
trading share price of $19.
Challenges
Mainstreet continued to face ongoing challenges in 2006, including:
- Increased human resource costs and cycle time of renovations,
especially in the severely tight labour market of Alberta. The
Corporation is addressing this problem by working to mobilize its
workers across the country.
- Increased cost of materials, which increases the cost of renovations.
- Difficulty expanding in Calgary due to dramatically escalating
property prices. On the bright side, existing Calgary-based
properties are expected to contribute significantly to the
Corporation's revenue stream for the foreseeable future.
Outlook
In 2007, Mainstreet will focus on these objectives:
- Continued growth. Using its cash surplus, Mainstreet will concentrate
on acquiring properties in Vancouver/Lower Mainland, Edmonton,
Greater Toronto Area and the Corporation's new core area in
Saskatoon, Saskatchewan, which was announced subsequent to fiscal
year-end 2006. Mainstreet will continue to stabilize its newly
acquired properties as quickly as possible to bring added rental
revenues on-stream.
- Attractive refinancing. Mainstreet has $73 million (34% of mortgage
loans) in floating loans at short-term interest rates, which are
approximately 2.8% higher than the long-term CMHC rate. The
Corporation also has approximately $49 million (23% of mortgage
loans) maturing over the next three to 24 months. Mainstreet plans to
refinance most of these mortgage loans with longer-term CMHC-insured
mortgages in 2007, at interest rates lower than the current
commitments on those loans. Mortgage rates peaked in September 2006,
but are expected to remain low, easing by up to 75 basis points over
the next two to three quarters.(3)
- Rental increases. As of October 1, 2006, the Company had already
increased the rental rate of its Calgary portfolio by about 39%
compared to 2005. Ninety-three per cent of the rent increase has been
implemented during the first two months of the fiscal year 2007.
Mainstreet is currently reviewing the rental rates of its Edmonton
portfolio and expects to have a substantial increase in those rental
rates as well. Implementation of the Edmonton rent increase is
expected in the second quarter of the fiscal year 2007. Rental income
in the British Columbia and Ontario portfolios is also expected to
grow when more suites are renovated and introduced to the market at
higher rental rates.
Management is confident the Corporation will achieve these objectives because it has proven ability to create value, and market fundamentals are stronger than ever. For example, Calgary's current vacancy rate was expected to drop to 0.6% by October 2006 (it averaged 1.6% in 2005). With only about 46,000 units of apartment rental inventory (as of October 2005), and an influx of close to 26,000 new people, Mainstreet believes the market fundamentals are getting even stronger for 2007.(4)
Similar conditions are expected for Edmonton, with increased demand and a forecast vacancy rate of 1.2% in 2007 compared to 4.5% in October 2005. Mainstreet believes the rental market in Vancouver also will remain tight, with the vacancy rate expected to drop slightly to 1.0% in 2007.(5)
In all kinds of market conditions, Mainstreet is confident it has the ability to buy underperforming assets below replacement costs, and add value by repositioning and branding properties using its Value Chain business model. That's how Mainstreet will continue to increase its asset value, and how the Corporation will achieve its goal of being the mid-market leader in its industry sector.
1. Market value of the properties held on September 30, 2006 was
determined by Wernick Omura Limited, an independent real estate appraisal
firm in Calgary, Alberta, established in 1998. The appraisal report was
completed on December 7, 2006 by Tony Omura, President, who is an
Accredited Appraiser Canadian Institute (AACI). Market value is
determined on an income approach basis, which is based on an estimated
market rental income, net operating income and market cap rate of
individual properties in each market as of September 30, 2006.
The actual selling value of these properties may be substantially
different and will depend on market conditions at the time of the sale.
2. The financial year end 2006 refers to the period from October 1,2005
to September 30, 2006
3, 4, 5. Data source: Canada Mortgage and Housing Market Outlook, Fall
2006.
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 (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 9,534,493 common shares outstanding.
Cautionary Statement Regarding Forward-Looking Statements
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.
Additional information is available at:
www.mainst.biz
www.sedar.com