CALGARY, July 30 /CNW/ - In the third quarter of 2008(1), Mainstreet Equity Corp. improved on all fronts including portfolio growth, increased rental revenues and stabilization progress. Even with an average vacancy rate of 20.8% and the high costs of stabilization, same assets revenues and net operating income went up. As well, through refinancing of matured mortgages and converting short term mortgages to long term CMHC insured mortgages, the Corporation was able to lower its cost of financing and raised additional funds to support acquisitions in this flat opportunistic environment.
Mainstreet's continued success in Saskatoon in Q3 is expected to have a positive impact on future results. In the quarter the Corporation initiated acquisition of another 45 units in Saskatoon, 26 of which have been closed as of July 22, 2008. This brings the total unit count in the Corporation's Saskatoon portfolio to 527 units at an average purchase price of $39,700 per unit which is substantially lower than the current market price and replacement cost in Saskatoon. Subsequent to the quarter end, the Corporation also completed the stabilization of a 165 unit property, representing 31% of the total portfolio in Saskatoon, and refinanced its existing mortgage loan. The average rent has increased by 90% since the property was acquired and additional funds of $8.6 million are expected to be raised from the refinancing. The Corporation's average rents for stabilized properties in Saskatoon are now the same as stabilized properties in Edmonton and about 90% of average Calgary rents. With a market environment of attractive purchase prices, a good supply of mid-market properties and comparatively high rents, Saskatoon continues to be a great market choice for Mainstreet.
OTHER THIRD QUARTER HIGHLIGHTS
1. Portfolio grew by 6%
As of June, 2008, Mainstreet's portfolio of properties had grown to
5,367 rental units compared to 5,065 units at the end of Q3 2007.
Other than acquisitions in Saskatoon, the Corporation also closed
acquisitions of 126 units in Calgary, Alberta and Abbotsford, British
Columbia subsequent to the Q3, which increased its overall portfolio
to 5,538 units. The details of these acquisitions are as follows:
Calgary
- An additional 42 units in the Calgary area (Cochrane) for an
average cost per door of $85,900 - below estimated market value
and replacement cost.
- This is a mid-market property, consistent with the Corporation's
Value Chain model, and offers a significant opportunity to
increase rents after it is renovated to Mainstreet's branded
standard and repositioned in the market.
- This acquisition will bring the sizable Calgary portfolio to a
total of 1,277 rental units.
B.C. Lower Mainland
- Mainstreet acquired an additional 84 units in Abbotsford for an
average cost per door of $98,800, below estimated market value and
replacement cost.
- This is a condo-quality building clustered adjacent to a building
already owned by Mainstreet; tenants are responsible for paying
all utilities, including heat, which reduces energy price risk for
Mainstreet.
- This acquisition brought the B.C. Lower Mainland portfolio to a
total of 1,281 rental units.
2. Mainstreet refinanced $31 million of debt
- In Q3 Mainstreet obtained approvals from CMHC to refinance
$31.4 million of matured mortgages for $81.9 million of which
$3.0 million was funded during the quarter. The Corporation
expects that the average interest rate on these mortgages will
reduce from 5.3% to 5.0% and the additional funds of approximately
$50.5 million will be raised to fund ongoing growth.
3. Stabilization moving ahead according to plan
Stabilization
- The process continued for completing renovations on Edmonton
properties that were acquired in the past 24 months and renovated
buildings are being actively marketed.
- The overall vacancy rate and rental revenues are improving in
Edmonton. Stabilization in Saskatoon is moving quickly, with 31%
of units expected to be stabilized in Q4 2008.
Vacancy rates
- The Corporation's overall average vacancy rate was 20.8% in Q3
2008 compared to 14.2% in Q3 2007, due mainly to the stabilization
process.
- In Q3 Mainstreet's average vacancy in Edmonton reduced by 5.2%
over Q2 2008 bringing the quarter's average vacancy down to 32.6%
as compared to 37.8% in Q2 2008. As well, the Calgary average
vacancy rate decreased to 9.1% as compared to 12.8% in Q2 2008
even with the Corporation's aggressive rent increases. The vacancy
rate excludes a 48 unit property which is currently under a
complete renovation that was previously leased to an institutional
tenant.
- Subsequent to the quarter-end, at July 28, 2008, Mainstreet's
vacancy improved to 27.4% in Edmonton; 25.4% in Saskatoon; and
4.4% in Calgary, excluding the property under complete renovation.
4. Rental revenues up 14% in Q3, despite high vacancy
- Even with 37% of properties undergoing stabilization, mainly in
Edmonton, total rental revenues from continuing operations were
approximately $11.8 million in Q3 2008 compared to $10.3 million
in Q3 2007.
- This increase is due mainly to portfolio growth, increased rents
and newly renovated properties beginning to generate revenues.
- After stabilized Edmonton properties are marketed and leased,
rental revenues are expected to increase significantly.
- Same assets rental revenues increased by 7% to $10.2 million from
$9.5 million in Q3 2007.
5. Net operating income up by 10%
- Net operating income (NOI) in Q3 2008 reached $6.8 million,
compared to $6.2 million in Q3 2007, resulting mainly from an
increased number of units in the portfolio and increased rents.
- Same assets NOI also increased by 5% to $6.2 million compared to
$5.9 million in Q3 2007.
6. Funds from operations improve
- Overall FFO from continuing operations increased by 10% to
$1.5 million compared to $1.4 million in Q3 2007, mainly the
result of growth in the size of the portfolio and higher rents per
unit.
- FFO for stabilized properties was $2.2 million compared with
$2.0 million in Q3 2007, as a result of the growth in the
stabilized portfolio and higher rents.
CHALLENGES
Mainstreet faced a few ongoing challenges in Q3, including:
1. Temporary high vacancy and costs in Edmonton
- At the same time as in-migration has slowed in Edmonton, an
estimated 8,000 new condos are under construction and Mainstreet's
management believes that a substantial number of them may be
offered to the rental market. Because this has the potential to
affect Mainstreet's Edmonton targets, for now the Corporation is
not pursuing acquisitions in Edmonton. But management is watching
this market closely because, as condo conversion activity slows
due to oversupply and prices flatten, good acquisition
opportunities may resurface for Mainstreet. In the meantime,
management will focus efforts on completing the stabilization
process in Edmonton by the end of December 2008, leasing up the
units and maximizing rental revenues.
2. U.S. credit crunch having an impact
- The U.S. led real estate recession is starting to have an effect
on the Canadian debt markets, resulting in fewer institutions
bidding for mortgage loans.
- Fortunately, Mainstreet is positioned well with an acquisition
line of credit in place, and CMHC insures the lenders, which
provides a competitive borrowing advantage for Mainstreet.
3. Labour shortage
- Even with the ongoing labour shortage, especially in Alberta,
Mainstreet has been able to stay on schedule with its growth plan.
- As announced earlier, Mainstreet is in the process of bringing in
foreign workers to help speed the pace of renovations; so far six
workers have completed training and more are expected.
4. Heating costs on the rise
- Significant increases in natural gas prices are likely to affect
future acquisitions, but existing properties are sheltered through
contracts that Mainstreet locked in at an average price of $8 per
gigajoule, significantly lower than the average rate for the
period.
OUTLOOK
In all of its markets Mainstreet will continue to pursue distressed mid-market properties that fit its Value Chain model. The exception will be Edmonton where the Corporation will take a watch-and-see position for now, until it can acquire properties with high potential to add value. Management believes there will be good opportunities in Edmonton when the market settles.
From the end of Q3 to calendar year-end Mainstreet expects to refinance $42 million of short-term and maturing mortgage loans to long-term CMHC financing. This process is expected to net approximately $71 million to support ongoing growth.
In Q3, the Corporation was on track with its plan and targeted performance. With 90% of its portfolio in major cities in Western Canada, stable rental markets, continued low interest rates, and markets flat in terms of purchase price, Mainstreet is positioned to take advantage of acquisition opportunities.
(1) This third quarter report is for the three-month period ended
June 30, 2008. Mainstreet's current fiscal year ends September 30,
2008.
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, 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 14,573,473 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.