In Q1 2024, Mainstreet posted its ninth consecutive quarter of double-digit, year-over-year growth across all key operating metrics. Funds from operations (“FFO”) before current income tax grew near the fastest rates in Mainstreet history at 32%, FFO increased 23%, net operating income (“NOI”) increased 23%, same-asset NOI rose 16% and rental revenues grew 19%.
Bob Dhillon, Founder, President & CEO of Mainstreet, said, “These results underscore Mainstreet’s track record of operational success, as we continue to leverage our trusted countercyclical growth strategy to drive shareholder value.” He added, “In this time of structural housing undersupply, Mainstreet continues to pride ourselves as a vital supplier of affordable, quality, renovated living for middle-class Canadians.”
What’s new in 2024
- Mainstreet has announced that it will pay a nominal quarterly dividend (starting at $0.0275 per share for Q1 2024) for the first time. Its introduction was part of Mainstreet’s strategic decision to continue widening our shareholder base and increasing our trading volumes.
- Mainstreet vacancy rates decreased to 3.3% (despite 13% of Mainstreet’s portfolio currently being in the stabilization process) down from 4.4% in Q1 2023. Same asset vacancy dropped to 3.2% from 4.4% a year earlier.
- Margins on a same-asset basis improved to 64.2% in Q1, up from 61.5% in Q1 2023. These are some of Mainstreet’s best operating margins on record for the winter season, which we attribute to multiple factors including our relentless dedication to efficient operations (see Challenges below).
- Year-to-date (“YTD”) acquisitions totalled $62.3 million (508 units). Acquisitions in Q1 were $45.3 million, up from $33.6 million a year earlier.
- Liquidity remained strong at $418 million, despite high levels of acquisitions in Q1, providing Mainstreet with a strong cash balance to fund future organic growth.
We believe these highly positive results are consistent with the demonstrated success of Mainstreet’s value-add business model. Since Mainstreet began trading on the TSX in 2000, we have expanded our portfolio from a handful of rental units to more than 17,600 units YTD, and built up a $3-billion asset base while avoiding significant equity dilution. By adhering to our trusted countercyclical growth strategy, Mainstreet has for years leveraged low cost of capital and our sizable liquidity position to acquire underperforming rental properties at attractive prices, which properties are then renovated to bring them up to a consistent standard.
In Q1, the Canadian rental market continued to be dominated by structural imbalances that are likely to persist in the long term as soaring demand greatly outstrips new supply. In the last three years alone, Canada’s population has grown by 2.49 million people—more than Canada’s entire rental universe of 2.3 million apartments, according to CMHC data. Over that same period, the rental market added just 133,204 new purpose-built units, according to CMHC data. Given that supply shortages are the result of historical trends compounded over many years, we believe this imbalance will remain a fixture in the market for a prolonged time.
These market forces have pushed national vacancy rates to their lowest levels on record of 1.5%. Based on CMHC data, Rental vacancy in Edmonton and Calgary, two of Mainstreet’s biggest operating hubs, fell at the fastest rate in the country in 2023 (down to 2.3% and 1.4%, respectively). Historically low vacancies can also be seen across all other Mainstreet centres including Vancouver (0.9%), Regina (1.4%), Saskatoon (2%) and Winnipeg (1.8%). We believe these current trends are just the beginning of a multi-year cycle that will provide ample opportunity for Mainstreet to pursue our 100% organic, non-dilutive growth strategy.
CHALLENGES
Inflation and cost pressures
Despite promising macroeconomic tailwinds, rising costs continue to pose a challenge to Mainstreet. Primarily, higher interest rates increase the cost of Mainstreet debt, our single-largest expense. Mainstreet has locked 99% of our debt into CMHC-insured mortgages at an average interest rate of 2.89%, maturing in 5.4 years, to proactively protect us against any eventual rate increase(see Outlook below). Smaller line items including everything from labour to materials are also impacted by inflation, elevating operating costs.
Additionally, due to strong growth and consecutive operating profits over the past 24 years, we are now liable for corporate income taxes for one of the first times in Mainstreet’s history. We view our performance as an unmitigated success, and do not expect a material impact on Mainstreet’s overall performance going forward.
Combatting higher expenses
Mainstreet works tirelessly on multiple fronts to counteract rising expenses. By securing longer-term natural gas contracts, we substantially reduced energy costs across a large portion of Mainstreet buildings. We also managed to reduce our insurance costs—a sizable Mainstreet expense—by more than 13% for fiscal 2024 by obtaining improved premium rates and coverage. Still, major fixed expenses like maintenance and utilities, property taxes and apartment repairs remain high. Carbon taxes, which place the financial burden on property owners, are scheduled to rise annually, from $65 per tonne today to $170 by 2030. Despite our best efforts to control costs where possible, inflationary pressures nonetheless introduce added financial burdens that will, in some cases, be passed onto tenants through soft rent increases.
Ottawa’s international student cap
The federal government recently placed a two-year limit on the number of new student visas Canada awards, reducing intake 35% from 2023 levels. According to the immigration ministry’s official estimates, Canada will still approve 360,000 new studies in 2024 this year under the cap.
OUTLOOK
Turning intangibles to tangibles
Heading into 2024, we see multiple opportunities to expand our portfolio. To combat the ongoing housing shortage, Canadian municipalities are increasingly increasing density through rezoning efforts. Mainstreet, with an extensive portfolio of more than 800 low density buildings, is well placed to similarly extract more value out of existing assets and land titles at no cost. To that end, Management is in the early stages of developing a three-point plan to 1) turn unused or residual space within existing buildings into new units 2) explore zoning and density relaxations to potentially build new capacity within existing land footprints and 3) subdivide residual lands for future developments. While the plan is currently conceptual in nature, we view this as a major driver of future growth in the longer-term, and further evidence of Mainstreet’s inherent intangible value.
A long-term view on short-term debt
As debt markets shift due to rising interest rates, Mainstreet continues to take an adaptive approach to our mortgage positions. In the past, when interest rates were lower, Mainstreet locked in its mortgages at longer-term, 10-year maturities to maximize savings. Now that rates are higher, we have shifted toward shorter-term debt obligations, which will yield more cost reduction should interest rates eventually fall.
BC continues to perform
We expect Vancouver/Lower Mainland will continue to provide exceptional growth in 2024. British Columbia is a vital aspect of Mainstreet’s portfolio, accounting for approximately 46% of our estimated net asset value (“NAV”) based on IFRS value. With an average monthly mark-to-market gap of $702 per suite per month, 98% of our customers in the region are below the average market rent. According to our estimates, that translates into approximately $29 million in same-store NOI growth potential after accounting for tenancy turnover and mark-to-market gaps.
Alberta’s population swells
Alberta, which comprises the largest portion of Mainstreet’s portfolio, continues to see explosive population growth that has far surpassed the Canadian average. Despite expectations that economic growth will decline in Alberta the next two years, Alberta is still expected to lead the national average of economic growth in 2024 (Deloitte). In the year ended October 2023, Alberta’s population grew 4.3%, to 4.75 million. This represents the highest annual growth rate since the early 1980s and is also significantly higher than the national rate of 3.2%. In Q3 alone, Alberta added 61,000 people, and marked the fifth consecutive quarter of in-migration gains higher than 10,000.
RUNWAY ON EXISTING PORTFOLIO
- Pursuing our 100% organic, non-dilutive growth model: Using our strong potential liquidity position, estimated at $418 million, we believe there is significant opportunity to continue acquiring underperforming assets at attractive valuations. As such, Mainstreet will continue to solidify its position as a leader in the add-value, mid-market rental space in Western Canada.
- Closing the NOI gap: As of Q1 2024, 13% of Mainstreet’s portfolio was going through the stabilization process as a result of recent acquisitions. Once stabilized, we remain confident same-asset revenue, vacancy rates, NOI and FFO will be meaningfully improved. We are cautiously optimistic that we can increase cash flow in coming quarters. In the BC market alone, we estimate that the potential upside based on mark-to-market gaps for NOI growth is approximately $29 million. The Alberta market in particular also has substantial room for mark-to-market catch up.
- Buying back shares at a discount: We believe MEQ shares continue to trade below their true NAV, and that ongoing macroeconomic volatility could intensify that trend.
Forward-Looking Information
Certain statements contained herein constitute “forward-looking statements” as such term is used in applicable Canadian securities laws. These statements relate to analysis and other information based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. In particular, statements concerning: estimates related to the effect of rising interest rates on the Corporation, the effect that inflation will have on: (i) the Corporation’s tenants and the effect on credit risk; and (ii) the cost of renovations and other expenses, disruptions effecting the global supply chain and energy and agricultural markets (including as a result of geopolitical turmoil including Russia’s invasion of Ukraine and other geopolitical conflicts), future acquisitions, dispositions and capital expenditures, future vacancy rates, increase of rental rates and rental revenue, future income and profitability, timing of refinancing of debt, access to low-cost long-term Canada Mortgage and Housing Corporation (“CMHC”) insured mortgage loans, the potential changes in interest and mortgage rates, the potential changes in inflation rates, completion timing and costs of renovations, benefits of renovations, funds to be expended on renovations in fiscal year 2024 and the sources thereof, increased funds from operations and cash flow, access to capital, minimization of operating costs, the Corporation’s liquidity and financial capacity, the Corporation’s intention and ability to make distributions to shareholders in fiscal 2024, improved rental conditions and decreased vacancy rates, the period of time required to stabilize a property, future climate change impact, the Corporation’s strategy and goals and the steps it will take to achieve them, the Corporation’s anticipated funding sources to meet various operating and capital obligations, key accounting estimates and assumptions used by the Corporation, the attraction and hiring of additional personnel, the effect of changes in legislation on the rental market, expected cyclical changes in cash flow, net operating income and operating margins, the effect of environmental regulations on financial results, the handling of any future conflicts of interests of directors or officers, the effects of cyber incidents on the Corporation 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 of future events or performance (often, but not always, using such words or phrases 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 are not guarantees of future events or performance and by their nature involve known and unknown risks, uncertainties and other factors, including those risks described in this Annual Information Form under the heading "Risk Factors", that 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 stabilization programs, other issues associated with the real estate industry including availability but without limitation of labour and costs of renovations, fluctuations in vacancy rates, unoccupied units during renovations, rent control, fluctuations in utility and energy costs, credit risks of tenants, fluctuations in interest rates and availability of capital, and other such business risks as discussed herein. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking statements include, among others, the rental environment compared to several years ago, relatively stable interest costs, access to equity and debt capital markets to fund (at acceptable costs) and the availability of purchase opportunities for growth in Canada. 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, other factors may cause actions, events or results to be different than 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 forward-looking statements. Accordingly, readers should not place undue reliance on forward-looking statements contained herein.
Forward-looking statements are 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 if these beliefs, estimates and opinions should change except as required by applicable securities laws or as otherwise described therein.
Certain information set out herein may be considered as "financial outlook" within the meaning of applicable securities laws. The purpose of this financial outlook is to provide readers with disclosure regarding the Corporations reasonable expectations as to the anticipated results of its proposed business activities for the periods indicated. Readers are cautioned that the financial outlook may not be appropriate for other purposes.
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