CALGARY, May 10, 2016 /CNW/ - Mainstreet Equity Corp. (TMX: MEQ, "Mainstreet" or the "Corporation), an add-value, mid-market consolidator of apartments in Western Canada, is reporting its Q2 results amid a challenging economic environment. In the face of the current market uncertainty, we are rapidly transitioning toward a business model that will take full advantage of slower economic conditions. While prolonged low oil prices have negatively impacted some of our core markets, Saskatoon is showing early signs of recovery. In Alberta, meanwhile, we expect that the upcoming high rental season in Q3 and Q4 will provide a more clear indication of market direction.
Bob Dhillon, Founder and Chief Executive Officer of Mainstreet, said, "We recognize that current economic conditions have created uncertainty for Mainstreet in the near term. However, we are implementing a two-year outlook that will allow us to rapidly adapt to these ongoing economic challenges." Dhillon adds, "We see plenty of potential in the current environment to cut expenses while growing our portfolio, and we enjoy a substantial liquidity position to take advantage of any opportunities that emerge."
Although Alberta's economic health remains uncertain, we see encouraging market indicators beginning to emerge. Commodity prices have begun to gradually rise and, according to Statistics Canada, total in-migration to the province is forecasted to remain positive at 37,200 in 2016 and 38,200 in 2017. In Vancouver/Lower Mainland we enjoyed record-low vacancy rates below 2% due to the robust economic activity in the region, which should continue to place upward pressure on rental rates.
SUCCESSFUL SUBSTANTIAL ISSUER BID
We are also pleased to announce the results of a successful substantial issuer bid ("SIB") that led to a 13% increase in both funds from operations ("FFO") and net asset value ("NAV") per share to our existing shareholders. Mainstreet leveraged its strong liquidity position to reduce the total number of issued and outstanding common shares by 1.2 million, translating into significantly increased shareholder value on a per share basis. Under the fully subscribed SIB, which closed April 22, shares were bought back at a price of $36 per share for an aggregate amount of $43.2 million. Following the closure of the SIB, the number of issued and outstanding common shares was reduced by 11.8% to 8,932,915.
In Q2 2016, FFO increased 10% to $6.7 million, compared to Q2 2015. FFO per basic share increased 14% to $0.67 from $0.59 in Q2 2015. Mainstreet's rental revenue rose 1% to $25.3 million, up from $25 million in Q2 2015; this came alongside a 3% fall in same asset rental revenues to $23.8 million, from $24.5 million in Q2 2015. NOI decreased 2% to $16 million, while falling 5% to $15.1 million on a same asset basis. Operating margins dropped to 63% compared to 65% in Q2 2015.
The same asset vacancy rate increased year-over-year to 8.6% from 7.3% in Q2 2015. The overall Q2 2016 vacancy rate, which includes vacant units as apartments undergo stabilization, increased year-over-year to 8.3% from 7.5% in Q2 2015. In the second quarter, 1,011 units, or 11% of the portfolio, remained in the stabilization process.
During Q2 2016 Mainstreet refinanced $15.9 million of pre-maturity mortgages for $42.5 million at an average interest rate of 2.43%. We also financed three clear title assets for $20 million at an average rate of 2.7% (10-year CMHC-insured fixed-rate mortgages). On average, refinancing was completed at 253 basis points below that of existing mortgages, translating into $408,000 in annual interest expense savings. We also extracted $46 million in additional equity, while at the same time extending our debt maturities and mitigating interest rate risk.
Also in Q2 2016, Mainstreet held its normal-course issuer bid and did not buy back any shares in anticipation of the Substantial Issuer Bid. For the six months ended March 31, 2016, Mainstreet repurchased and cancelled 138,336 shares at a weighted average price of $31.72 per share for an aggregate amount of $4.4 million.
Ongoing volatility in commodity prices continues to create economic uncertainty in the Prairies, particularly Alberta, where the slowdown has been further compounded by the overbuilding of condominiums during recent years of higher economic growth. As a result, a large number of investor-owned condominiums are now entering the rental pool. This has also resulted in the re-negotiation of rental rates, increased vacancies, and the need for landlords to offer more attractive concessions. However, volatility in energy prices also creates a series of opportunities that are discussed at greater length in the Outlook section below. Current challenges are in addition to hurdles inherent to the Mainstreet add-value business model.
Mainstreet is not immune from broader economic forces. The extent to which we will be impacted by slower GDP growth in the Prairie Provinces and volatility in capital markets is unclear. However, amid market uncertainty, Mainstreet has developed a two-year outlook to take advantage of low costs and grow our portfolio.
As part of our outlook, we see costs remaining low for several reasons. The easing of labour market pressure provides us with an opportunity to bulk up on senior and middle management personnel at a cost that would have been impossible when economic activity was at its peak. We also expect to see substantial reductions in heating costs due to natural gas prices that remain among their lowest in recent years. In addition to cost cutting, we believe our position in the middle rental market (our price point average rental rate is $1,000) will allow us to take advantage of ongoing economic uncertainty, which tends to be supportive of the rental market as consumers delay major purchases like new homes.
Mainstreet also sees opportunities to grow our portfolio through our organic, non-dilutive business model. We remain conservative in our underwriting criteria in Alberta and Saskatchewan, but we nonetheless see significant potential to make opportunistic acquisitions in the future. We view these opportunities in Alberta and Saskatchewan as having the added benefit of being in our own backyard, where we already enjoy a substantial foothold in the market.
Finally, stock market volatility will continue to create a buying opportunity in Mainstreet's own shares. Management intends to continue to purchase and cancel shares on an opportunistic basis under our normal course issuer bid. These buy back opportunities have emerged in part because of our current share price, which we view as substantially undervalued. Additionally, this undervaluation fails to take into account our numerous intangible assets, which we believe amounts to an even deeper discount to our total NAV. These assets include our residual land base, condominium titled assets, the consolidation of Edmonton's downtown Ice District, and our 30% market share of the Surrey and Abbotsford markets, where economic activity remains among the highest in the country.
Runway on existing portfolio
Closing the NOI gap: At the end of Q2 2016, 11% of the Mainstreet portfolio remained unstabilized, which contributed to higher vacancy rates. While this is a normal part of the Mainstreet business model, our continual work in renovating and improving properties before releasing them back to the market provides, in our opinion, additional avenues to improve NOI performance. Mainstreet's unstabilized portfolio is one of our greatest levers for future growth in NOI and FFO.
Renegotiating long-term debt: Interest rates are among the lowest Mainstreet has ever experienced (they account for our largest expense). We expect to cut these expenses by refinancing our remaining $87 million in mortgage loans at a lower interest rate, currently at 2.5% for 10-year mortgages, as compared to the average interest rate of 4.93% on our existing mortgage loans maturing in 2016 and 2017.
Leveraging our ample liquidity: Finally, we enjoy a position of strength to capitalize on opportunities for acquisitions and share buy backs while avoiding dilution. After accounting for the cost of the SIB, we anticipate the availability of approximately $144 million in liquidity by the end of fiscal year 2016. This includes $80 million on our line of credit secured by clear title assets, in addition to an estimated $64 million that can be extracted by refinancing mortgages maturing in the remainder of fiscal 2016 and 2017.
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 future acquisitions, dispositions and capital expenditures, increase or reduction of vacancy rates, increase or decrease of rental rates and rental revenue, future income and profitability, timing of refinancing of debt and completion, timing and costs of renovations, increased or decreased funds from operations and cash flow, the Corporation's liquidity and financial capacity, improved rental conditions, future environmental impact the Corporation's goals and the steps it will take to achieve them the Corporation's anticipated funding sources to meet various operating and capital obligations 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