While these results are indicative of Mainstreet's top-tier performance in their own right, they come ahead of what our management team anticipates will be a period of economic growth in our core markets, driven by a wave of newcomers to the province that we believe will further bolster NOI growth. Our positive results also come despite Q1 being a typically low-activity rental season.
We view our Q1 achievements as a direct result of Mainstreet's counter cyclical growth strategy, under which we have continued to take advantage of economic downturns by leveraging relatively low interest rates to acquire underperforming assets on an opportunistic basis. Since COVID, we have established our strategy and acquired
As we continue fiscal 2022, our management team sees substantial opportunities to continue pursuing our 100% organic, non-dilutive growth model to expand and diversify our portfolio. We believe that our strong liquidity position (estimated at approximately
Last year, we expanded beyond our core markets of
CHALLENGES
Rising operating costs continue to create headwinds for Mainstreet. In particular, inflationary pressures will raise our cost of capital and increase every line item of our operations. We believe that the
Meanwhile, pandemic restrictions continue to suppress Mainstreet's business velocity. While some international border restrictions have been eased, major impediments to international travel and immigration remain. In addition, classroom limits and online learning in colleges and universities have meaningfully reduced the number of domestic and foreign students, who make up a relevant portion of our customer base, especially in
In addition, rising operating costs pose challenges. Major fixed expenses have increased sharply, including property taxes, insurance, and utilities. Carbon taxes and increased labour costs, which effectively place the financial burden on property owners, have added to these cost increases. Global supply chain constraints have also put further upward pressure on costs for materials and renovations.
Meanwhile, the productivity of Mainstreet's workforce has been negatively impacted by pandemic protocols. That comes as costs for human resources have also climbed. Paid leave was extended to team members whose children were not able to attend school.
Costs for additional cleaning, sanitizing, human resources, and the purchase of personal protective equipment ("PPE") likewise increased expenses. Renovation costs have risen due to public emergency orders that restrict on-site work and substantially inflate costs for building materials. More broadly, a tightening labour market has raised costs and introduced new challenges in hiring staff.
OUTLOOK
Despite difficult operating conditions brought on by the pandemic, we expect to see an improved macroeconomic picture in some of our core markets, particularly in
We believe this will help propel an influx of migration to our
Both provinces saw those increases even as pandemic-era border controls remain in place. We expect that a gradual easing of those restrictions in 2022 could bring a further increase in immigrants to
We also remain optimistic that
Low cost capital continues to propel non-dilutive growth
Despite rising oil prices and inflation, our two biggest expenses (acquisition costs and interest) remain low. This provides our management team with significant opportunities to continue expanding our portfolio through opportunistic acquisitions funded by low cost capital. While the
Narrowing our NOI gap
As in-migration levels improve, Mainstreet is also presented with opportunities to boost operating income by taking advantage of our unusually high vacancy rates, which are largely a result of the acquisition of unstablilized properties. In Q1 2022, 1,849 units out of a total 15,344 (12% of our portfolio) remain unstabilized and are currently under repositioning process, creating favourable conditions to increase NOI. Moreover, we believe that our strong estimated liquidity reserves will assist Mainstreet in repositioning units and acquiring new assets.
Capturing the middle market
This reinforces Mainstreet's conviction that inner-city, workforce affordable rental housing will remain an essential and safe asset class in
Fortifying our commitment to social responsibility
In the face of the global pandemic, Mainstreet doubled down on its commitment to customer safety and corporate social responsibility. This has included waiving rental payments for struggling tenants; delaying rent increases; halting evictions; and allocating additional financial resources toward safety provisions, among other things. Although these measures sharply increased our operating costs and negatively affected our earnings on a same-asset basis, we strongly believe that the social benefits of our actions will far outweigh any short-term financial losses incurred by Mainstreet.
Growing our inclusive workforce
Ever since Mainstreet listed on the TSX in 2000, diversity has been a key pillar in who we are. We have continued to hold to that belief during the global pandemic, giving Mainstreet a more resilient, dynamic, and unified workforce.
An affordable option for the middle class
Beyond our core mandate of creating shareholder value, Mainstreet also provides affordable, inner-city housing to low and middle-income Canadians. This crucial service forms the bedrock of Mainstreet's business model, and helps create a stronger and more resilient middle class across Western Canada.
RUNWAY ON EXISTING PORTFOLIO
- Pursuing our 100% organic, non-dilutive growth model: Using our strong potential liquidity position, estimated at
$218 million for fiscal 2022 (including a$130-million line of credit), we believe there is significant opportunity to continue acquiring underperforming assets at attractive valuations. - Boosting NOI: As of Q1 2022, 12% of the Mainstreet portfolio was going through the stabilization process. Once stabilized, we remain confident same-asset revenue, vacancy rate, NOI and FFO will be meaningfully improved. We are cautiously optimistic that we can boost cash flow in coming quarters. In the B.C. market alone, we estimate that the potential upside for NOI growth is approximately
$13.5 million , which mainly represents leveraging our loss-to-lease gaps. - Lowering interest costs: The current 10-year,
CMHC -insured mortgage rate is currently around 2.7%. We expect interest rates to remain low in the near term, and we believe that our refinancing of$155 million in debts at an average interest rate of 3.18%, maturing in the next two financial years, will result in approximately$1.5 million in annual savings to Mainstreet. - Buying back shares at a discount: We believe MEQ shares continue to trade below their true NAV. We will therefore continue to buy back our own common shares on an opportunistic basis under our normal course issuer bid.
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 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
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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