We attribute these positive results in large part to the success of our long-term, value-add growth strategy, which we executed by accelerating acquisitions and improving stabilization cycle times during the COVID-19 pandemic. We also view these results as a result of improving market fundamentals, including the return of immigrants and foreign students to
Meanwhile, we believe that ongoing inflationary pressures will make it increasingly difficult for many low and middle-income Canadians to own a home. In that context, Mainstreet will continue to fulfill our role as a crucial provider of quality affordable housing, offering inner-city living at modest prices. To maximize our position in the market, Mainstreet intends to aggressively reposition units during the second half of fiscal 2022 to reduce our sizable NOI gap, continuing our 22-year legacy of driving shareholder value.
Despite a promising operating environment for Mainstreet, inflation and subsequent
At the same time, global supply-chain constraints have also significantly increased the cost of goods and services. Costs for materials are rising, which increases Mainstreet's costs in completing renovations and maintenance.
Major fixed expenses, such as property taxes, insurance, and utilities have increased in line with government policy. Carbon taxes, which place the financial burden on property owners, are scheduled to increase on an annual basis.
Even as the current economic climate creates some operational uncertainties, Mainstreet sees substantial opportunity in fiscal 2022 and 2023 to further diversify and expand its portfolio and acquire assets at competitive prices. In 2021, Mainstreet diversified into the
In upcoming quarters, we anticipate that interest rates are likely to rise quickly as the
Management believes that sharp interest rate increases may further cause market price corrections, which would provide unique opportunities for Mainstreet to purchase more apartment buildings at adjusted risk. Furthermore, management believes that inflationary periods tend to be transitory in nature. Should interest rates once again fall sometime in the coming years, Mainstreet will benefit not only from more competitive acquisition costs, but also lower interest expenses (resulting in higher FFO) on refinancing after stabilization.
Current market conditions also create opportunities to extract additional value out of its existing assets. Mainstreet's vacancy rates were 8.3% in Q2 2022 and are currently 7.4%, largely due to our large volume of unstabilized acquisitions in the last 18 months. Looking ahead, we see major opportunity to reposition units in order to lower that vacancy rate and reduce our NOI gap. In Q2 2022, 2,086 units out of a total 15,609 (13% of our portfolio) remain unstabilized, creating favourable conditions to boost operating income after stabilization.
Meanwhile, Mainstreet's strong Western Canadian asset base, reaching from
We expect our
As border restrictions are eventually fully lifted, we believe that immigration levels will increase and more foreign students will enter
Lastly, a chronic housing shortage will continue to make owning a home unaffordable for average Canadians. This reinforces Mainstreet's belief that inner-city, workforce affordable rental housing will remain an essential and safe asset class in
Inflation, as with all aspects of the economy, will drive up the cost of building new rental properties. We believe this only deepens Mainstreet's leading position in the rental market, given that we have built our portfolio through the acquisition of existing properties at prices that are well below the replacement cost of such properties (or, the cost of developing new rental properties). That market dynamic is central to the value-added proposition Mainstreet offers, supported by strong market fundamentals like rising levels of immigration and our ongoing stabilization process. Further, higher costs to build rental properties is supportive of broader rental market dynamics, as it restricts new supply.
Our management team has worked hard to safeguard Mainstreet from rising interest rates by locking in the majority of our debt at low fixed rate long term mortgages (see Challenges section). While we anticipate that interest rate hikes will plateau in the medium term, we also believe that we will benefit even if inflationary trends persist, given that we have taken full advantage of the last few years of low interest rates, allowing us to expand our portfolio at highly competitive costs.
Mainstreet, as a provider of affordable housing for middle-income Canadians, is deeply committed to maintaining the highest standards of social responsibility. Amid the ongoing
Ever since Mainstreet listed on the TSX in 2000, diversity has been a key pillar in who we are. Our belief in the positive benefits of minority inclusion has persisted for decades, providing Mainstreet with a highly dynamic and unified workforce.
- Pursuing our 100% organic, non-dilutive growth model: Using our strong potential liquidity position, estimated at
$240 million for fiscal 2022 (including$25 million cash-on-hand, a$130-million line of credit and potential financing of clear title assets), we believe there is significant opportunity to continue acquiring underperforming assets at attractive valuations. - Boosting NOI: As of Q2 2022, 13% 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
$16 million , which mainly represents leveraging our mark-to-market gaps. - 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. We will therefore continue to buy back our own common shares on an opportunistic basis under our normal course issuer bid.
TSX: MEQ
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