The global pandemic has created “especially difficult” operating circumstances for Calgary-based Mainstreet Equity (MEQ-T), but the residential rental company sees “immense” opportunity for continued growth in its portfolio in the near future.
In releasing this week its Q3 2021 financial results, the company said it continued to see improvement across all key metrics. It was the second consecutive quarter of double-digit growth (10 per cent) in funds from operations; revenue growth was seven per cent; there were $122 million in acquisitions comprising 918 units ($176 million year-to-date to acquire 1,373 units); and Mainstreet’s fair market value for its portfolio is $2.53 billion.
Bob Dhillon, the founder, president and CEO of Mainstreet, said the company also continued to leverage low interest rates, raising $48 million through the refinancing of 10-year, CMHC-insured mortgages at 2.52 per cent to fund future growth.
He said Mainstreet’s counter-cyclical growth strategy has continually allowed the company to take advantage of market downturns while providing value for its shareholders.
15,000 residential rentals in portfolio
The company’s portfolio in Western Canada is just under 15,000 residential rental units. Of the $176 million Mainstreet has invested in its fiscal year for growth, $61 million has been in British Columbia with about 430 units acquired.
The overall portfolio consists of 22 per cent of its assets in B.C., 55 per cent in Alberta and 22 per cent in Saskatchewan. Mainstreet also owns one property in Winnipeg.
“Very few people took COVID as an opportunity to double down and take advantage of the situation. Very few people did that and we did that,” said Dhillon, who believes Mainstreet “hit it out of the park” with its strategy.
“I look at COVID as one period of time. I see COVID as this big black cloud came in and we had a terrible winter and it didn’t go away for like 18 months. . . . During COVID, we bought $230 million worth of real estate. We entered into the Winnipeg market and we expanded in B.C.
“When the economy comes back and we see a V-shaped recovery, why wouldn’t you double down?”
He said the COVID-19 pandemic created an environment of very low interest rates – so Mainstreet financed or refinanced $426 million in debt.
Mainstreet sees apartments as “resilient”
“One of the great things that happened in Q3 is the apartment buildings became the most resilient and safest asset class,” said Dhillon. “We’ve had during this COVID time, and even the last quarter, around 99 per cent collections.
“Revenue numbers even with the most difficult times remain flat and year-over-year went up 10 per cent.”
The company’s value creation strategy involves acquiring under-performing properties at prices well below replacement cost, undertaking capital improvement projects on those properties to enhance their value in the market, and reducing costs through operational efficiencies.
“Despite the difficult circumstances created by the pandemic, the Mainstreet business model remains uniquely structured to thrive in times of economic volatility. Relatively low interest rates and costs for acquisitions . . . will continue to provide significant potential for opportunistic growth,” Dhillon explained.
“Mainstreet has continued to grow and diversify throughout the pandemic.
“In 2020, we entered the Winnipeg market, extending our portfolio to four provinces, while we also continue to rapidly expand our B.C. footprint.”
In Q3 2021, 1,808 of its 14,762 units (12 per cent of the portfolio) remained un-stabilized, offering major potential to increase NOI as these properties are stabilized. Overall, the vacancy rate rose to 9.1 per cent from eight per cent a year ago.
Dhillon optimistic about Western economy
The company’s estimated potential liquidity for the remainder of fiscal year 2021 is approximately $190 million, including available credit facilities of $95 million.
Dhillon is optimistic about the economic prospects in the Western provinces, particularly in Alberta and Saskatchewan, which will feel the strength of commodity markets as well as stronger immigration levels.
There is also a supply/demand imbalance in the market with increasing demand taking a bite out of overall inventory.
Dhillon added Mainstreet believes workforce-affordable rental housing will remain an essential and safe asset class, underpinned by favourable long-term market fundamentals that have persisted despite the ongoing pandemic.
Affordability is a key, he said, as 73 per cent of Canadians make less than $50,000 a year.
“We believe MEQ (Mainstreet) is well positioned to deliver on its long-term value creation model. The supply/demand fundamentals for multifamily residential properties remain very strong and should drive MEQ higher over the next several years,” said a research report by Acumen Capital.
“Immigration and the return of strong economic growth in the West should provide the company strong tailwinds moving into fiscal 2022.”
Dhillon said MEQ’s stock price on the Toronto Stock Exchange was about $94 prior to the pandemic then it crashed to about $40 and it is now back to about $104.