Mr. Bob Dhillon reports

MAINSTREET EQUITY CORP ACHIEVED 24 YEARS OF CONTINUED DOUBLE-DIGIT GROWTH ACROSS KEY METRICS

In the fourth quarter of 2023, Mainstreet Equity Corp. posted its eighth-consecutive quarter of double-digit, year-over-year growth across all key operating metrics. The company views these results as a significant achievement given that Mainstreet has been operating through successive quarters of historically severe headwinds. Capping off this highly successful fiscal year, Mainstreet is looking forward to strong tailwinds in fiscal 2024.

Bob Dhillon, founder, president and chief executive officer of Mainstreet, said, "Mainstreet has yet again proven the viability of our add-value business model as we continue to post positive results amid elevated economic and geopolitical uncertainty." He added, "In this time of structural housing undersupply, Mainstreet continues to pride itself on being a vital supplier of affordable, quality, renovated housing for middle-class Canadians."

Performance highlights for fiscal year 2023:

• Drove significant shareholder value by achieving double-digit growth in funds from operations (30 per cent), net operating income (20 per cent) and rental revenues (16 per cent). The company also achieved significant growth on a same-asset basis (net operating income increased 12 per cent, revenues 9 per cent).

• Improved efficiencies by boosting operating margins to 63 per cent (up from 61 per cent in 2022) and same-asset operating margins to 63 per cent (up from 61 per cent in 2022).

• Enhanced value creation and diversification by growing its portfolio. Mainstreet now operates 17,042 (year to date 17,462) residential apartment units in 20 cities across Western Canada, with total asset value exceeding $3-billion.

• Maintained strong liquidity of $430-million (1).

• Bolstered operational and vacancy gains by repositioning units at an accelerated pace, reducing vacancy rates to 4.5 per cent (down from 7.2 per cent in 2022) despite high levels of unstabilized recent acquisitions that make up 13 per cent of Mainstreet's portfolio.

The company believes these highly positive results yet again demonstrate the viability of Mainstreet's value-add business model. Since Mainstreet began trading on the Toronto Stock Exchange in 2000, its management team has continued to generate shareholder value by adhering to its proven countercyclical growth strategy, leveraging low cost of capital and the company's sizable liquidity position to acquire underperforming rental properties at attractive prices. Over the last 24 years, Mainstreet has expanded its portfolio from a handful of rental units to more than 17,400, and built up a $3-billion-plus asset base while avoiding equity dilution. The company's share value has increased 5,000 per cent over that period.

Continued strong market conditions

Mainstreet's strong performance also comes at a time when rental markets have tightened to new, historically low levels. Sharp population growth in Canada, combined with a lack of new apartment spaces, continues to intensify a structural supply-demand imbalance in the market, pushing vacancies down to record lows. Across Canada's entire rental universe of 2.2 million apartments, vacancy rates in 2022 were the lowest in decades at 1.9 per cent, according to Canada Mortgage and Housing Corp. data. That trend is particularly visible in some of Mainstreet's main operating hubs like Vancouver (0.9 per cent), Calgary (2.7 per cent), Edmonton (4.3 per cent, down from 7.3 per cent in 2021), Saskatoon (3.2 per cent, down from 4.6 per cent in 2021) and Regina (3.0 per cent, down from 6.8 per cent in 2021), according to CMHC data. Meanwhile, high immigration levels have raised Canada's population at the steepest rate since the 1950s. As of July 1, 2023, Canada's population was 40,097,761, marking a 2.9-per-cent increase from a year earlier, according to Statistics Canada. About 98 per cent of Canada's population increase over that period was due to a major influx in international migrants, particularly non-permanent residents (697,701), immigrants (468,817) and international students (551,405 in 2022). Mainstreet believes the current macroeconomic environment is just the beginning of a multiyear cycle that will provide ample opportunity for Mainstreet to pursue its growth strategy.

In 2023, the Western Canadian rental housing market once again proved to be among the most resilient asset classes, offering stability at a time of elevated economic uncertainty. And while robust market fundamentals are beneficial to Mainstreet, they also underscore the company's corporate objective of improving the lives of middle-class Canadians. At a mid-market average rental rate of just $1,050, Mainstreet apartments provide affordable, quality, renovated housing during a period when high inflation has pinched the pocketbooks of every Canadian family, worker and student.

Challenges

Inflation and cost pressures

Despite promising macroeconomic tailwinds, rising costs continue to pose a challenge to Mainstreet. Primarily, inflation and associated higher interest rates increase the cost of Mainstreet debt, the company's single-largest expense. Mainstreet has locked in 99 per cent of its debt into CMHC-insured mortgages with an average interest rate of 2.79 per cent, maturing in 5.37 years, to pro-actively protect the company against any eventual rate increases -- see "Outlook" section below. Smaller line items including everything from labour to materials are also impacted by inflation, elevating operating costs.

Combatting higher expenses

Mainstreet works tirelessly on multiple fronts to counteract rising expenses. By securing longer-term natural gas contracts, the company substantially reduced energy costs across a large portion of Mainstreet buildings. It also managed to reduce its insurance costs -- a sizable Mainstreet expense -- by more than 13 per cent for fiscal 2023 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 the company's 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. Mainstreet has reignited its supply chain, aiming to further reduce capital costs in 2024.

Improving capital market exposure

Due to the success of its non-dilutive growth model, Mainstreet stock has always attracted high levels of interest on public markets. While this is an unmitigated achievement, the company believes that high investor appetite combined with Mainstreet's relatively narrow equity shareholder base has at times restricted MEQ trading volume, in turn limiting its market value (see next section).

Outlook

Mainstreet introduces new nominal dividend policy

Backed by the company's enviable liquidity position ($430-million) and strong cash flow position (per-share FFO of $7.37), Mainstreet continues to see an abundant pipeline of acquisitions for generating organic, non-dilutive growth. It plans to introduce a nominal dividend -- 11 cents per share starting in the first quarter of 2024 -- for the sole purpose of widening its shareholder base and increasing trading volume. This decision comes after significant numbers of fund managers expressed interest in investing in Mainstreet, but said they were prohibited from taking positions in non-dividend paying corporations. By offering a small dividend, the company believes it can satisfy the requirements of more investors while also leaving ample capital available for countercyclical growth opportunities.

A shift toward shorter-term debt

As debt markets shift due to rising interest rates, Mainstreet continues to take an adaptive approach to its 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, it has shifted toward shorter-term debt obligations, which will yield more cost reduction should interest rates eventually fall.

Turning intangibles to tangibles

To combat the continuing 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 to maximize useable space. While the plan is currently conceptual in nature, Mainstreet views this as a major driver of future growth in the longer-term, and further evidence of Mainstreet's inherent intangible value.

British Columbia remains a standout

The company expects Vancouver/Lower Mainland will continue to provide growth and performance. British Columbia has become central to Mainstreet's portfolio, accounting for approximately 45 per cent of the estimated net asset value (NAV) based on international financial reporting standards value. With an average monthly mark-to-market gap of $621 per suite per month, 98 per cent of the customers in the region are below the average market rent. According to Mainstreet's estimates, that translates into approximately $25-million in same-store NOI growth potential after accounting for tenancy turnover and mark-to-market gaps.

Alberta and Saskatchewan prosper

The company believes Edmonton, which makes up the largest portion of Mainstreet's portfolio, could be a major performer in 2024. Concession rates in the city continue to fall as vacancy rates hit an all-time low. Rental rates are beginning to grow as Edmonton's economy and population rise.

A similar trend is taking shape across Mainstreet's entire prairie portfolio. In the year ended July 1, 2023, Alberta's population expanded by about 184,000 people, or 4.1 per cent. This represents the highest annual growth rate since 1981 and is also significantly higher than the national rate of 2.98 per cent. Over the same period, 56,245 more people moved to the province than left it, the highest annual net interprovincial gains in Alberta's history and the highest ever recorded in any single province or territory since comparable data are available (1971/1972). Meanwhile, Saskatchewan's population increased by 30,685 over the past year, representing a 2.6-per-cent rise, compared with 10,711 (0.92 per cent) in the previous 12 months. The company believes high in-migration numbers in Alberta, combined with robust economic activity, could continue to nudge rental rates upward.

Runway on existing portfolio

Pursuing the company's 100-per-cent organic, non-dilutive growth model: Using its strong liquidity position, estimated at $430-million, the company believes there is significant opportunity to continue acquiring underperforming assets at attractive valuations. As such, Mainstreet will solidify its position as the leader in the add-value, mid-market rental space in Western Canada.

Closing the NOI gap: As of Q4 2023, 13 per cent of Mainstreet's portfolio was going through the stabilization process (recent acquisitions). Once stabilized, the company remains confident same-asset revenue, vacancy rates, NOI and FFO will be meaningfully improved. Mainstreet is cautiously optimistic that it can increase cash flow in coming quarters. The Alberta market in particular also has substantial room for mark-to-market catchup.

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.

(1) Including $82 million cash-on-hand, $220-million expected funds to be raised through up-financing of maturing mortgages and financing of clear titled assets after stabilization and a $130-million line of credit.

We seek Safe Harbor.