Mr. Bob Dhillon reports

MAINSTREET EQUITY CORP ACHIEVES 9TH CONSECUTIVE QUARTER OF DOUBLE-DIGIT GROWTH IN Q1

In Q1 2024, Mainstreet Equity Corp. posted its ninth-consecutive quarter of double-digit, year-over-year growth across all key operating metrics. Funds from operations (FFO) before current income tax grew near the fastest rates in Mainstreet history at 32 per cent, FFO increased 23 per cent, net operating income (NOI) increased 23 per cent, same-asset NOI rose 16 per cent and rental revenues grew 19 per cent.

Bob Dhillon, founder, president and chief executive officer of Mainstreet, said, "These results underscore Mainstreet's track record of operational success, as we continue to leverage our trusted counter-cyclical growth strategy to drive shareholder value." He added, "In this time of structural housing undersupply, Mainstreet continues to pride ourselves as a vital supplier of affordable, quality, renovated living for middle-class Canadians."

What is new in 2024:

• Mainstreet has announced that it will pay a nominal quarterly dividend (starting at 2.75 cents per share for Q1 2024) for the first time. Its introduction was part of Mainstreet's strategic decision to continue widening its shareholder base and increasing its trading volumes.
• Mainstreet vacancy rates decreased to 3.3 per cent (despite 13 per cent of Mainstreet's portfolio currently being in the stabilization process), down from 4.4 per cent in Q1 2023. Same-asset vacancy dropped to 3.2 per cent from 4.4 per cent a year earlier.
• Margins on a same-asset basis improved to 64.2 per cent in Q1, up from 61.5 per cent in Q1 2023. These are some of Mainstreet's best operating margins on record for the winter season, which it attributes to multiple factors, including the company's relentless dedication to efficient operations.
• Year-to-date (YTD) acquisitions totalled $62.3-million (508 units). Acquisitions in Q1 were $45.3-million, up from $33.6-million a year earlier.
• Liquidity remained strong at $418-million, despite high levels of acquisitions in Q1, providing Mainstreet with a strong cash balance to finance future organic growth.

Mainstreet believes these highly positive results are consistent with the demonstrated success of Mainstreet's value-add business model. Since Mainstreet began trading on the TSX in 2000, it has expanded its portfolio from a handful of rental units to more than 17,600 units YTD, and built up a $3-billion asset base while avoiding significant equity dilution. By adhering to the company's trusted countercyclical growth strategy, Mainstreet has, for years, leveraged low cost of capital and its sizable liquidity position to acquire underperforming rental properties at attractive prices, which properties are then renovated to bring them up to a consistent standard.

In Q1, the Canadian rental market continued to be dominated by structural imbalances that are likely to persist in the long term, as soaring demand greatly outstrips new supply. In the last three years alone, Canada's population has grown by 2.49 million people -- more than Canada's entire rental universe of 2.3 million apartments, according to CMHC (Canada Mortgage and Housing Corp.) data. Over that same period, the rental market added just 133,204 new purpose-built units, according to CMHC data. Given that supply shortages are the result of historical trends compounded over many years, Mainstreet believes this imbalance will remain a fixture in the market for a prolonged time.

These market forces have pushed national vacancy rates to their lowest levels on record of 1.5 per cent. Based on CMHC data, rental vacancy in Edmonton and Calgary, two of Mainstreet's biggest operating hubs, fell at the fastest rate in the country in 2023 (down to 2.3 per cent and 1.4 per cent, respectively). Historically low vacancies can also be seen across all other Mainstreet centres, including Vancouver (0.9 per cent), Regina (1.4 per cent), Saskatoon (2 per cent) and Winnipeg (1.8 per cent). The company believes these current trends are just the beginning of a multiyear cycle that will provide ample opportunity for Mainstreet to pursue its 100-per-cent organic, non-dilutive growth strategy.

Challenges

Inflation and cost pressures

Despite promising macroeconomic tailwinds, rising costs continue to pose a challenge to Mainstreet. Primarily, higher interest rates increase the cost of Mainstreet debt, its single-largest expense. Mainstreet has locked 99 per cent of our debt into CMHC-insured mortgages at an average interest rate of 2.89 per cent, maturing in 5.4 years, to pro-actively protect the company against any eventual rate increase (see outlook section). Smaller line items, including everything from labour to materials, are also impacted by inflation, elevating operating costs.

Additionally, due to strong growth and consecutive operating profits over the past 24 years, Mainstreet is now liable for corporate income taxes for one of the first times in Mainstreet's history. The company views its performance as an unmitigated success, and do not expect a material impact on Mainstreet's overall performance going forward.

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. The company also managed to reduce its insurance costs -- a sizable Mainstreet expense -- by more than 13 per cent for fiscal 2024 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.

Ottawa's international student cap

The federal government recently placed a two-year limit on the number of new student visas Canada awards, reducing intake 35 per cent from 2023 levels. According to the immigration ministry's official estimates, Canada will still approve 360,000 new studies in 2024 this year under the cap.

Outlook

Turning intangibles to tangibles

Heading into 2024, Mainstreet sees multiple opportunities to expand its portfolio. 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 for future developments. While the plan is currently conceptual in nature, the company views this as a major driver of future growth in the longer term, and further evidence of Mainstreet's inherent intangible value.

A long-term view on short-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, the company has shifted toward shorter-term debt obligations, which will yield more cost reduction should interest rates eventually fall.

British Columbia continues to perform

Mainstreet expects Vancouver/Lower Mainland will continue to provide exceptional growth in 2024. British Columbia is a vital aspect of Mainstreet's portfolio, accounting for approximately 46 per cent of its estimated net asset value (NAV) based on IFRS (international financial reporting standards) value. With an average monthly mark-to-market gap of $702 per suite per month, 98 per cent of the company's customers in the region are below the average market rent. According to Mainstreet's estimates, that translates into approximately $29-million in same-store NOI growth potential after accounting for tenancy turnover and mark-to-market gaps.

Alberta's population swells

Alberta, which comprises the largest portion of Mainstreet's portfolio, continues to see explosive population growth that has far surpassed the Canadian average. Despite expectations that economic growth will decline in Alberta the next two years, Alberta is still expected to lead the national average of economic growth in 2024 (Deloitte). In the year ended October, 2023, Alberta's population grew 4.3 per cent, to 4.75 million. This represents the highest annual growth rate since the early 1980s and is also significantly higher than the national rate of 3.2 per cent. In Q3 alone, Alberta added 61,000 people, and marked the fifth consecutive quarter of in-migration gains higher than 10,000.

Runway on existing portfolio:

1. Pursuing the company's 100-per-cent organic, non-dilutive growth model: Using Mainstreet's strong potential liquidity position, estimated at $418-million, the company believes there is significant opportunity to continue acquiring underperforming assets at attractive valuations. As such, Mainstreet will continue to solidify its position as a leader in the add-value, mid-market rental space in Western Canada.
2. Closing the NOI gap: As of Q1 2024, 13 per cent of Mainstreet's portfolio was going through the stabilization process as a result of 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. In the B.C. market alone, the company estimates that the potential upside based on mark-to-market gaps for NOI growth is approximately $29-million. The Alberta market, in particular, also has substantial room for mark-to-market catch-up.
3. Buying back shares at a discount: Mainstreet believes its shares continue to trade below their true NAV, and that continuing macroeconomic volatility could intensify that trend.

We seek Safe Harbor.