Mainstreet Equity Corp. — Management Reports 2020

Dec 7, 2020

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following Management’s Discussion and Analysis (“MD&A”) provides an explanation of the financial position, operating results, performance and outlook of Mainstreet Equity Corp. (“Mainstreet” or the “Corporation”) as at and for the fiscal year ended September 30, 2020 and 2019. This discussion should not be considered all-inclusive, as it excludes changes that may occur in general economic and political conditions. Additionally, other events may occur that could affect the Corporation in the future. This MD&A should be read in conjunction with the Corporation’s audited consolidated financial statements and accompanying notes for the fiscal years ended September 30, 2020 and 2019. The audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). This MD&A has been reviewed and approved by the Audit Committee and Board of Directors of the Corporation and is effective as of December 7, 2020. All amounts are expressed in Canadian dollars. Additional information regarding the Corporation including the Corporation’s annual information form (“AIF”) is available under the Corporation’s profile at SEDAR (www.sedar.com).

Unless indicated otherwise, reference herein to 2020 and 2019 refers to the fiscal years ended September 30, 2020 and 2019, respectively.

NON-IFRS MEASURES

Mainstreet prepares and releases unaudited interim condensed consolidated financial statements and audited consolidated annual financial statements in accordance with IFRS. In this MD&A and in any earnings releases, as a complement to results provided in accordance with IFRS, Mainstreet also discloses and discusses certain financial measures not recognized under IFRS and that do not have standard meanings prescribed by IFRS. These non-IFRS measures are recommended by the Real Property Association of Canada’s (“REALPAC”), a leading national industry association of investment real estate. These include funds from operations (“FFO”) and FFO per share. FFO is widely accepted as a supplemental measure of the performance of Canadian real estate entities, and management believes these Non-IFRS measures are relevant measures to maintain comparability in operating performance. FFO is defined as profit before change in fair value, deferred income taxes and depreciation of property and equipment excluding depreciation of items which are not uniquely significant to the real estate industry (for example, computers or vehicles). Liquidity is defined to include cash and cash equivalents on hand plus estimated new financings of clear title assets and upfinancings of maturing mortgages, assuming current lending criteria remains mainly unchanged.

These non-IFRS measures may not be comparable to similarly titled measures reported by other issuers. The Non-IFRS measures should not be construed as alternatives to net profit (loss) or cash flows from operating activities determined in accordance with IFRS as indicators of Mainstreet’s performance. Reconciliation of FFO to profit, the most directly comparable IFRS – Summary of Financial Results”.

COVID-19 OVERVIEW

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Since then, COVID-19 has had a substantial impact on the Canadian and global economy. In an attempt to slow down the spread of this virus, the various levels of government in Canada and throughout the world have enacted various emergency measures. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in a significant amount of economic activity being either shut down or scaled back materially. This economic contraction has resulted in widespread hardship, significant losses in jobs and business incomes, resulting in unprecedented unemployment levels. Uncertainty regarding the duration and severity of the pandemic has affected the spending decisions of both households and businesses. Until the pandemic is contained, a substantial portion of economic activity will continue to be adversely affected and the COVID-19 pandemic may have a significant impact on the operation and financial results of Mainstreet. Uncertain economic conditions resulting from the COVID-19 pandemic may, in the short or long term, have a materially adverse impact on the Corporation’s tenants and/or debt and equity markets, both of which could materially adversely affect the Corporation’s operations and financial performance. For example, the pandemic could result in an increase in bad debt expense and higher credit risk for the Corporation as a result of increased difficulty the collection of rent, a requirement to defer the

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eviction of tenants who do not pay their rent, and an inability by the Corporation to increase rent in certain of its markets. The future impact of the COVID-19 pandemic is very difficult to determine and it is not possible to reliably predict the long-term effect on the Corporation.

Notwithstanding the operational and financial impact of the COVID-19 pandemic on the Corporation, the health and safety of Mainstreet’s residents and team members are its top priority. As an essential service provider, the Corporation has made important changes in its operations in response to COVID-19 pandemic to support residents and team members. The following update is a brief summary of certain of those changes.

COVID-19 Operational Update

Cleaning: Mainstreet has increased its cleaning and maintenance with more frequent cleaning and sanitization of common areas and highly touched objects.

Rent collection: Mainstreet’s rent collections remains strong and are generally in line with the average rent collected by the same day of the previous month. As of December 7, 2020, Mainstreet has collected 98% of total rents for November, 2020 and 98% of total rents for September, 2020.

Mainstreet has made a commitment to defer rent for its tenants who have been affected by COVID-19 on a case by case basis and has entered into rent deferral agreements with such tenants. In addition, Mainstreet has committed to put on hold increases in its rental rates to existing tenants until September 2020.

Leasing and tenant support: During the COVID-19 pandemic period, Mainstreet has leveraged its technological investment in the Yardi System which enables paperless leasing processes. The Yardi System significantly improved Mainstreet’s operational efficiencies and competitive edge, while also protecting the health and safety of Mainstreet’s residents and team members.

Mainstreet believes in timely, transparent communication and has provided regular updates to both its tenants and team members, through various channels, both in respect of its COVID-19 guidelines and in respect of current health recommendations from both federal and provincial governments, and timely information about government financial support programs that provide support to tenants and their families.

Team Member Support: The Corporation has increased the procurement and use of personal protective equipment and implemented recommended physical distancing in the workplace. Mainstreet has utilized virtual showing capabilities, while ensuring on-going regular communication with its leadership and operational teams to assess and support any needs of its team members. Additionally, the Corporation has assisted its team members to transition to working from home where it is appropriate to do so.

Acquisitions: Mainstreet put a temporary break on its acquisition activity in early April, however such activity has recently resumed. In Q4 2020, Mainstreet has acquired $32.3 million (207 units) in new acquisitions in Calgary, Cochrane and Saskatoon. Subsequent to year end 2020, Mainstreet has acquired $9.8 million (91 units) in new acquisitions in the Province of British Columbia and Saskatchewan resulting in year-to-date acquisitions in the amount of $100 million (772 units).

Refinancing: Throughout the current COVID-19 pandemic, Mainstreet has continued to reposition its unstabilized properties and continues to have access to mortgage debt. Subsequent to year end 2020, Mainstreet’s most recent refinancing raised $43.1 million in additional funds through the financing of 3 maturing mortgage and 8 clear title properties at an interest rate of 1.61%.

Liquidity: Mainstreet estimates it will have access to approximately $240 million in available liquidity in the next 12 months, which management believes is sufficient to address the inherent uncertainty surrounding disruption from the COVID-19 pandemic and continue to support its stakeholders.

Currently, both the impact and length of the COVID-19 pandemic remain uncertain. Although there has recently been promising news regarding possible effective vaccines for COVID-19, the timing of the rollout of such vaccines in Canada remains uncertain. The Corporation expects that increased unemployment in all the markets in which it operates may adversely impact tenant’s ability to pay rent resulting in an increase in the bad debt expense. The governments have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. Currently, the government financial supports are assisting our tenants with their essential needs such as rental payment, however, it is not clear how long elevated unemployment rates may last, or the extent all the government programs that might be put in place, how long programs will last, how these programs may change over time, or what their full impact might be. As a result, the impact on the Corporation’s cash flow from operating activities is uncertain.

MAINSTREET EQUITY CORP. 11

The Corporation’s properties are measured at fair value based on assumptions influenced by market conditions. Given the uncertainty of the longer-term impact of the COVID-19 pandemic and how it will impact valuation assumptions, uncertainty exists with respect to the valuation of the Corporation’s properties. Additionally, due to the high uncertainty associated with the pandemic, lower weight can be applied to previous market evidence to inform fairness of opinions. Uncertain economic conditions resulting from the COVID-19 pandemic may, in the short or long term, have a materially adverse impact on operations and the financial performance of the Corporation. Please refer to the section titled “Risk Assessment and Management” in this MD&A.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) RESPONSIBILITY

Sustainability and social responsibility has been an important part of Mainstreet’s culture and values for many years, and Mainstreet’s commitment to corporate social responsibility continued during the pandemic with a focus on protecting and supporting residents and staff. Mainstreet continues to take steps to: (i) ensure it is a responsible steward of the environment by improving the energy efficiency of its properties and reducing its environmental footprint, (ii) attract and retain the best employees, (iii) create a safe and healthy environment for all of its employees and residents, (iv) build strong relationships with its tenants and the communities in which they live, and (v) maintain transparent and open communication with its employees, tenants and investors.

The following sets forth some of the programs and practices that Mainstreet already has in place to foster a positive impact in its business.

Environmental

The Company is continuously looking for ways to make its operations more sustainable and has already taken positive steps in furtherance of this goal, including:

• Adopting a policy to obtain a Phase 1 environmental report conducted by independent environmental consultants and committing to implement the recommendations wherever possible to improve its environmental practices;

• Decreasing energy and water consumption by utilizing LED lights, as well as low flush toilets and water conserving shower heads;

• Replacing windows, roofs, sidings, old appliances and boilers with new energy efficient alternatives whenever possible, to further reduce water and energy consumption;

• Utilizing sub-metering to encourage residents to be more efficient in utility usage;

• Currently conducting a review in respect of installing charging stations for electric vehicles on our properties; and

• Continuously looking for, and participating in, new energy saving programs, including utilizing new energy saving devices wherever possible and working towards further quantifying the results with applied metrics.

Social Community Investment

The Company strives to give back in a number of meaningful ways, including the following initiatives:

• participating in various housing assistance programs designed to assist those who have lost their homes due to natural disasters, such as the Slave Lake and Fort McMurray wildfires, or through conflicts, such as the Syrian refugees;

• partnering with various social organizations such as Calgary Housing, the Mustard Seed and the Homeless Society, to provide affordable housing for those members of the community who may not otherwise be able to access affordable and secure housing; and

• in response to the COVID-19 pandemic, the Company implemented a number of programs for its residents including rent deferrals, waivers of late and non-sufficient funds fees, the provision of financial assistance and deferring any rent increases.

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Employee Engagement

The Company creates a positive experience for employees through numerous programs, including:

• continuous training and development is a top priority for the Company, and many learning opportunities are offered both internally thorough on the job training and in academic settings. Further the Company supports and encourages internal advancement and promotions wherever possible;

• providing annual evaluations of its team member’s performance, for the purpose or identifying and supporting career growth and development opportunities for such team members;

• providing a healthy and safe work environment for its employees and providing all employees with competitive medical benefits, short and long term disability plans and life insurance plans. The Company had set up occupational health and safety committees and representatives in all functional cities and met regularly to assist in safety training aand inspections;

• working to ensure that all human resource policies and practices are non-discriminatory and actively promote a diverse work force, as evidenced by the diversity of the Company’s management team; and

• during the COVID-19 pandemic, ensuring that employees can take paid leave or work at home to ensure the health and safety of our employees and their families, as well as ensuring they are able to be home for their children during school closures. In addition, the Company has invested in additional PPE for all of its employees, and has implemented social distancing and enhanced cleaning protocols to ensure that its residents and employees are able to remain safe.

Governance

The Company is committed to maintaining the highest ethical standards through a strong governance framework and an experienced Board of Directors. The Company has a diverse and gender-balanced executive leadership team and a well-rounded and experienced Board of Directors, which adheres to the highest standards of governance.

The Company has developed a clear business strategy and organization structure, which sets out clearly the roles and accountabilities of each member of the organization. The Company has ensured that it has the proper resources for its members to succeed in implementing its business strategy, including in respect of human resources, specialized skills, organizational infrastructure, technology and financial resources.

The Board of Directors has constituted a number of committees to assist it in achieving the highest standards of governance, including an audit committee (which has adopted a whistleblower policy), executive committee, a human resources committee, a risk management committee, a safety committee and a cyber security committee. In addition, the Company has a work and safety committee in each location where is owns properties, to ensure a safe and healthy environment in each such location.

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MAINSTREET EQUITY CORP.

BUSINESS OVERVIEW

Based in Calgary, Alberta, Mainstreet is a Canadian real estate corporation focused on the acquisition, redevelopment, repositioning and management of mid-market rental apartment buildings in five major Canadian markets: Vancouver/ Lower Mainland, Calgary (including the City of Airdrie, the City of Lethbridge, and the Town of Cochrane), Edmonton (including the City of Fort Saskatchewan), Saskatoon and Regina.

Mainstreet is listed on the Toronto Stock Exchange (“TSX”) and its common shares are traded under the symbol “MEQ”.

BUSINESS STRATEGY

Mainstreet’s goal is to become Canada’s leading provider of affordable mid-sized, mid-market rental accommodations—typically properties with fewer than 100 units. In pursuit of this goal, the Corporation adheres to its six-step “Value Chain” business model:

• Acquisitions: Identify and purchase underperforming rental units at prices well below replacement costs.

• Capital improvements: Increase the asset value of Mainstreet’s portfolio by renovating acquired properties.

• Operational efficiencies: Minimize operating costs through professional management, efficient technology and energy-saving equipment.

• Value enhancement: Reposition renovated properties in the market as Mainstreet branded products for higher rents, and build and sustain customer loyalty through high levels of service.

• Financing: Maintain a sound capital structure with access to low-cost, long-term Canada Mortgage and Housing Corporation (“CMHC”) insured mortgage loans.

• Divestitures: Occasionally sell mature real estate properties to redirect capital into newer, higher potential properties.

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The Mainstreet
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VALUE CHAIN
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© 2012-20 Mainstreet Equity Corp.
All rights reserved.
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ADD VALUE
Improving the life of Canadians
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INTERNATIONAL FINANCIAL REPORTING STANDARDS

The financial statements of the Corporation prepared in conjunction with this MD&A have been prepared in accordance with IFRS as issued by the International Accounting Standard Board (“IASB”).

Investment properties

Investment properties are properties held to earn rental income and are initially measured at cost. Cost includes the initial purchase price and any direct attributable expenditure related to the acquisition and improvement of the properties. All costs associated with upgrading the quality and extending the economic life of the investment properties are capitalized as an additional cost of investment properties.

After initial recognition, the Corporation adopts the fair value model to account for the carrying value of investment properties in accordance with International Accounting Standard (“IAS”) 40 Investment Property (“IAS 40”).

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Method used in determining the Fair Value of investment properties

Fair value is determined based on a combination of internal and external valuation processes. Gains and losses arising from differences between current period fair value and the sum of previous measured fair value and capitalized costs as described above are recorded in profit and loss in the period in which they arise.

For the Corporation’s financial reporting, external valuations were obtained from independent qualified real estate appraisers who are members of the Appraisal Institute of Canada and have appropriate qualifications and experience in the valuation of the Corporation’s investment properties in the relevant locations. In addition, the Corporation has established an internal valuation model, which is based on the same assumptions and valuation techniques used by the external valuation professionals. The Corporation grouped its investment properties in each city by their types and geographic locations. Samples were selected in each group for independent appraisal. The appraised values of the samples selected were compared with their carrying values. The percentage changes in values of those samples selected were applied to the whole population of each group in determination of the fair value of investment properties of the Corporation as of September 30, 2020 and September 30, 2019. Properties are selected on a rotational basis, approximately 40% of the Corporation’s portfolio is externally valued annually.

The fair values are most sensitive to changes in net operating income and capitalization rates. Mainstreet’s total portfolio is valued at $2.2 billion as of September 30, 2020 ($2.0 billion as of September 30, 2019). The following is the breakdown of market value by city and average capitalization rates used in determining the fair value of investment properties at September 30, 2020 and September 30, 2019, respectively.

							Average
							capitalization
	Number of	Number of	Market value		Average value		rate as at
As at September 30, 2020	properties	units		($ million)	per unit ($000)		Sep. 30, 2020
Surrey, British Columbia (Note 1)	10	1,775	$	411	$	232	4.39%
Abbotsford, British Columbia (Note 2)	16	1,024		180		176	4.80%
Calgary, Alberta (Note 3)	72	3,028		608		201	5.09%
Edmonton, Alberta (Note 4)	132	4,562		619		136	5.67%
Saskatoon, Saskatchewan	59	2,328		263		113	6.62%
Regina, Saskatchewan	59	866		102		118	6.33%
Total investment properties	348	13,583	$	2,183	$	161	5.34%

Note (1) – includes the City of New Westminster Note (2) – includes the City of Kamloops Note (3) – includes the City of Lethbridge, the Town of Cochrane and the City of Airdrie Note (4) – includes the City of Fort Saskatchewan

							Average
							capitalization
	Number of	Number of	Market value		Average value		rate as at
As at September 30, 2019	properties	units		($ million)	per unit ($000)		Sep. 30, 2019
Surrey, British Columbia (Note 1)	10	1,775	$	386	$	217	4.19%
Abbotsford, British Columbia	15	976		163		167	4.66%
Calgary, Alberta (Note 2)	66	2,753		555		202	4.85%
Edmonton, Alberta (Note 3)	129	4,285		582		136	5.59%
Saskatoon, Saskatchewan	56	2,246		252		112	6.64%
Regina, Saskatchewan	59	866		102		118	6.08%
Total investment properties	335	12,901	$	2,040	$	158	5.20%

Note (1) – includes the City of New Westminster

Note (2) – includes the City of Lethbridge, the Town of Cochrane and the City of Airdrie Note (3) – includes the City of Fort Saskatchewan

MAINSTREET EQUITY CORP. 15

ACQUISITIONS & GROWTH

ACQUISITIONS & GROWTH
(000s of dollars)
Year ended September 30,		2020		2019
	Calgary,	Edmonton,	Calgary,	Edmonton,
	Saskatoon and		Saskatoon and
		Kamloops		Regina
Number of rental units (Note 1 & 2)		681		1,119
Total costs	$	89,644	$	128,889
Average price per apartment unit (Note 1 & 2)	$	132	$	115

Note (1) – Excludes 1 warehouse in Edmonton, AB acquired for $1.04 million in Q1 2019 Note (2) – Includes 1 vacant land in Saskatoon, SK

Employing a strict set of criteria, Mainstreet identifies and acquires underperforming rental properties in major residential centres in Western Canada that offer the potential to enhance the Corporation’s asset value and its long-term revenues through increased rental rates. In 2020, Mainstreet acquired 681 units in the Province of Alberta, British Columbia and Saskatchewan for a total consideration of $89.6 million. Since Mainstreet’s previous financial year-end (September 30, 2019), the Corporation has grown its portfolio of properties by 5%.

As of September 30, 2020, Mainstreet’s portfolio included 13,580 residential units and 3 freestanding commercial houses, including townhouses, garden-style apartments, concrete mid-rise and high-rise apartments. A total of 92% of these residential units were rented, while 5% were being renovated and the remaining 3% left vacant, primarily in the Provinces of Alberta and Saskatchewan.

Since 1997, the Corporation’s portfolio has increased from 10 to 348 buildings, while the fair value of the investment properties within this portfolio has grown from approximately $17 million to $2.2 billion as of September 30, 2020.

The following table demonstrates the growth of the Corporation by region since the end of the previous financial year ended September 30, 2019.

ended September 30, 2019.
		Acquisitions/	Additional	Number
	Number of units	disposition 12	units created 12	of units
	as at	months ended	months ended	as at
	Oct. 1, 2019	Sept. 30, 2020	Sept. 30, 2020	Sept. 30, 2020	% Growth
Surrey, British Columbia (Note 1)	1,775	–	–	1,775	–
Abbotsford, British Columbia (Note 2)	976	48	–	1,024	–
Calgary, Alberta (Note 3)	2,753	275	–	3,028	10%
Edmonton, Alberta (Note 4)	4,285	276	1	4,562	6%
Saskatoon, Saskatchewan	2,246	82	–	2,328	4%
Regina, Saskatchewan	866	–	–	866	–
Investment properties	12,901	681	1	13,583	5%

Note (1) – includes the City of New Westminster Note (2) – includes the City of Kamloops Note (3) – includes the City of Lethbridge, the Town of Cochrane and the City of Airdrie Note (4) – includes the City of Fort Saskatchewan

CAPITAL IMPROVEMENTS

Mainstreet’s “Value Chain” business philosophy focuses on creating value in capital assets by renovating newly-acquired properties and enhancing operating efficiencies. Every property and rental unit is upgraded to meet Mainstreet’s branded standard, which creates an attractive product while reducing operating costs and enhancing long-term asset value. Capital investment also includes expenses incurred on turnover units.

In 2020, the Corporation spent $16.7 million (2019 – $18.8 million) on capital improvements, of which $14.8 million (2019 – $14.6 million) was for upgrading stabilized properties and improving other holdings – specifically for exterior upgrades such as new roofs, windows, balconies, siding and insulation. These expenditures also covered mechanical and interior upgrades such as new boilers, flooring and paint to address the balance of non-renovated units and to maintain the condition

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of properties in the current portfolio. Mainstreet currently plans to spend an estimated total of $20 million on capital improvement in the fiscal year 2021, however these plans may be revised depending upon the effect of the COVID-19 pandemic and governmental policy responses. These improvements are expected to be financed through existing cash balances, funds from operations and ongoing refinancing of existing properties. Mainstreet expects to complete most of the renovations of its existing properties within the next 6 to 24 months. Revenue and income are expected to increase over time as more units are renovated and reintroduced to the market at anticipated higher rental rates.

Uncertainties affecting future revenue and income include the ongoing effect of the COVID-19 pandemic, rate of turnover of existing tenants, availability of renovation workers and building materials, as well as increases in labour and material costs. All of these uncertainties could have a material impact on the timing and cost of completing these capital improvements.

REVIEW OF FINANCIAL & OPERATING RESULTS

Summary of financial results

(000s of dollars except per share amounts)

(000s of dollars except per share amounts)
							% Change	% Change
For the year ended September 30,		2020		2019		2018	2020	2019
Gross revenue	$	149,976	$	138,052	$	116,229	9%	19%
Net proft and total comprehensive income		68,550		58,685		72,723	17%	(19%)
Change in fair value		37,211		26,908		61,417	38%	(56%)
Depreciation		651		250		234	160%	7%
Deferred income tax expense		11,691		7,231		18,085	62%	(60%)
Funds from operations
– Non IFRS Measurement (Note 1)	$	43,681	$	39,258	$	29,625	11%	33%
Interest income		(206)		(179)		(564)	15%	(68%)
Other income		–		(260)		–	(100%)	–
Software development cost write off		–		–		555	–	(100%)
General and administrative expenses		12,477		12,463		10,925	0%	14%
Financing costs		36,861		34,771		31,458	6%	11%
Depreciation (computer and vehicle)		220		255		222	(14%)	15%
Net operating income	$	93,033	$	86,308	$	72,221	8%	20%
Operating margin from operations		62%		63%		62%
Proft per share
Basic	$	7.32	$	6.41	$	8.23	14%	(22%)
Fully diluted	$	7.32	$	6.23	$	7.62	17%	(18%)
Funds from operations per share
Basic	$	4.66	$	4.29	$	3.35	9%	28%
Fully diluted	$	4.66	$	4.17	$	3.10	12%	35%
Weighted average number of shares
Basic		9,367,358		9,154,434	8,832,472
Fullydiluted		–	9,424,680		9,548,291
Total Assets	$	2,238,311	$ 2,056,025		$ 1,878,347
Total Long term liabilities	$	1,259,967	$	1,064,515	$ 1,072,299

1. FFO is calculated as profit before change in fair value, deferred income taxes and depreciation of property and equipment excluding depreciation of items which are not uniquely significant to the real estate industry (such as computers or vehicles). FFO is a widely accepted supplemental measure of a Canadian real estate company’s performance but is not a recognized measure under IFRS. The IFRS measurement most directly comparable to FFO is profit (for which reconciliation is provided above). FFO should not be construed as an alternative to profit or cash flow from operating activities, determined in accordance with IFRS, as an indicator of Mainstreet’s performance. Readers are cautioned that FFO may differ from similar calculations used by other comparable entities. Management believes FFO is useful for readers to determine the operating performance. This information is critical for the Corporation to maintain comparability in operating performance.

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MAINSTREET EQUITY CORP.

REVENUE

In 2020, revenue primarily comprised of rental and ancillary revenue totalling $149.8 million (2019 – $137.6 million), interest income and other income. Overall, rental revenue increased 9% as compared to 2019, which is discussed and analysed in the session entitled “Rental Operations” below.

NET PROFIT

For the year ended September 30, 2020, Mainstreet reported a net profit of $68.6 million ($7.32 per basic share) as compared to a net profit of $58.7 million ($6.41 per basic share) for the year ended September 30, 2019. Net profit is further analysed as follows:

Net proft is further analysed as follows:
(000s of dollars)
For the year ended September 30,		2020		2019	% change
Funds from operations
– Non IFRS measurement (see Note 1 previous table)	$	43,681	$	39,258	11%
Change in fair value		37,211		26,908	38%
Depreciation		(651)		(250)	160%
Deferred income tax expense		(11,691)		(7,231)	(62%)
Net proft and total comprehensive income – IFRS measurement	$	68,550	$	58,685	17%

The increase in funds from operations in 2020 is further discussed and analysed below.

In 2020, Mainstreet incurred a fair value gain of $37.2 million, compared with a fair value gain of $26.9 million in 2019. This was mainly due to changes as identified below:

This was mainly due to changes as identifed below:
(000s of dollars)
Change in Fair value		2020		2019
Surrey	$	24,870	$	19,480
Abbotsford		9,508		4,703
Calgary		11,296		15,779
Edmonton		537		2,361
Saskatoon		7,010		2,942
Regina		761		(140)
		53,982		45,125
Gain on disposal		–		575
Capital expenditure		(16,771)		(18,792)
Change in fair value	$	37,211	$	26,908

The fair value gain represented the change in the market value of the Corporation’s investment properties over the fiscal years 2020 and 2019. The amount of change was determined by the market value of the investment properties at the year-end dates September 30, 2020 and 2019, which was regarded as a non-operating expense.

FUNDS FROM OPERATIONS – NON IFRS MEASUREMENT

Management believes that FFO is also a meaningful performance measurement for a real estate company’s operating performance. FFO excludes changes in fair value, deferred income taxes and depreciation of property and equipment excluding depreciation of items which are not uniquely significant to the real estate industry (for example, computers and vehicles). Mainstreet generates FFO from three sources: rental and ancillary revenue from investment properties, sale of properties acquired for resale purposes, and the periodic sale of investment properties. Mainstreet generally reinvests the proceeds from the latter into investment properties with greater potential for long-term returns.

Mainstreet’s FFO increased by 11% to $43.7 million in 2020 compared with $39.3 million in 2019. The increase in FFO in 2020 was mainly attributable to the increased rental revenue which will be discussed and analysed in the following section entitled “Rental Operations”.

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See “Non-IFRS Measures” and Note (1) to the table titled “Summary of Financial Results” for additional information regarding FFO and a reconciliation of FFO to net profit, the most directly comparable IFRS measurement.

GENERAL & ADMINISTRATIVE (“G&A”) EXPENSES

G&A expenses mainly include corporate costs such as office overhead, legal and professional fees and salaries. In 2020, G&A expenses remain around $12.5 million in both 2020 and 2019. The increase in professional expenses and additional administrative expenses to support residents related to the Corporation’s response to the COVID-19 pandemic were partially offset by decreased travelling expense.

FINANCING COSTS

FINANCING COSTS
(000s of dollars)
For the Year ended September 30,		2020		2019	% change
Mortgage interest	$	32,968	$	31,674	4%
Amortization of deferred fnancingcost		3,893		3,097	26%
Financing costs	$	36,861	$	34,771	6%

Mortgage interest expenses increased by 4% to $33.0 million in 2020 compared to $31.7 million in 2019.

The rise was mainly attributable to an increase in mortgage loans from financing of clear title assets. The Corporation continues to take advantage of the current low interest rates. In 2020, the Corporation financed 16 maturing mortgages and 31 clear-title assets for $309.0 million at an average interest rate of 2.10%. These financings raised approximately $200.1 million in additional funds which were used to support the Corporation’s growth in its core markets.

Subsequent to year-end September 30, 2020, the Corporation also financed 3 maturing mortgage and 8 clear title properties raising additional $43.1 million at an interest rate of 1.61%.

RENTAL OPERATIONS

(000s of dollars except per unit data)

			Total Portfolio	Total Portfolio				Same Asset	Same Asset				Acquisition	Acquisition
For the year ended September 30,		2020		2019	% Change		2020		2019	% Change		2020		2019	% Change
Rental and ancillary revenue	$ 149,770		$	137,613	9%	$	134,108	$ 131,417		2%	$	15,662	$	6,196	153%
Operating expenses		56,737		51,305	11%		50,198		48,739	3%		6,539		2,566	155%
Net operating income	$	93,033	$	86,308	8%	$	83,910	$	82,678	1%	$	9,123	$	3,630	151%
Operating margin		62%		63%			63%		63%			58%		59%
Average vacancy rate		7.3%		6.4%	15%		6.7%		5.9%	12%		12.9%		14.7%	(13%)
Weighted average number of units		13,249		12,425	7%		11,790		11,790	–		1,459		635	130%
Average rental rate per unit
per month	$	942	$	923	2%	$	948	$	929	2%	$	895	$	813	10%
Average operating expense per	unit
per month	$	357	$	344	4%	$	355	$	344	3%	$	373	$	337	11%

The vacancy rate increased to 7.3% in 2020, from 6.4% in 2019 partially due to higher vacancy rates in the provinces of Alberta and Saskatchewan as a result of a weakened high rental season caused by the COVID-19 pandemic. The average monthly rental rate increased 2% to $942 per unit in 2020, compared to $923 per unit in 2019, mainly due to higher rental rates following stabilization of newly acquired unstabilized assets and increasing rental rates in British Columbia. Overall rental and ancillary revenue increased 9% to $149.8 million in 2020 as compared to $137.6 million in 2019. This was mainly due to decreasing concession expense and the continued growth of the Corporation’s portfolio as the average number of units owned by the Corporation increased by 7% over the year.

For same asset properties, which refer to properties owned by the Corporation for the entire twelve month period ended September 30, 2020 and 2019, rental and ancillary revenue increased 2% to $134.1 million in 2020 as compared to $131.4 million in 2019. The average monthly rental rate increased 2% to $948 per unit in 2020, up from $929 per unit in 2019. The vacancy rate increased to 6.7% in 2020 from 5.9% in 2019, mainly due to the increased number of skipped suites as a result of the COVID-19 pandemic.

19

MAINSTREET EQUITY CORP.

Mainstreet’s overall operating expenses increased 11% to $56.7 million in 2020 from $51.3 million in 2019, due mainly to the increased number of newly acquired units since 2019.

The overall and same asset operating expenses on a per unit basis increased by 3%, due mainly to higher property taxes, insurance expenses, and repair and maintenance expenses as a result of the Corporation’s response to COVID-19 to ensure the health and safety of tenants.

As a result, overall net operating income increased 8% to $93.0 million in 2020, from $86.3 million in 2019, while the net operating margin decreased to 62% in 2020, from 63% in 2019.

For same asset properties, net operating income increased 1% to $83.9 million in 2020 from $82.7 million in 2019. The net operating margin remained the same at 63% in both 2020 and 2019.

RENTAL OPERATIONS BY PROVINCE

Mainstreet manages and tracks the performance of rental properties in each of its geographic markets.

British Columbia

Mainstreet achieved a 7% increase in rental revenue in its British Columbia portfolio in 2020 due primarily to a continued increase in market rents in its British Columbia rental markets. The average vacancy rate increased slightly to 0.5% in 2020 from 0.4% in 2019. An above-average occupancy rate can be largely attributed to the overall economic performance of British Columbia, which is among the strongest in the country, according to data published by Statistics Canada. As a result, due to higher occupied rents and occupancy levels, rental revenue per unit increased by 6% to $1,085 per month in 2020, up from $1,025 per month in 2019.

Operating expenses per unit increased by 2% to $288 per month in 2020 compared with $283 per month in 2019, due mainly to increased insurance and property tax expenses, as well as higher repair and maintenance expenses as a result of the Corporation’s response to COVID-19 to ensure the health and safety of tenants. As a result, the net operating income increased 9%, and the net operating margin increased to 74% in 2020 from 72% in 2019.

(000s of dollars except per unit data)
For the year ended September 30,		2020		2019	% change
Rental and ancillary revenue	$	36,318	$	33,831	7%
Operatingexpenses		9,623		9,357	3%
Net operatingincome	$	26,695	$	24,474	9%
Weighted average number of units		2,789		2,751	1%
Average rent per unit per month	$	1,085	$	1,025	6%
Operating cost per unit per month	$	288	$	283	2%
Average vacancy rate		0.5%		0.4%
Operating margin		74%		72%

20 2020 ANNUAL REPORT

Alberta

Mainstreet achieved growth of 7% in its Alberta portfolio in 2020; the weighted average number of rental units grew to 7,286 units, compared with 6,829 units in 2019. The average vacancy rate increased to 7.9% in 2020 from 7.2% in 2019. Rental revenue per unit increased 2% to $954 per month in 2020 from $936 per month in 2019 mainly due to higher rental rates after the stabilization of newly acquired unstabilized assets and decreasing concession expenses in 2020.

Operating expenses per unit increased by 2% to $379 per month in 2020 compared to $371 per month in 2019 due mainly to higher property tax and insurance expenses, as well as higher repair and maintenance expenses as a result of the Corporation’s response to COVID-19 to ensure the health and safety of tenants. As a result, the net operating income increased 9%, and the net operating margin remained the same at 60% for both 2020 and 2019.

(000s of dollars except per unit data)
For the year ended September 30,		2020		2019	% change
Rental and ancillary revenue	$	83,440	$	76,705	9%
Operatingexpenses		33,101		30,433	9%
Net operatingincome	$	50,339	$	46,272	9%
Weighted average number of units		7,286		6,829	7%
Average rent per unit per month	$	954	$	936	2%
Operating cost per unit per month	$	379	$	371	2%
Average vacancy rate		7.9%		7.2%
Operating margin		60%		60%

Saskatchewan

Mainstreet achieved growth of 12% in its Saskatchewan portfolio in 2020, due mainly to the Corporation’s expansion in Saskatoon markets since 2019. The average number of rental units grew to 3,174 units in 2020, compared with 2,845 units in 2019. The average vacancy rate increased to 12.1% in 2020 from 10.2% in 2019 partially due to the acquisition of unstabilized properties in 2020. Excluding these unstabilized properties, the average vacancy rate is 10.5% in 2020. As a net result, rental revenue per unit decreased to $788 per month in 2020 from $793 per month in 2019 due mainly to higher bad debt expense related to COVID-19.

Operating expenses per unit increased by 9% to $368 per month in 2020, up from $337 per month in 2019, due mainly to increased insurance expenses during the period. The Corporation also incurred additional repair and maintenance expenses as a result of the Corporation’s response to COVID-19 to ensure the health and safety of tenants. As a result, the net operating income increased 3% and the net operating margin decreased to 53% in 2020 as compared to 57% in 2019.

as compared to 57% in 2019.
(000s of dollars except per unit data)
For the year ended September 30,		2020		2019	% change
Rental and ancillary revenue	$	30,012	$	27,077	11%
Operatingexpenses		14,013		11,515	22%
Net operatingincome	$	15,999	$	15,562	3%
Weighted average number of units		3,174		2,845	12%
Average rent per unit per month	$	788	$	793	(1%)
Operating cost per unit per month	$	368	$	337	9%
Average vacancy rate		12.1%		10.2%
Operating margin		53%		57%

MAINSTREET EQUITY CORP. 21

SUMMARY OF QUARTERLY RESULTS

(000s of dollars except per share amounts)

		Sep. 30,		Jun. 30,	Jun. 30,		Mar. 31,		Dec. 31,	Dec. 31,		Sep. 30,		Jun. 30,		Mar. 31,		Dec. 31,
		2020			2020		2020			2019		2019		2019		2019		2018
Rental revenue
British Columbia	$	9,096	$		8,998	$	8,919	$		8,693	$	8,521	$	8,379	$	8,218	$	8,099
Alberta		21,364		20,603			20,467		19,998			20,109		19,069		18,465		17,986
Saskatchewan		7,428			7,371		7,314			7,519		7,346		6,825		6,518		6,107
Total rental Revenue	$	37,888	$	36,972		$	36,700	$	36,210		$	35,976	$	34,273	$	33,201	$	32,192
Ancillary revenue		485			498		532			485		599		420		536		416
Interest income		98			37		34			37		40		53		43		43
Total revenue
from operations	$	38,471	$		37,507	$	37,266	$	36,732		$	36,615	$	34,746	$	33,780	$	32,651
Change in fair value	$	51,370	$		(2,527)	$	(3,324)	$		(8,308)	$	15,567	$	5,344	$	7,305	$	(1,308)
Proft (loss)
from operations	$	48,420	$	10,873		$	3,681	$		5,576	$	29,197	$	11,357	$	12,288	$	5,843
Net proft (loss) per share
– Basic	$	5.17	$		1.16	$	0.39	$		0.59	$	3.11	$	1.21	$	1.36	$	0.66
– Diluted	$	5.17	$		1.16	$	0.39	$		0.59	$	3.11	$	1.21	$	1.29	$	0.61
Same assets rental and ancillary revenue
British Columbia	$	9,084	$		9,000	$	8,932	$		8,812	$	8,696	$	8,520	$	8,386	$	8,231
Alberta		18,393		18,277			18,601		18,598			18,868		18,275		18,233		17,962
Saskatchewan		6,042			6,027		6,092			6,250		6,138		6,097		6,039		5,972
Total same assets rental
and ancillaryrevenue	$	33,519	$	33,304		$	33,625	$	33,660		$	33,702	$	32,892	$	32,658	$	32,165
Same assets vacancy rate		7.28%			7.39%		6.57%			5.37%		5.21%		5.81%		6.15%		6.56%
Same assets net operating income
British Columbia	$	7,076	$		6,663	$	6,051	$		6,540	$	6,622	$	6,019	$	5,768	$	6,066
Alberta		11,207		11,003			10,581			11,391		11,985		10,841		10,452		10,894
Saskatchewan		3,358			3,309		3,172			3,559		3,689		3,469		3,356		3,517
Total same assets
net operatingincome	$	21,641	$	20,975		$	19,804	$	21,490		$	22,296	$	20,329	$	19,576	$	20,477
Net operating income	$	24,530	$	23,511		$	21,704	$	23,288		$	24,032	$	21,327	$	20,156	$	20,793
Funds from operations of stabilized			properties – Non-IFRS measurement (Note								1)
	$	11,263	$		9,488	$	8,433	$	10,394		$	9,577	$	7,651	$	7,007	$	8,168
Funds from operations –	Non-IFRS measurement
	$	12,320	$	10,935		$	9,091	$		11,295	$	12,134	$	9,320	$	8,272	$	9,532
Funds from operations of stabilized			properties per			share – Non-IFRS				measurement
– Basic	$	1.20	$		1.01	$	0.90	$		1.11	$	1.02	$	0.82	$	0.78	$	0.92
– Diluted	$	1.20	$		1.01	$	0.90	$		1.11	$	1.02	$	0.82	$	0.73	$	0.86
Funds from operations per		share – Non-IFRS measurement (Note						1)
– Basic	$	1.32	$		1.17	$	0.97	$		1.20	$	1.29	$	0.99	$	0.92	$	1.08
– Diluted	$	1.32	$		1.17	$	0.97	$		1.20	$	1.29	$	0.99	$	0.87	$	1.00
Average vacancy rate
British Columbia		0.5%			0.5%		0.6%			0.4%		0.3%		0.3%		0.5%		0.3%
Alberta		8.6%			8.6%		7.7%			6.4%		6.1%		7.2%		7.5%		7.8%
Saskatchewan		13.0%		13.2%			12.5%			9.7%		9.7%		10.3%		10.2%		10.6%
Total average vacancy rate		8.0%			8.0%		7.4%			5.9%		5.7%		6.4%		6.5%		6.7%

Note 1 – See “Non-IFRS Measures” and Note (1) to the table titled “Summary of Financial Results” for additional information regarding FFO and a reconciliation of FFO to net profit, the most directly comparable IFRS measurement.

22 2020 ANNUAL REPORT

Highlights of the Corporation’s financial results for the fourth quarter ended September 30, 2020:

• Rental and ancillary revenue increased to $38.4 million, compared to $37.5 million in Q3 2020 and $36.6 million in Q4 2019.

• Average vacancy rate for the quarter was 8.0%, compared with 8.0% in Q3 2020 and 5.7% in Q4 2019.

• Change in fair value for the quarter was a gain of $51.4 million, compared with a loss of $2.5 million in Q3 2020 and a gain of $15.6 million in Q4 2019.

• Funds from operations for the quarter were $12.3 million, a 13% increase from $10.6 million in Q3 2020 and an increase of 2% from $12.1 million in Q4 2019. See “Non-IFRS Measures”.

• Net operating income for the quarter was $24.5 million, a 4% increase from $23.5 million in Q3 2020 and a 2% increase from $24.0 million in Q4 2019.

• In Q4 2020, overall economic performance in British Columbia remains among the strongest in the country. As a result, British Columbia continues to achieve below 1% vacancy result and constant revenue growth.

• Mainstreet’s same asset vacancy rate decreased to 7.3% in Q4 2020, from 7.4% in Q3 2020, and same asset revenues increased 1% to $33.5 million in Q4 2020, from $33.3 million in Q3 2020 and decreased 1% from $33.7 million in Q4 2019.

• Net operating income on a same asset basis for the quarter was $21.6 million, a 3% increase from $21.0 million in Q3 2020 and a 3% decrease from $22.3 million in Q4 2019.

• Funds from operations related to stabilized properties were $11.3 million in Q4 2020, a 19% increase from $9.5 million in Q3 2020 and a 18% increase from $9.6 million in Q4 2019. See “Non-IFRS Measures”

STABILIZED PROPERTIES

The Corporation focuses on the acquisition of underperforming properties, renovating them and repositioning the renovated properties in the market at current market rents. Underperforming properties have typically been poorly managed, with substantial deferred maintenance and rents that are often well below current market rental rates.

The Corporation refers to such underperforming properties acquired as “unstabilized properties”; and to the process of renovating and repositioning those acquired unstabilized properties as the “stabilization process”. After completion of the stabilization process, such properties are referred to as “stabilized properties”. The period of time required for the completion of renovations and repositioning of renovated properties at current market rents depends on the condition of the properties acquired, the amount of renovation work required to bring the property up to Mainstreet’s standards and the applicability of rent control legislation to those properties, according to the provinces in which they are acquired.

Based upon the Corporation’s past experience, the average period required for the stabilization process is approximately two years in provinces without statutory rent controls, such as the Provinces of Alberta and Saskatchewan. In British Columbia, due to applicable statutory rent controls, the allowable annual rent increase for existing tenants is determined by the Tenancy Board of the Province of British Columbia (thereby potentially decreasing tenant turnover rate and delaying of rent increases to current market levels). For this reason, past experience suggests the average stabilization process in British Columbia is approximately three years.

As of September 30, 2020, 317 properties (12,601 units) out of 348 properties (13,583 units) were stabilized. The following table summarizes the change of the Corporation’s stabilized and unstabilized units since the beginning of fiscal year 2020.

year 2020.
	Oct. 1,		Acquisition/	Number of units	Sept. 30,
	2019	%	Creation	stabilized	2020	%
Stabilized Units	10,524	82%	–	2,077	12,601	93%
Unstabilized Units	2,377	18%	682	(2,077)	982	7%
Total Units	12,901	100%	682	–	13,583	100%

The following table summarizes the progress of the Corporation’s stabilization progress since the beginning of fiscal year 2020.

MAINSTREET EQUITY CORP. 23

		No. of units	No. of unstabilized
		stabilized	units acquired/
		during	created during
	Oct. 1, 2019	the period	the period	Sep. 30, 2020
Numbers of unstabilized units held for renovation	2,377	(2,077)	682	982
Number of months
Average time spent on stabilization	13	20	6	9
Estimated remaining time for stabilization	11	–	19	15

During the year ended September 30, 2020, the Corporation acquired 258 unstabilized units in Calgary, Alberta; acquired 17 unstabilized units in Cochrane, Alberta; created 1 unit and acquired 276 unstabilized units in Edmonton, Alberta; acquired 82 unstabilized units in Saskatoon, Saskatchewan; and acquired 48 unstabilized units in Kamloops, British Columbia. Some acquired assets required substantial renovation and had rental rates that are considered well below the market for stabilized units. The Corporation has stabilized 2,077 units in 2020, for which renovation work is substantially completed, resulting in rent increases to or near current market levels.

FUNDS FROM OPERATIONS OF STABILIZED PROPERTIES

For 2020, FFO of Mainstreet’s stabilized property portfolio amounted to $42.8 million ($4.57 per basic share and per fully diluted share). See “Non-IFRS Measures”.

diluted share). See “Non-IFRS Measures”.
(000s of dollars except per share amounts)
		Stabilized	Non-stabilized
For the year ended September 30, 2020		properties		properties		Total
Rental and ancillary rental income	$	142,159	$	7,611	$	149,770
Propertyoperatingexpenses		53,317		3,420		56,737
Net operatingincome	$	88,842	$	4,191	$	93,033
Operating margin		62%		55%		62%
Vacancy rate		6.7%		13.3%		7.3%
Interest income	$	(186)	$	(20)	$	(206)
General & administrative expenses		11,390		1,087		12,477
Financing cost		34,599		2,262		36,861
Depreciation (computer and vehicle)		198		22		220
Funds from operations – Non-IFRS measurement	$	42,841	$	840	$	43,681
Depreciation					$	651
Fair value gain						37,211
Deferred income tax expense						11,691
Net proft and total comprehensive income					$	68,550
Funds from operations per share – Non-IFRS measurement
Funds from operations per share
– basic	$	4.57	$	0.09	$	4.66
– diluted	$	4.57	$	0.09	$	4.66
Weighted average number of shares
– basic						9,367,358
– diluted						–

24 2020 ANNUAL REPORT

(000s of dollars except per share amounts)
		Stabilized	Non-stabilized
For the year ended September 30, 2019		properties		properties		Total
Rental and ancillary rental income	$	117,955	$	19,658	$	137,613
Propertyoperatingexpenses		43,167		8,138		51,305
Net operatingincome	$	74,788	$	11,520	$	86,308
Operating margin		63%		59%		63%
Vacancy rate		5.6%		10.1%		6.4%
Interest income	$	(149)	$	(30)	$	(179)
Other income		(260)		–		(260)
General & administrative expenses		10,660		1,803		12,463
Financing cost		31,208		3,563		34,771
Depreciation (computer and vehicle)		212		43		255
Funds from operations – Non-IFRS measurement	$	33,117	$	6,141	$	39,258
Depreciation					$	250
Fair value gain						26,908
Deferred income tax expense						7,231
Netproft and total comprehensive income					$	58,685
Funds from operations per share – Non-IFRS measurement
Funds from operations per share
– basic	$	3.62	$	0.67	$	4.29
– diluted	$	3.52	$	0.65	$	4.17
Weighted average number of shares
– basic						9,154,434
– diluted						9,424,680

In 2020, FFO of the stabilized property portfolio increased 29% to $42.8 million as compared to $33.1 million in 2019, while the number of stabilized units increased 20% to 12,601 units as of September 30, 2020 compared to 10,524 units as of September 30, 2019. The increase in the FFO for stabilized properties was due to the increased number of stabilized units.

stabilized units.
(000s of dollars)
For the year ended September 30,		2020		2019	% change
FFO of stabilizedproperties (Note 2)	$	42,791	$	33,117	29%
Number of stabilized units		12,601		10,524	20%

Note 2 – See “Non-IFRS Measures” and Note (1) to the table titled “Summary of Financial Results” for additional information regarding FFO and a reconciliation of FFO to net profit, the most directly comparable IFRS measurement.

LIQUIDITY & CAPITAL RESOURCES

Access to liquidity is an important as it allows the Corporation to implement its overall strategy. With the current COVID-19 pandemic crisis, the importance of liquidity has been magnified even more due to the uncertainty of when the pandemic will abate. The continuing low interest rate environment has allowed Mainstreet to renew its existing maturing mortgages and obtain new mortgages on clear titles at favourable interest rates. With the COVID-19 pandemic, we have seen declining interest rates which may result in lower interest rates as compared to the existing interest rate, however, potential interest savings may be tempered by an increase in refinancings to ensure appropriate liquidity.

MAINSTREET EQUITY CORP. 25

Working Capital Requirement

Mainstreet requires sufficient working capital to cover day-to-day operating and mortgage expenses as well as income tax payments. In 2020, after payments of all required expenses, the Corporation generated funds from operations of $43.7 million.

Management expects funds generated from operations will continue to grow in the long term when more units are renovated and re-introduced to the market at higher rental rates and Management believes that these funds should be sufficient to meet the Corporation’s working capital requirements on a year-to-year basis going forward. Although the disruption and uncertainty caused by COVID-19 could adversely affect Mainstreet’s tenant’s ability to pay rent on time, as of September 30, 2020, the potential working capital deficiency is being managed through the available liquidity under the banking facility as well as the ongoing financing of mortgage payable, which is discussed and analysed in the session entitled “Financing” below.

Other Capital Requirements

Mainstreet also needs sufficient capital to finance continued growth and capital improvement. In 2020, the Corporation spent approximately $107.6 million on acquisitions and capital improvements. Management expects the following capital resources to be sufficient to meet the capital requirements on a year-to-year basis.

Financing

Debt financing after property stabilization and maturity of initial loans is a cornerstone of Mainstreet’s business strategy. Management believes this unlocks the value added through stabilization and liberates capital for future growth. Management also believes this mitigates the risk of anticipated interest rate hikes and minimizes the costs of borrowing. Mainstreet continually refinances as much floating and maturing debt as possible into long-term debt, primarily CMHC insured mortgages at lower interest rates. Mainstreet’s financing program has remained stable as scheduled since the onset of COVID-19. Furthermore, the current low interest rate environment has allowed Mainstreet to finance its clear title assets and maturing mortgages at attractive low interest rates. In 2020, the Corporation financed 16 maturing mortgages and 31 clear-title assets for $309.0 million at a 10-year fixed interest rate of 2.10% raising approximately $200.1 million additional funds.

Subsequent to year-end September 30, 2020 the Corporation also financed 3 maturing mortgage and 8 clear title properties raising additional $43.1 million at an interest rate of 1.61%. As of September 30, 2020, the Corporation owned title to 27 clear title properties and three development lots having an aggregate fair value of approximately $173 million.

If required, Mainstreet believes it could raise additional capital funds through mortgage financing at competitive rates under which these clear title properties would be pledged as collateral.

The Corporation’s policy for capital risk management is to keep a debt-to-fair value of investment properties ratio under 70%. The current ratio is approximately 52%, which Management believes will leave considerable room to raise additional funds from refinancing if the need arises.

Effective January 2014, the Corporation was granted a banking facility to a maximum of $85 million with a syndicate of chartered financial institutions. The facility is secured by a floating charge against the Corporation’s assets and carries an interest rate of prime plus 1.15%. The facility requires monthly interest payments and is renewable every three years subject to the mutual agreement of the lenders and the Corporation. The Corporation has extended the maturity date to December 5, 2022. As at September 30, 2020, the Corporation has drawn $Nil (September 30, 2019 – $56.4 million) against this credit facility. The facility contains financial covenants to maintain an overall funded debt to gross book value ratio of not more than 65% and debt service ratio of not less than 1.2. As of September 30, 2020, the Corporation’s overall funded debt to gross book value ratio and debt service coverage ratio are 53% and 1.49, respectively.

CONTRACTUAL OBLIGATIONS

As of September 30, 2020, the Corporation had the following contractual obligations, which are anticipated to be met using the existing revolving credit facility, funds from operations and proceeds from the refinancing of maturing and floating mortgage loans.

26 2020 ANNUAL REPORT

PAYMENTS DUE BY PERIOD

Estimated principal payments required to retire the mortgage obligations as of September 30, 2020 are as follows:

(000s of dollars)

(000s of dollars)
Years ending September 30,		Amount
2021	$	101,569
2022		85,821
2023		111,458
2024		145,073
2025		76,908
Subsequent		686,749
		1,207,578
Deferred fnancingcost		(28,057)
	$	1,179,521

LONG-TERM DEBT

LONG-TERM DEBT
(000s of dollars)
				Average interest
For the year ended September 30, 2019		Amount	% of debt	rate (%)
Fixed rate debt
– CMHC-insured	$	1,164,234	96%	2.69%
– non-CMHC-insured		43,344	4%	3.42%
Total debt		1,207,578	100%	2.72%
Deferred fnancingcosts		(28,057)
	$	1,179,521

Mainstreet’s long-term debt consists of low-rate, fixed-term mortgage financing. All individual mortgages are secured with their respective real estate assets. Based largely on the fair value of properties, Management believes this financing reflects the strength of its property portfolio. The maturity dates for this debt are staggered to mitigate overall interest rate risk.

As of September 30, 2020, total mortgages payable were $1,180 million compared to $1,020 million on September 30, 2019, an increase of 15.7% resulting from financing and acquisition activity during the year-ended September 30, 2020.

As of September 30, 2020, Management believes the Corporation’s financial position to be stable, with overall mortgage levels reported at 54% of the fair value of investment properties. About 96% of the Corporation’s mortgage portfolio was CMHC-insured, providing Mainstreet with what management believes are interest rates lower than those available through conventional financing.

To maintain cost-effectiveness and flexibility of capital, Mainstreet continually monitors short-term and long-term interest rates. When doing so is expected to provide a benefit, the Corporation intends to convert short-term floating-rate debt to long-term, CMHC-insured fixed-rate debt.

MAINSTREET EQUITY CORP. 27

MORTGAGE MATURITY SCHEDULE

MORTGAGE MATURITY SCHEDULE
(000s of dollars)
Maturing during the following fnancial year end		Balance maturing	% of debt maturing	Weighted average rate on expiry (%)
2021		79,748	7%	3.94%
2022		67,302	6%	2.84%
2023		97,205	8%	3.37%
2024		137,434	11%	3.36%
2025		69,144	6%	2.67%
Subsequent		756,745	62%	2.39%
	$	1,207,578	100%	2.72%

The average maturing term of mortgage loans is 6.20 years as of September 30, 2020, compared to 5.42 years as of September 30, 2019.

INTERNAL CONTROLS

Disclosure controls and procedures (“DC&P”) are designed to provide reasonable assurance that information required to be disclosed by the Corporation in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. DC&P are also designed to include controls and procedures designed to ensure that information required to be disclosed by the Corporation in its annual filings, interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to the Corporation’s Management, including its certifying officers, as appropriate to allow timely decisions regarding required disclosure.

The preparation of this information is supported by an internal control and procedure framework designed by Management to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The control and procedure framework related to the Corporation’s Internal Control over Financial Reporting (“ICFR”) and DC&P were designed in accordance with Risk Management and Governance – Guidance on Control, published by the Canadian Institute of Chartered Accountants and the requirements of National Instrument 52-109 of the Canadian Securities Administrators entitled, “Certification of Disclosure in Issuer’s Annual and Interim Filings”.

As at September 30, 2020, Mainstreet determined that there were no material weaknesses in the design of its ICFR or DC&P.

Mainstreet’s Management evaluated, or caused to be evaluated under its supervision, the effectiveness of its ICFR and DC&P as at September 30, 2020. Based on this evaluation, Management has concluded that the Corporation’s ICFR and DC&P were effective as at September 30, 2020.

As at September 30, 2020, Mainstreet has confirmed that it has designed DC&P to provide reasonable assurance that information required to be disclosed by Mainstreet in its annual filings, interim filings, or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation, and include controls and procedures designed to ensure that information required to be disclosed by Mainstreet in its annual filings, interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to Mainstreet’s management, including its certifying officer, as appropriate to allow timely decisions regarding required disclosure. No changes were made to the Corporation’s DC&P during the year ended September 30, 2020.

As at September 30, 2020, Mainstreet confirmed it had designed its ICFR to provide reasonable assurances regarding the reliability of the financial reporting and the preparation of financial statements and information for external purposes in accordance with IFRS and that the ICFR operated effectively throughout the reported period. The Corporation may, from time to time, make changes aimed at enhancing their effectiveness and ensuring that these systems evolve with the Corporation’s business. There were no changes in the Corporation’s ICFR during the year ended September 30, 2020, which have materially affected, or are reasonably likely to materially affect, the Corporation’s ICFR.

28 2020 ANNUAL REPORT

Financial Instruments & Risk Management

Fair value of financial assets and liabilities

The Corporation’s financial assets and liabilities comprise restricted cash, cash and cash equivalents, trade and other receivables, mortgages receivable, bank indebtedness, mortgages payable, trade and other payables, and refundable security deposits. Fair values of financial assets and liabilities, summarized information related to risk management positions, and discussion of risks associated with financial assets and liabilities are presented as follows.

The fair values of restricted cash, cash and cash equivalents, trade and other receivables, bank indebtedness, trade and other payables, and refundable security deposits approximate their carrying amounts due to the short-term maturity of those instruments.

The fair values of mortgages receivable and payable are determined using the current market interest rates as discount rates, the net present value of principal balances and future cash flows over the terms of the mortgages. In identifying the appropriate level of fair value, the Corporation performs a detailed analysis of financial assets and liabilities. The inputs used to measure fair value determine different levels of the fair value hierarchy categorized as follows:

• Level 1: Values based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

• Level 2: Values based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability; and

• Level 3: Values based on valuation techniques for which any significant input is not based on observable market data. The fair values of financial assets and liabilities were as follows:

(000s of dollars)

(000s of dollars)
			September		30, 2020		September		30, 2019
			Carrying		Fair		Carrying		Fair
			amount		value		amount		value
Financial assets:
Restricted cash	Level 1	$	3,298	$	3,298	$	3,387	$	3,387
Cash and cash equivalents	Level 1		38,472		38,472		70		70
Trade and other receivables	Level 2		1,308		1,308		1,878		1,878
Financial liabilities:
Bank indebtedness	Level 1		–		–		56,442		56,442
Mortgages payable	Level 2		1,179,521		1,259,831		1,019,723		1,057,210
Trade and other payables	Level 2		9,386		9,386		8,911		8,911
Refundable security deposits	Level 1	$	4,754	$	4,754	$	4,774	$	4,774

• Refundable security deposits for Alberta and Saskatchewan are considered as restricted cash as they are held in trust bank accounts and subject to the contingent rights of third parties.

See also the Notes to the Corporation’s audited consolidated financial statements for the fiscal years ended September 30, 2020 and 2019 (the “Annual Financial Statements”) for additional information regarding financial assets and the risks associated therewith.

Risk Associated with Financial Assets & Liabilities

The Corporation is exposed to risks arising from its financial assets and liabilities. These include market risk related to interest rates, credit risk and liquidity risk. For detailed explanations of these risks, refer to the section entitled “Risk Assessment and Management”.

29

MAINSTREET EQUITY CORP.

SHARE CAPITAL

Authorized:

Unlimited number of common voting shares with no par value Unlimited number of preferred shares with no par value Issued, outstanding and fully paid:

Issued, outstanding and fully paid:
	Year ended September 30, 2020			Year ended September 30, 2019
	Number of		Amount	Number of		Amount
	common shares		(000s)	common shares		(000s)
Issued and outstanding,
– beginning of the period	9,381,730	$	26,597	8,832,305	$	24,215
Shares purchased for cancellation	(31,900)		(90)	–		–
Exercise of stock options	–		–	549,425		2,382
Issued and outstanding,
– end of the period	9,349,830	$	26,507	9,381,730	$	26,597

All common shares share an equal right to dividends.

On May 28, 2020, Mainstreet obtained approval from the Toronto Stock Exchange (“TSX”) to repurchase up to 476,539 common shares of the Corporation under a Normal Course Issuer Bid (“NCIB”) commencing June 1, 2020. The current NCIB expires on May 31, 2021. The Corporation’s previous NCIB expired on May 31, 2020.

During 2020 and 2019, the Corporation purchased and cancelled 31,900 (2019 – Nil) common shares at an average price of $55.37 (2019 – Nil) per common share pursuant to the NCIB for total consideration of $1.8 million (2019 – Nil).

Given the discount between its current trading share price and net asset value (“NAV”), Management believes that the re-purchasing of its common shares is returning capital to shareholders in a tax-efficient manner that is accretive to NAV. Mainstreet will continue to assess on an ongoing basis whether increased purchases of its common shares is warranted.

STOCK OPTIONS

A summary of the Corporation’s stock options as of September 30, 2020, and September 30, 2019 and changes during the periods are presented below:

the periods are presented below:
	September 30, 2020			September 30, 2019
	Number	Weighted average		Number	Weighted average
Stock option	of shares	exercise	price	of shares	exerciseprice
Outstanding and exercisable,
– beginning of the year	–	$	–	822,000	$	5.51
Exercised	–		–	549,425		45.75
Cancelled	–		–	272,575		45.75
Outstanding and excercisable
– end of the year	–		–	–		–

The exercise prices of the options were to equal the market-trading price of the Corporation’s common share on the date of grant. The stock options were fully vested at the time of issue. The fair value of the stock options is determined at the date of grant using the Black-Scholes Model. The assumptions used in determining the fair value of the stock options included estimated risk-free interest rate; expected life of the stock options; expected volatility rate and expected dividend rate. The fair value is recognized as stock compensation expense over the vesting period of the options with a corresponding increase to contributed surplus. Any consideration received by the Corporation on exercise of stock options is credited to share capital as well as the amounts previously credited to contributed surplus for services rendered that were charged to compensation cost.

30 2020 ANNUAL REPORT

During the fiscal year 2019, the Corporation issued 549,425 common shares pursuant to the exercise of outstanding stock options with an average weighted price of $5.51 per common share. Also during the fiscal year 2019, four officers and directors of the Corporation exercised options to purchase 272,575 common shares on a cash settlement alternative basis whereby the Corporation paid to these officers and directors an amount of $7.9 million representing the in-themoney value of the options on the dates of exercise (being the difference between the weighted average closing price of the common shares of the Corporation on the dates of exercise and the exercise prices of the options multiplied by the number of common shares exercised on such basis) and cancelled the stock options. The amounts paid to the officers and directors were recognized as a stock option settlement change in the statement of changes in equity.

As a result of the foregoing, the Corporation has no issued and outstanding stock options.

Since March 24, 2017, the Corporation was unable to grant any further options under the Corporation’s stock option plan and as a result of the foregoing exercise of all remaining issued and outstanding stock options, the Corporation’s stock option plan expired in accordance with the terms thereof.

Shareholder Rights Plan

Effective February 21, 2013, the Board of Directors of the Corporation approved the adoption of a shareholder rights plan agreement (the “Rights Plan”) dated February 21, 2013 between the Corporation and Computershare Trust Company of Canada. The Rights Plan was ratified and approved by shareholders of the Corporation on March 21, 2013 and subsequently amended and renewed by the shareholders of the Corporation on March 18, 2016 and March 29, 2019. The Rights Plan was amended to change the time from 120 days to 105 days for a take-over bid to be taken up to coincide with changes to securities law related to take-over bids, expand the definition of “Convertible Securities” to include any securities issued by the corporation carrying an exercise, conversion or exchange right pursuant to which the holder thereof may acquire Common Shares, amend the definition of “Expiration Time” from 2019 to 2022, amend the definition of “Permitted Lock Up Agreement” to reflect best practices and institutional shareholder services recommendations in respect of shareholder rights plans, amend the definition of “Acting Jointly or in Concert” to better align the same with current securities legislation and make certain amendments relating to the right’s agent duties and procedures to change the Right to Agent. The Rights Plan will expire at the termination of the annual general meeting of shareholders of the Corporation, scheduled for the 2022 fiscal year unless otherwise renewed at or prior to that time.

Immediately upon the Rights Plan coming into effect, one right (“Right”) was issued and attached to each common share of the Corporation outstanding and will continue to attach to each common share subsequently issued.

The Rights will separate from the common shares of the Corporation and will be exercisable on the close of business on the 10th trading day after the earlier of the date on which a person has acquired 20% or more of, or a person commences or announces a take over bid for, the Corporation’s outstanding common shares, other than an acquisition pursuant to a Permitted Bid or a Competing Permitted Bid as such terms are defined under the Rights Plan.

The acquisition by a person of 20% or more of the common shares of the Corporation is referred to as a “Flip In Event”. When a Flip In Event occurs, each Right (except for Rights beneficially owned by an Acquiring Person or certain transferees of an Acquiring Person, which Right will be void pursuant to the Rights Plan) becomes a right to purchase from the Corporation, upon exercise thereof, in accordance with the terms of the Rights Plan, that number of common shares having an aggregate market price on the date of consummation or occurrence of such Flip In Event equal to twice the Exercise Price for an amount in cash equal to the Exercise Price. The Exercise Price for the Rights provided in the Rights Plan is $100. As an example, if at the time of the Flip-in Event the Common Shares have a market price of $25, the holder of each Right would be entitled to receive $200 (twice the Exercise Price) in market value of the Common Shares (8 Common Shares) for $100, i.e.: at a 50% discount.

Certain exemptions exist under the Rights Plans for Portfolio Managers and Grandfathered Persons as such terms are defined in the Rights Plan.

A complete copy of the Rights Plan as amended and renewed, including the specific provisions thereof, is available under the Corporation’s profile filed on SEDAR.

Key accounting estimates and assumptions

The following are the key accounting estimates and assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year:

MAINSTREET EQUITY CORP. 31

• i) Significant estimates used in determining the fair value of investment properties include capitalization rates, market rent, vacancy rate, net operating income and operating expenses. A change to any one of these inputs could significantly alter the fair value of an investment property. Please refer to Note 4 to the Annual Financial Statements for a sensitivity analysis;

• ii) Significant estimates used in determining the fair value of financial instruments include the discount rate used to discount the future cash flows of mortgages for similar loans with similar credit ratings and the same maturities. Please refer to Note 22 to the Annual Financial Statements;

• iii) Allocation of purchase cost in the acquisition of investment properties is based on information from industry practice and entity specific history;

• iv) Allocation of purchase cost in the acquisition of property and equipment into different components, estimation of useful life and impairment, are based on information from industry practice and entity specific history; and

• v) The amount of temporary differences between the carrying value of the assets and liabilities versus the tax basis values and the future income tax rate at which these differences will be realized.

Actual results could differ from estimates.

In addition, beginning in 2020, the COVID-19 pandemic has had a substantial impact on the economy. As a result of the uncertainty associated with the unprecedented nature of the pandemic, certain of the Corporation’s significant assumptions may be impacted. In particular, significant assumptions are required when measuring the value of the Corporation’s properties which are carried at fair value using assumptions based on market conditions, which are uncertain at this time. Accordingly, the full long-term impact of COVID-19 on the valuation of the Corporation’s properties is unknown. Furthermore, assumptions are required in assessing the collectability of any outstanding tenant rent receivable balances and the consideration of applying an allowance for doubtful accounts to these balances. In response to the spread of the virus, provincial governments have limited landlord’s ability to evict tenants for the non-payment of rent. Government responses to the pandemic have resulted in the temporary closure of many businesses, which has had a significant impact on unemployment rates across Canada and may adversely impact resident’s ability to pay rent, with the long-term impact being unknown at this time.

New accounting policies and changes to accounting policies

New IFRSs, including IFRS 16 described below, which relate to accounting periods beginning on or after January 1, 2019 are not expected to have a significant effect on Mainstreet’s financial statements.

IFRS 16 – Leases – Effective for periods beginning on or after January 1, 2019 The new standard on leases supersedes IAS 17, Leases and related interpretations. IFRS 16 eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. From a lessee perspective, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17. From a lessor perspective, the accounting remains similar to current practice of classifying leases as finance and operating leases. The Corporation has concluded that adoption of IFRS 16 does not have material impact on its consolidated financial statements.

Transactions with Related Parties

• a) The President and Chief Executive Officer is paid a commission at commercial rates in his capacity as a licensed broker for certain property transactions conducted by the Corporation in its normal course of business. Commissions are determined on an exchange value basis. Except in very limited circumstances, these commissions are paid by the selling third party or third parties to the transaction. The commissions received by the President and Chief Executive Officer during the year-ended September 30, 2020 amounted to $221,756 (2019 – $406,775). Each year the Chief Executive Officer is entitled to receive an annual performance bonus based upon pre-determined performance goals and discretionary bonus amounts determined by the board of directors. In making such determination, the board of directors takes in consideration the amount of commission paid to the Chief Executive Officer during each year, such that once determined, that portion of the annual performance bonus paid by the Corporation amounts to the difference between the amount of annual performance bonus determined by the board of directors, if any, less the amount of commissions paid to the Chief Executive Officer during that year. As a result, the actual portion of the discretionary bonus, if any, paid by the Corporation each year to the Chief Executive Officer will vary, depending on how much commission was paid to the Chief Executive Officer during that year.

32 2020 ANNUAL REPORT

• b) The Corporation paid legal fees, professional fees and reimbursements for the year-ended September 30, 2020 amounting to $485,641 (2019 – $374,077) to a law firm of which a director and officer of the Corporation is a senior associate. As at September 30, 2020, the amounts payable to the law firm were $Nil (2019 – $5,623). These fees were incurred at amounts which in management’s opinion approximate fair market value that would be incurred by a third party law firm.

Off Balance Sheet Arrangements

No off balance sheet arrangement was made by the Corporation for 2020.

Subsequent Events

Subsequent to year-end September 30, 2020, the Corporation also financed 3 maturing mortgage and 8 clear title properties raising additional $43.1 million at an interest rate of 1.61%.

Subsequent to year-end September 30, 2020, the Corporation acquired additional 91 residential units in the Provinces of British Columbia and Saskatchewan for a total consideration of $9.8 million.

Risk Assessment and Management

Management defines risk as the evaluation of the probability that an event that could negatively affect the financial condition or results of the Corporation may happen in the future. The following section describes specific and general risks that could affect the Corporation. As it is difficult to predict whether any risk will occur or what its related consequences might be, the actual effect of any risk on the business of the Corporation could be materially different than anticipated. The following discussion of risk does not include all possible risks as there may be other risks of which the Corporation is currently unaware. Please also see the risks which are summarized in the Corporation’s Annual Information Form for the year ended September 30, 2020 (“AIF”).

Pandemic Risk

Since December 2019, the outbreak of the novel strain of coronavirus, specifically known as COVID-19, has resulted in all levels of governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to business globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Government and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Corporation in future periods.

The Corporation, in coordination with its Board of Directors, will continue to monitor the situation and has taken and may take additional actions that alter its business operations as may be required by federal, provincial or local authorities or that the Corporation determines are in the best interests of its tenants, employees, suppliers, shareholders and other stakeholders. However, any such alterations or modifications could cause substantial interruption to the Corporation’s business, any of which could have a material adverse effect on the Corporation’s operations or financial results, and could include increased administration, maintenance and repair expenses, related to property modifications, increased cleaning and maintenance of the property, increased communication and technology costs and increased costs related to obtaining personal protection equipment for team members, temporary closures the Corporation’s administrative offices and moves to remote working, temporary or long-term adverse impacts on the Corporation’s supply chain and labour and the potential of increased network vulnerability and risk of data loss resulting from increased use of remote access and removal of data from the Corporation’s facilities. Management of the Company has enacted its COVID-19 business continuity plan and currently only has experienced minimal disruptions to its business operations.

In addition, there is an increased risk of loss to the Corporation due to the failure of its tenants to fulfill their obligations of required payments, resulting in increased bad debt expense and decreased revenue for the Corporation. To date, Canada has experienced unprecedented unemployment rates which could hamper a tenant’s ability to pay rent. In addition, upon expiry of a lease, there can be no assurance that the lease will be renewed or the tenant replaced. Governments have implemented support programs which should mitigate this risk; however, the impact of the risk remains unknown.

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MAINSTREET EQUITY CORP.

There is also risk that the Corporation could be adversely affected due to market changes particularly in supply, interest rates and regional rent controls. With the COVID-19 pandemic, certain provincial governments have frozen rent increases indefinitely, which could adversely impact the Corporation’s cash flows from operating activities. To date, we have seen a decrease in mortgage interest rates. This may provide an opportunity for the Corporation to obtain financing at lower interest rates when mortgages mature and need to be renewed. Lastly, as social distancing practices are maintained, the expected onset of new supply of rental housing may take longer as construction completion times are extended. This decreases the supply risk to the Corporation.

The real estate industry is highly capital intensive and accessing capital may be more difficult during a global health pandemic, including the COVID-19 pandemic. To date, governments have responded quickly to ensure capital remains available, and currently, Mainstreet still remains able to access capital.

Vacancy Risk

The Corporation is subject to tenant vacancy risk when, in some markets and under certain economic conditions, housing/condominiums are affordable, financing is readily available and interest rates are low, making it easier for renters to become homebuyers. This increases vacancy rates and decreases rental revenue cash flow.

Vacancy rates can also be affected negatively by increased supply of multi-family units in the Corporation’s core markets. Numerous other residential developers and apartment owners compete for potential tenants. Although it is Mainstreet’s strategy to own multi-family residential properties in premier locations in each market in which it operates, some of the apartments or its competitors may be newer, better located or offer lower rents. In addition, an increase in alternative housing could have a material adverse effect on the Corporation’s ability to lease units and in the rents charged and could adversely affect the Corporation’s revenues and ability to meet its obligations.

Accordingly, the Corporation’s performance will always be affected by the supply and demand for multi-family rental real estate in Western Canada. The potential for reduced rental revenue exists in the event that Mainstreet is not able to maintain its properties at a high level of occupancy, or in the event of a downturn in the economy, which could result in lower rents or higher vacancy rates. Mainstreet has minimized these risks by:

• attempting to increase customer satisfaction;

• diversifying its portfolio across Western Canada, thus lowering its exposure to regional economic swings;

• acquiring properties only in desirable locations, where vacancy rates for properties are higher than city-wide averages but can be reduced by repositioning the properties through better management and selective upgrades;

• holding a balanced portfolio which includes a variety of multi-family building types including high-rise, townhouse, garden and walk-ups, each with its own market niche;

• maintaining a wide variety of suites, including bachelor suites, one, two and three bedroom units;

• building a broad and varied customer base, thereby avoiding economic dependence on larger-scale tenants;

• focusing on affordable multi-family housing, which is considered a stable commodity;

• advertising and offering competitive market pricing to attract new tenants;

• developing a specific rental program characterized by rental adjustments that are the result of enhanced services and superior product; and

• developing regional management teams with significant experience in the local marketplace, and combining this experience with its existing operations and management expertise.

Economic Uncertainty

Any worldwide or regional economic slowdown, stock market uncertainty and international political credit crisis or uncertainty could adversely impact the business and the future profitability of the Corporation. During any period of economic uncertainty tenants may experience financial difficulty and may default in payment of rent or possibly look for less expensive accommodations thereby having a corresponding longer-term impact on rental and vacancy rates. In addition, Mainstreet’s ability to obtain financing or renegotiate line of credit financing may be negatively affected.

In addition to the COVID-19 pandemic discussed above, the slowing of Western Canada’s economic growth rate has filtered through to weaker employment prospects in the Prairie Provinces, a tempering of housing and rental demand and a decline in net migration with a corresponding impact on the Corporation’s rental and occupancy levels. Still unknown is the impact of various recently enacted or pending government initiatives, including increases to operating

34 2020 ANNUAL REPORT

costs resulting from carbon tax legislation and the implementation of new climate change plans at both the provincial and federal government levels.

Interest Risk

Mainstreet is exposed to interest rate risk to the extent of any upward or downward revision in prime lending rates. Increases in the interest rate have the potential to adversely affect the profitability of the Corporation. However, the Corporation attempts to mitigate this risk by staggering the maturity dates for its mortgages. The majority of Mainstreet’s mortgages and fixed-rate mortgage financings are insured by Canada Mortgage and Housing Corporation (“CMHC”) under the National Housing Association (“NHA”) mortgage program. This added level of insurance offered to lenders allows the Corporation to receive the best possible financing and interest rates and significantly reduces the potential for a lender to call a loan prematurely.

Utilities and Tax Risk

Mainstreet’s business is exposed to fluctuating utility and energy costs such as electricity and natural gas (heating) prices as well as exposure to significant increases in property taxes. Utility expenses, mainly consisting of natural gas and electricity service charges, have been subject to considerable price fluctuations over the past several years. In recent years, water and sewer costs have increased significantly, as other forms of direct and indirect “taxes” imposed by various municipalities. Any significant increase in these costs that cannot be passed on to the tenant / customer may have a significant impact on the operations of the Corporation.

Management continues to monitor all these costs very closely. In order to mitigate these risks, the Corporation has implemented the following steps:

• where possible, electrical sub-metering devices have been installed, passing on the responsibility for electrical charges to the end tenant / customer;

• where possible, direct metering conversion programs have been implemented which effectively introduced a volume-based consumption system rather than a flat rate, in turn lowering operating costs for the Corporation.

• in other cases, rents have been, or will be adjusted upward to cover increased costs; and

• where possible, the Corporation enters into long term supply contracts at a fixed price.

For example, Mainstreet has entered into a rate protected natural gas contract with a maturity date of November 30, 2020 that caps future natural gas costs at $3.50 per GJ in Alberta, but permits the Corporation to purchase natural gas at lower market rates. In Surrey, British Columbia, Mainstreet has completed a water meter conversion program for all its properties.

In addition, over the past few years, municipal property taxes have increased as a result of re-valuations of municipal properties and their inherent tax rates. These re-valuations may result in significant increases in some property assessments due to enhancements, which often are not represented on the Corporation’s balance sheet as such representations are contrary to existing IFRS reporting standards. To address these risks, the Corporation has a team of property reviewers who, with the assistance of outside consultants, constantly review property tax assessments and, if warranted, appeal them. While it is not unusual for the Corporation to receive property tax refunds and / or adjustments, due to uncertainty of the timing and the amount of the refunds or adjustments, these amounts are only reported when they are actually received.

In addition, it is uncertain if municipal property tax rates will increase in certain markets to address municipal revenue losses resulting from the COVID-19 pandemic.

Risks of Real Estate Property Ownership

Real estate investments and projects are, generally, subject to numerous risks depending on the nature and location of the property that can affect attractiveness and sale ability of real estate assets to potential purchasers or other investors, or the owner’s use of such real estate assets, all of which are beyond the control of the Corporation. Such risks include:

• the highly competitive nature of the real estate industry;

• changes in general economic conditions (such as the availability and cost of the property or widespread fluctuations in adjacent property values), including as a result of COVID-19;

• changes in general or local conditions (such as the supply of competing real estate assets or the possibility of competitive overbuilding or the inability to obtain full occupancy or other usage of any real estate assets);

35

MAINSTREET EQUITY CORP.

• governmental regulation, rules or policies (such as increased taxation on the sale of or profits from real estate property, environmental legislation or municipal approvals for usage, development or subdivision); and

• changes in costs or operating expenses anticipated for real estate assets.

Each segment in the real estate industry is capital intensive and is typically sensitive to interest rates. Any proceeds generated by the sale of real estate assets depend upon general economic conditions and, accordingly, the ability to repay its financing may be affected by changes in those conditions. The Corporation will be required to make certain significant expenditures in respect of its business including, but not limited to, the payment of property taxes, mortgage payments, property management costs, insurance costs and related charges which must be made regardless of whether real estate assets are producing sufficient income to service such expenses. If the Corporation is unable or unwilling to meet the payment obligations on such loans, losses could be sustained as a result of the exercise by the lenders of their rights of foreclosure or sale. As a result, the Corporation’s ability to make interest payments or distributions of cash could be adversely affected.

In addition, real estate property investments are relatively illiquid. This illiquidity will tend to limit the ability of the Corporation to vary its property portfolio promptly in response to changes in economic or investment conditions. If the Corporation were required to quickly liquidate its assets, there is risk that the Corporation would realize sale proceeds of less than the stated value of the properties of the Corporation. The Corporation’s property portfolio is concentrated in British Columbia, Alberta and Saskatchewan. As a result, economic and real estate conditions in Western Canada will significantly affect the Corporation’s revenues and the value of its properties.

Renovation Risks

The Corporation is subject to the financial risk of having unoccupied units during extended periods of renovations. During renovations, these properties are unavailable for occupancy and do not generate income. Certain significant expenditures, including property taxes, maintenance costs, interest payments, insurance costs and related charges must be made throughout the period of ownership of real estate property regardless of whether the property is producing revenue. Delays in the renovation of a building or individual apartment units as a result of labour shortages and similar risks, including the COVID-19 pandemic, could delay the renting of such building or units resulting in an increased period of time where the building is not producing revenue or produces less revenue than a fully tenanted building. As the Corporation intends to source labour from other countries and renovation supplies directly from manufacturers in China and elsewhere, the Corporation will be subject to related immigration expenses, possible changes in laws related to the use of migrant or immigrant labour, shipping risks and currency fluctuations, all of which may result in unexpected or higher costs or possible delays. The Corporation intends to address these risks by acquiring financing to fund renovations, staggering renovations and by carrying out a detailed capital expenditures budget to monitor its cash position on a monthly basis. However, recent and possible new changes in federal immigration laws related to migrant or immigrant labour may have a negative impact regarding mitigating an increase in labour costs and expenses. In addition, COVID-19 has and will likely continue to effect the Corporation’s ability to source labour and supplies from other countries.

Credit Risk

Credit risk is the risk that the counterparty to a financial asset will default, resulting in a financial loss for the Corporation. The Corporation is exposed to credit risk as some tenants may experience financial difficulty and may default in payment of rent in the current economic environment. However, the Corporation attempts to minimize possible risks by conducting in-depth credit assessments of all tenants and collecting security deposits from tenants. The Corporation’s tenants are numerous, which also reduces the concentration of credit risk. As tenants’ rent is due at the beginning of the month, all amounts in accounts receivable are considered overdue by the Corporation. As of September 30, 2020, rents due from current tenants amounted to $574,000 (September 30, 2019 – $501,000). The possibility of not receiving payment of rent due from current tenants was covered by security deposits of $4.8 million (September 30, 2019 – $4.8 million) and provisions for bad debts of $200,000 (September 30, 2019 – $145,000).

36 2020 ANNUAL REPORT

The aging bands of rents due from current tenants as at September 30, 2020 and September 30, 2019 are outlined in the table below:

(000s of dollars)

(000s of dollars)
		Sept. 30, 2020		Sep. 30, 2019
0-30 days	$	420	$	290
31-60 days		81		69
61-90 days		7		22
Over 90 days		66		120
Total rents due from current tenants	$	574	$	501

In relation to cash, cash equivalents and restricted cash, the Corporation believes that its exposure to credit risk is low. The Corporation places its cash, cash equivalents and restricted cash only with reputable Canadian financial institutions. Please see “Pandemic Risk” above.

Liquidity Risk

Liquidity risk is the risk that the Corporation will encounter difficulties in meeting its financial obligations. The Corporation manages its liquidity risk by monitoring forecast cash flows on a regular basis to meet expected operating expenses, by maintaining adequate banking facilities, by managing mortgage debt secured by its investment properties and by matching the maturity profiles of assets and liabilities. Please see “Liquidity and Capital Resources” above.

An investment in real estate is relatively illiquid, with the degree of liquidity generally fluctuating in relation to demand for and the perceived desirability of such investments. Such illiquidity may limit the Corporation’s ability to divest itself of certain of its properties promptly in response to changing economic, investment or other conditions. If the Corporation was to be required to quickly liquidate its real property, the proceeds to the Corporation might be significantly less than the aggregate carrying or net asset value of its properties or less than what would be expected to be received under normal circumstances, which could have an adverse effect on the Corporation’s financial condition and financial performance. Illiquidity may also result from legal or contractual restrictions on the resale of properties. In addition, in recessionary times, it may be difficult to dispose of certain types of real estate. The costs of holding real estate are considerable and, during an economic recession, the Corporation may be faced with ongoing expenditures with a declining prospect of incoming receipts. In such circumstances, it may be necessary for the Corporation to dispose of properties at lower prices in order to generate sufficient cash for operations. There can be no assurance that the fair market value of any properties held by the Corporation will not decrease in the future.

Financing Risk

Mainstreet anticipates that it will make substantial capital expenditures for the acquisition of properties in the future. There can be no assurance that debt or equity financing or cash generated by operations will be available or sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to Mainstreet. Moreover, future activities may require Mainstreet to alter its capitalization significantly. The inability of Mainstreet to access sufficient capital for its operations could have a material adverse effect on Mainstreet’s financial condition, the result of its operations or its overall prospects. Please see “Pandemic Risk” above.

Disclosure Controls & Procedures on Internal Control over Financial Reporting Risk

Mainstreet’s business could be adversely impacted if it has deficiencies in its disclosure controls and procedures or internal control over financial reporting. The design and effectiveness of Mainstreet’s disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While Management continues to review the design and effectiveness of Mainstreet’s disclosure controls and procedures and internal control over financial reporting, Mainstreet provides no assurance that its disclosure controls and procedures or internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, particularly material weaknesses, in internal control over financial reporting which may occur in the future could result in misstatements of Mainstreet’s results of operations, restatements of its financial statements, a decline in the share price, or otherwise materially adversely affect Mainstreet’s business, reputation, results of operation, financial condition or liquidity.

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Reliance on Key Employees

Mainstreet’s success depends in large measure on certain key executive personnel. The loss of the services of such key personnel could have a material adverse effect on the Corporation. Mainstreet does not have key person insurance in effect for management. The contributions of these individuals to the immediate operations are likely to be of central importance. In addition, competition for qualified personnel in the industry is intense, and there can be no assurance that the Corporation will be able to continue to attract and retain all personnel necessary for the development and operation of its business. Investors must rely upon the ability, expertise, judgment, discretion, integrity and good faith of the management of Mainstreet.

Income Tax Risk

Mainstreet intends to file all required income tax returns and believes that it will be in full compliance with the provisions of the Income Tax Act (Canada) and all applicable provincial tax legislation. However, such returns are subject to reassessment by the applicable taxation authority. In the event of a successful reassessment of Mainstreet, whether by re-characterization and development expenditures or otherwise, such reassessment may have an impact on current and future taxes payable.

Market Risks

The economic performance and value of the Corporation’s investments in real estate assets will be subject to all of the risks associated with investing in real estate, including, but not limited to:

• changes in the national, regional, provincial and local economic climates, including as a result of the COVID-19 pandemic;

• local conditions, including an oversupply of properties or a reduction in demand for properties;

• the attractiveness of all or parts of real estate assets to renters or purchasers;

• competition from other available real estate assets and

• changes in laws and governmental regulations, including those governing usage, zoning, the environment and taxes.

The Corporation’s performance will be affected by the supply and demand for property in its geographic area(s) of ownership. Key drivers of demand include employment levels, population growth, demographic rents and consumer confidence. The potential for reduced rental revenue exists in the event that demand diminishes or supply becomes overabundant thereby driving down prices for real estate assets.

Acquisitions Risks

Mainstreet’s growth depends in large part on identifying suitable acquisition opportunities, pursuing such opportunities and consummating acquisitions. It is not possible to manage all risks associated with such acquisitions in the terms and conditions contained in commercial agreements pertaining to such acquisitions. The real estate assets may be subject to unknown, unexpected or undisclosed liabilities that may materially and adversely affect the Corporation’s operations, financial condition and results. The representations and warranties, if any, given by arm’s length third parties to the Corporation may not adequately protect against these liabilities and any recourse against third parties may be limited by the financial capacity of such third parties. Moreover, real estate assets acquired by the Corporation may not meet expectations of operational or financial performance due to unexpected costs associated with developing an acquired property, as well as the general investment risks inherent in any real estate investment.

Appraisals of Properties

An appraisal is an estimate of market value and caution should be used in evaluating data with respect to appraisals. It is a measure of value based on information gathered in the investigation, appraisal techniques employed and quantitative and qualitative reasoning, leading to an opinion of value. The analysis, opinions and conclusions in an appraisal are typically developed based on and in conformity with, interpretations of the guidelines and recommendations set forth in the Canadian Uniform Standards of Professional Appraisal Practice. Appraisals are based on various assumptions of future expectations of property performance and while the appraiser’s internal forecast of net income for the properties appraised are considered to be reasonable at that time, some of the assumptions may not materialize or may differ materially from actual experience in the future.

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The Corporation’s properties are measured at fair value based on assumptions influenced by market conditions. Given the uncertainty of the longer-term impact of the COVID-19 pandemic and how it will impact valuation assumptions, uncertainty exists with respect to the valuation of the Corporation’s properties.

Environmental, Health and Safety Risks

Under various environmental, health and safety laws, ordinances and regulations, the current or previous owner or operator of properties acquired or refinanced by the Corporation, may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such properties. These costs could be substantial. Such laws could impose liability whether or not the Corporation knew of, or was responsible for, the presence of such hazardous or toxic substances when it acquired a property.

The presence of hazardous or toxic substances, or the failure to remove or remediate such substances, if any, or restrictions imposed by environmental, health and safety laws on the manner in which such properties may be operated or developed could adversely affect the Corporation’s ability to sell such properties and could potentially also result in claims against the Corporation.

Environmental, health and safety laws provide for sanctions for non compliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental, health and safety laws and common law principles could be used to impose liability for release of and exposure to hazardous substances into the air. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. In addition, third parties may seek recovery from the Corporation in the event of an outbreak of COVID-19 in a property owned by the Corporation. The cost of defending against claims of liability, of complying with environmental, health and safety regulatory requirements, of remediating any contaminated property or of paying personal injury claims could be substantial.

The Corporation may be subject to liability for undetected pollution or other environmental hazards against which it cannot insure, or against which it may elect not to insure where premium costs are disproportionate to the Corporation’s perception of relative risk. Such factors may have an adverse impact on the Corporation.

Mainstreet has policies and procedures to review and monitor environmental exposure, including the completion of environmental audits in connection with the Corporation’s due diligence procedures when looking at potential acquisitions when the Corporation deems if advisable.

Cyber Security Risk

Cyber security has become an increasingly issue for corporations and businesses. A cyber-attack is an intentional attack which can include gaining unauthorized access to information systems to disrupt business operations, corrupt data or steal confidential information. Such an attack could compromise Mainstreet, its employees and tenants’ confidential information, and third parties with whom Mainstreet interacts and may result in negative consequences, including remediation costs, loss of revenue, data corruption, additional regulatory scrutiny, litigation and reputational damages. As a result, Mainstreet has implemented processes, procedures and controls to help mitigate these cyber-security risks, but these measures do not guarantee that cyber-attack can be totally avoided due to ever increasing sophistication of all forms of cyber-attacks.

Climate Change Risk

There is growing concern from members of the scientific community and the general public that an increase in global average temperatures due to emissions of greenhouse gases and other human activities have or will cause significant changes in weather patterns and increase the frequency and severity of climate stress events. Climate change, including the impact of global warming, creates physical and financial risk. Physical risks from climate change include an increase in sea level and changes in weather conditions, such as an increase in intense precipitation and extreme heat events, as well as tropical and non-tropical storms.

Mainstreet owns buildings in locations that may be susceptible to climate stress events or adverse localized effects of climate change, such as sea-level rise and increased storm frequency or intensity. The occurrence of one or more natural disasters, such as hurricanes, fires, floods, and earthquakes (whether or not caused by climate change), could cause considerable damage to its properties, disrupt operations and negatively impact Mainstreet’s financial performance. To the extent these events result in significant damage to or closure of one or more of Mainstreet’s buildings, its operations and financial performance could be adversely affected through lost tenants and an inability to lease or re-lease the space.

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In addition, these events could result in significant expenses to restore or remediate a property, increases in fuel (or other energy) prices or a fuel shortage, increases in the costs of insurance if they result in significant loss of property or other insurable damage, and the introduction of or increases in climate change taxes such as provincial or federal carbon taxes or cap and trade taxes.

No History of Dividends

Mainstreet has not declared or paid any dividends on its common shares since its incorporation. Any decision to pay dividends on the shares will be made by the board of directors on the basis of the Mainstreet’s earnings, financial requirements and other conditions existing at such future time. The dividend policy of Mainstreet is established by the directors and is subject to change at the discretion of the directors. The recourse of shareholders who disagree with the dividend policy or any change in policy is limited and could require such shareholders to seek to replace the directors. Other than pursuant to corporate law and compliance with the provisions of its banking facility, there is no restriction that could prevent Mainstreet from paying dividends or another form of distribution in respect of the common shares.

Workforce Availability

Mainstreet’s ability to provide services to its existing tenants is somewhat dependent on the availability of well-trained employees and contractors to service such tenants as well as complete required maintenance and capital upgrades on its buildings. The Corporation must also balance requirements to maintain adequate staffing levels while balancing the overall cost to the Corporation.

Within Mainstreet, its most experienced employees are employed full-time; this full-time force is supplemented by, seasonal and full-time immigrant labour, additional part-time employees, and specific contract services needed by the Corporation. Mainstreet constantly reviews existing overall market factors to ensure that its compensation program is in line with existing levels of responsibility and, if warranted, adjusts the program accordingly. Mainstreet also encourages employees’ feedback in these areas to ensure existing programs are meeting their personal needs. The COVID-19 pandemic may result in a disruption to the Corporation’s workforce in the event of illness or to their ability to complete their duties in an efficient manner as a result of governmental health and safety requirements.

Uninsured Losses

The Corporation carries comprehensive general liability, fire, flood, earthquake, tornado, natural disaster, extended coverage, rental loss and vacancy insurance with policy specifications, limits and deductibles customarily carried for similar properties. However, there are certain types of risks, generally of a catastrophic nature, such as wars, terrorist attacks or environmental contamination, which are either uninsurable or not insurable on an economically viable basis. Should an uninsured or underinsured loss occur, the Corporation could lose its investment in, and anticipated profits and cash flows from, one or more of its properties, but would continue to be obligated to repay any recourse mortgage indebtedness on such properties.

From time to time the Corporation may be subject to lawsuits as a result of the nature of its business. The Corporation intends to maintain business and property insurance policies in amounts and with such coverage and deductibles as are deemed appropriate, based on the nature and risks of the businesses, historical experience and industry standards. However, there can be no assurance that claims in excess of the insurance coverage or claims not covered by the insurance coverage will not arise or that the liability coverage will continue to be available on acceptable terms. A successful claim against the Corporation that is not covered by, or in excess of, the Corporation’s insurance could materially affect the Corporation’s operating results and financial condition, which would have an adverse effect on the Corporation. Claims against the Corporation, regardless of their merit or eventual outcome, will require the Corporation’s management to devote time to matters unrelated to the operation of the business.

Substitutions for Residential Rental Units

Demand for residential rental properties is impacted by and inversely related to the relative cost of home ownership. The cost of home ownership depends upon, among other things, interest rates offered by financial institutions on mortgages and similar home financing transactions. Recently, interest rates offered by financial institutions for financing home ownership have been at low levels. If the interest rates offered by financial institutions for home ownership financing remain low, demand for rental properties may be adversely affected. A reduction in the demand for rental properties may have a material adverse effect on the Corporation’s ability to lease suites and on the rents charged. This, in turn, may have a material adverse effect on the Corporation’s business, cash flows, financial condition and results from operations.

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Litigation Risks

In the normal course of the Corporation’s operations, whether directly or indirectly, it may become involved in, named as a party to or the subject of, various legal proceedings, including regulatory proceedings, tax proceedings and legal actions relating to personal injuries or illness, property damage, property taxes, land rights, the environment and contract disputes. The outcome with respect to outstanding, pending or future proceedings cannot be predicted with certainty and may be determined in a manner adverse to the Corporation and as a result, could have a material adverse effect on the Corporation’s assets, liabilities, business, financial condition and results from operations. Even if the Corporation prevails in any such legal proceeding, the proceedings could be costly and time consuming and may divert the attention of management and key personnel from the Corporation’s business operations, which could have a material adverse effect on the Corporation’s business, cash flows, financial condition and results of operations and ability to make dividends to shareholders.

Regulatory Risks and Adverse Changes in Law

The Corporation is subject to laws and regulations governing the ownership and leasing of real property, zoning, building standards, landlord/tenant relationships, employment standards, environmental matters, taxes and other matters. It is possible that future changes in applicable federal, provincial, municipal or common laws or regulations or changes in their enforcement or regulatory interpretation could result in changes in the legal requirements affecting the Corporation (including with retroactive effect). Any changes in the laws to which the Corporation is subject could materially affect its rights and title to its assets. It is not possible to predict whether there will be any further changes in the regulatory regimes to which the Corporation is subject or the effect of any such changes on its business.

Increases in real estate taxes and income, service and transfer taxes, or introductions of new taxes such as previously or to be enacted carbon taxes, cannot always be passed through to residents or users in the form of higher rents, and may adversely affect the Corporation’s operating expenses and to pay amounts due on its debt. Similarly, changes or interpretations of existing laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions, as well as changes in laws affecting development, construction and safety requirements, may result in significant unanticipated expenditures, which could have a material adverse effect on the Corporation. Further, residential landlord/tenant laws in certain provinces may provide tenants with the right to bring certain claims to the applicable judicial or administrative body seeking an order to, among other things, compel landlords to comply with health, safety, housing and maintenance standards. As a result, the Corporation may, in the future, incur capital expenditures, which may not be fully recoverable from tenants.

Rent Control

The Corporation may be subject to legislation that exists or is enacted in certain jurisdictions, which restricts the right of landlords to increase rents charged to tenants. As a result, the inability to adjust rents to address higher operating costs or to improve margins on certain properties may have an adverse effect on the returns available from such properties.

Currently, the Corporation operates in Canada in the Provinces of Alberta, British Columbia and Saskatchewan. Neither Alberta nor Saskatchewan is subject to rent control legislation; however, under Alberta rent legislation, a landlord is only entitled to increase rents once every twelve months.

Under British Columbia’s rent control legislation, a landlord is entitled to increase the rent for existing tenants once every twelve months by no more than the “guideline amount” established by regulations. During COVID-19 pandemic, the current guideline is to freeze rent increases until July 10, 2021. When a unit is vacant, however, the landlord is entitled to lease the unit to a new tenant at market rental amount, after which annual increases are limited to the applicable guideline amount. The landlord may also be entitled to a greater increase in rent for a unit under certain circumstances, including, for example, where extra expenses have been incurred as a result of a renovation of that unit.

To manage this risk, prior to entering a market where rent controls are in place, extensive time is spent researching existing rules, and, where possible, the Corporation will ensure it utilizes employees who are experienced in working in these controlled environments. In addition, the Corporation adjusts forecast assumptions on new acquisitions to ensure they are reasonable given the rent control environment.

In addition, please see “Pandemic Risk” above.

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Operational Risks

Operational risk is the risk that a direct or indirect loss may result from an inadequate or failed infrastructure, from a human process or from external events. The impact of this loss may be financial loss, loss of reputation or legal or regulatory proceedings. Mainstreet endeavours to minimize losses in this area by ensuring that effective infrastructure and controls exist. These controls are constantly reviewed and, if deemed necessary, improvements are implemented.

Public Market Risk

It is not possible to predict the price at which Mainstreet’s common shares will trade and there can be no assurance that an active trading market for the common shares will be sustained. The common shares will not necessarily trade at values determined solely by reference to the value of the properties of the Corporation. Accordingly, the common shares may trade at a premium or a discount to the value implied by the value of the Corporation’s properties. The market price for common shares may be affected by changes in general market conditions, fluctuations in the markets for equity securities and numerous other factors beyond the control of the Corporation.

Potential Conflicts of Interest

Mainstreet may be subject to various conflicts of interest because of the fact that directors and officers of the Corporation are engaged in other real estate-related business activities. The Corporation may become involved in transactions which conflict with the interests of the foregoing. Directors may from time to time deal with persons, firms, institutions or corporations with which the Corporation may be dealing, or which may be seeking investments similar to those desired by the Corporation. The interests of these persons could conflict with those of the Corporation. In addition, from time to time, these persons may compete with Mainstreet for available investment opportunities. Directors and officers of the Corporation are required to disclose material interests in material contracts and transactions and to refrain from voting thereon. See also “Transactions with Related Parties” above and “Interests of Management and Others in Material Transaction” in Mainstreet’s AIF.

CHALLENGES

Rising operating costs continue to pose a challenge to Mainstreet. Paid leave was extended to team members who could not work due to family health concerns or to look after their children, who were not able to attend school earlier in the pandemic. Social distancing requirements also restricted the number of team members working in the field, lowering overall workplace productivity. Human resources costs more broadly increased as a result of those restraints.

Additional cleaning, sanitizing, and the purchase of PPE also increased operating expenses for Mainstreet. Mainstreet expects that property taxes, insurance costs, carbon taxes, and other government-imposed costs, which had increased substantially this year, will continue to increase due to economic uncertainty. Further cost increases could be passed down to private-sector operators like Mainstreet by various orders of government facing weakened financial positions.

Higher operating costs come at a time of lower overall activity in the rental market. Mainstreet typically invests heavily in the first three months of the fiscal year to restabilize units in preparation for the summer high season. Economic restrictions in 2020 diminished that peak in the Mainstreet rental cycle, which negatively impacted performance.

Pandemic restraints also increased vacancy rates in the last two quarters of 2020. Management expects this trend to continue at least in the first two quarters of 2021 until lockdowns and travel restrictions are fully lifted.

Finally, high levels of uncertainty persist around the future health of the broader economy. The federal government has extended its two main COVID-19 support programs until June 2021, which will provide necessary capital to businesses and to renters, including Mainstreet clients. It remains unclear whether emergency programs will be extended into the second half of fiscal 2021; new economic restrictions could be imposed if cases of COVID-19 grow rapidly.

OUTLOOK

With these challenges come considerable opportunities to augment Mainstreet's countercyclical growth model. In fiscal 2021, this may involve the rollout of diversification efforts, including potential asset purchases in Vancouver/Lower Mainland (currently accounting for 21% of our assets); mainland British Columbia and Vancouver Island; and other locations outside Alberta and Saskatchewan.

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Current market conditions have meanwhile created highly favourable conditions to expand our portfolio. Costs for acquisitions, our single-biggest expense, have also fallen as the pandemic dampens buying activity. Interest expenses on debt, Mainstreet’s second-largest cost, are also at a record low.

The low cost of debt in particular will help fund Mainstreet acquisitions (the latest pool of 10-year, CMHC-insured debt was locked in at just 1.58%). In the next three years, Mainstreet has $244 million of maturing debts at an average 3.41% interest rate. Mainstreet is hopeful that if the current interest rate environment persists, it may be able to lock in those much lower rates upon renewal. Additionally, Management estimates that Mainstreet will have access to approximately $240 million in available liquidity in the next 12 months (assuming current lending criteria and continuing low interest rates) that can also be deployed for the purpose of acquisitions.

Management believes the mid-market rental industry will remain an essential and safe asset class, underpinned by longterm market fundamentals, like rising populations and relatively low supply of new rental units. As one of the leading providers of inner-city Millennial living, Mainstreet is well positioned to be one of the leading providers of the affordable housing space and continue to improve the quality of living for Canadians.

The Canadian population, meanwhile, is projected to continue grow in the long term even as migration inflows temporarily decline. In November, the Government of Canada announced it would increase immigration targets to 1.2 million people over the next three years — an annual increase of 60,000 new immigrants to 400,000 compared with 340,000 pre-pandemic levels. On October 20, the federal government relaxed restrictions on the inflow of foreign students, one of Mainstreet's target markets, which Mainstreet believes could positively impact the mid-market rental space. The federal government has also detailed plans to absorb a large influx of Hong Kong residents should unrest in the city continue to worsen. Taken together, Mainstreet believes the eventual flow of newcomers to Canada will be highly supportive of a sharp economic rebound.

Mainstreet's financial position is further bolstered by Mainstreet’s considerable residual land base, which is not represented on our balance sheet.

RUNWAY ON EXISTING PORTFOLIO

• 1) Pursuing 100% organic, non-dilutive growth model: Using the Corporation’s strong potential liquidity position which in estimate will be approximately $240 million, Mainstreet believes there is significant opportunity to continue acquiring new assets at low cost.

• 2) Closing the NOI gap: In Q4 2020, 7% of the Mainstreet portfolio was going through the stabilization process. Once stabilized, Management believes same-asset revenue, vacancy rate, NOI and FFO will be meaningfully improved.

• 3) Leveraging loss-to-lease: Mainstreet believes its Vancouver/Lower Mainland market offers a significant opportunity for future same-asset NOI growth. This is partly due to a continued increase in market rates, resulting in loss-to-lease of approximately $264 per unit per month. Currently, over 95% of Mainstreet’s customers in the region are below the market average. With an average annual turnover rate of about 25%, Mainstreet expects its NOI will continue to improve while the Corporation reduces its loss-to-lease over time.

• 4) Lowering interest costs: The current 10-year, CMHC-insured mortgage rate falls between 1.6% and 1.7%. Mainstreet expects interest rates to remain low in the near term, and Mainstreet believes that its refinancing of these maturing debts, which amount to $244 million at average interest rate of 3.41% in the next three years, will result in a substantial reduction in future mortgage expenses.

• 5) Buying back shares at a discount: The Corporation believes MEQ shares continue to trade below their true NAV. Mainstreet will therefore continue to buy back its own common shares on an opportunistic basis under its normal course issuer bid.

ADDITIONAL INFORMATION

Additional information about Mainstreet, including its AIF, is available on the Corporation’s website at www.mainst.biz and on SEDAR at www.sedar.com.

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