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Bob Dhillon is CEO, founder, and 36-per-cent owner of the company that’s snapping up run-down apartment buildings, fixing them up, and renting them out at higher rents suitable for the middle of the market.Larry MacDougal/The Globe and Mail

All the risk of real estate – with none of the income!

It doesn't sound terribly appealing to investors, but it's worked for Mainstreet Equity Corp. After all, with risk can come reward, and long-term shareholders have had plenty of it: a return of more than 800 per cent from its 2008 low, solely through share-price appreciation (no dividend, thank you).

Mainstreet shares have stalled over the last two years, however, for good reason. The company's real estate is concentrated in western cities like Calgary, Edmonton and Saskatoon. With Canada's economy, led by those sputtering western oil-based economies, slowing, and possibly tipping into recession, there's a legitimate question as to how well Mainstreet will weather the storm.

The flip side, of course, is that Mainstreet shares are cheap compared to many other real-estate stocks, nearly all of which focus on more established properties and give their investors some or all of their cash flow through a real-estate investment trust structure. That could mean a buying opportunity – as long as investors know exactly what they're getting when they travel down this road.

"If you want a distribution or a dividend, you've got 40 companies to choose from," said Bob Dhillon, Mainstreet CEO, founder, and 36-per-cent owner of the company.

"If you want an overall return … a true equity play, you would invest in me," Mr. Dhillon said in an interview with The Globe on Thursday. "Strategically, we didn't want to get into a bucket of competing with the 40 not only in the business model, but being valued on what kind of distribution you pay … we are a totally different deal."

Here is the deal: Mainstreet's business model is snapping up run-down apartment buildings, fixing them up (i.e. "stabilizing" them), and renting them out at higher rents suitable for the middle of the market. That stabilization process can take two years (three in some British Columbia cities) and requires a lot of capital expenditure. The REIT structure, where tax law requires most of the company's cash flow be sent directly to shareholders, is inappropriate for that business model, Mainstreet argues.

It's an immensely appealing business model: Buy low, sell high, Mr. Dhillon notes. And the company's third-quarter results, released this week, showed double-digit growth in earnings for the 19th consecutive quarter. (To make the claim, Mainstreet uses "funds from operations" and "net operating income," two real-estate-specific earnings measures, rather than net income.)

But what the Mainstreet model also means is the company has hundreds of millions of dollars of properties in Alberta, some not yet generating income to their full potential, just as the province's jobs picture is gloomier than it has been in years.

Canada Housing and Mortgage Corp. has forecast significant increases in rental apartment vacancy rates for Calgary, Edmonton, and Saskatoon for 2015 and 2016, notes analyst Jenny Ma of Canaccord Genuity.

"In our view, the weakening fundamentals in these core markets are expected to make it more difficult for Mainstreet to maintain portfolio occupancy and generate rental rate growth," she said, explaining why she's cut her forecast for the company's growth.

At Friday's closing price of $36.05, investors are more pessimistic than the analysts who follow Mainstreet, though. The six analysts affiliated with Canadian investment banks, including Ms. Ma, all have "buy" ratings, with an average target price of nearly $46. Ms. Ma, at $41.50, has the lowest.

Peter Prattas of AltaCorp Capital, who has a $46 target price, says there is "significant hidden value in Mainstreet's portfolio" because of the gaps between the unstabilized and stabilized vacancy rates, the potential for Mainstreet to increase its rent on many properties to market levels, and the potential for Mainstreet to refinance its borrowings to lower, market rates.

Mainstreet trades at about 13 times its "funds from operations figure," Mr. Prattas says; he believes a 17 multiple is more appropriate.

That P/FFO measure may be the best way to look at Mainstreet's valuation. The stock trades at a sharp discount to its net asset value, a number of analysts note. Mainstreet, like many other real-estate companies, calculates the value of its properties (the biggest contributor to NAV) using a method that relies on an estimate of one year's worth of net operating income (and has outside assessors sign off). At more stable companies, that NOI estimate can track closely to the company's reported results. But at Mainstreet, there can be variance, the analysts at Accountability Research noted in initiating coverage in April, 2014, with a "sell" rating. At the end of fiscal 2013, the NOI estimate was 20 per cent higher than what the company actually recorded in the preceding 12 months.

That gap has now narrowed – it is about 6 per cent, The Globe calculates, based on the June 30 numbers. But Mainstreet questions whether the comparison is relevant at all. Brendon Abrams, the company's vice-president, capital markets, notes that Mainstreet's model of acquiring buildings that take time to make fully profitable means that there are always properties in the portfolio that contribute little or nothing to trailing earnings – but clearly have future earnings power that should be included in the valuation estimate.

Which, really, brings us back to the issue: Stability is not Mainstreet's business model; getting properties stabilized, and reaping their future potential, is. And with all of Mainstreet's properties in the three westernmost provinces, investors are understandably nervous about whether that potential can be achieved in the near term, or if Mainstreet is going to have a painful interruption in its track record of growth.

But for Mr. Dhillon – remember that "buy low, sell high" model – Alberta's problems are "a golden, golden opportunity."

"Everybody, for all the right reasons, is down on Alberta, because of oil prices, Keystone, Iran deal, NDP government," he says.

"Everything possible that could have gone wrong in Alberta has gone wrong in the last year. But I see this as a golden opportunity of expanding our asset base in our backyard at fair, reasonable prices, because I think there will be less buyers right now. Interest rates are at an all-time low, and we have the liquidity to go out there and buy … we have all these opportunities which we wouldn't have had if the winds in Alberta didn't change."