Powerhouse Calgary landlord awes analysts and gears for aggressive push into B.C. and the U.S.A.
FRANK O’BRIEN
Other
Top Toronto stock analysts are discovering what western Canadian rental tenants and investors have known for years: street-wise Mainstreet Equity Corp. is a dominant player in Canada’s rental apartment market. Recently, the Calgary-based landlord has grabbed one-third of the apartment market in Surrey and is mounting a U.S. invasion. Mainstreet went public (MEQ/TSX) in 1998 with 200 apartment units. It now has more than 7,000 apartments and it is the fourth-best-performing real estate company in Canada, only lagging InterRent REIT, Canmarc REIT and Morguard Corp., according to analysts from Canaccord Genuity, Dundee Capital Markets, TD Newcrest and GMP Securities.
Mainstreet has a simple formula: it buys older apartment buildings, mostly walk-ups, at below replacement value, fixes up the property, raises the rent and adds long-term value to the building. Mainstreet just does it on a bigger and smarter scale than most anyone else. It is credited with turning whole neighbourhoods around, such as in Edmonton’s northern downtown where it upgraded some 70 old rental buildings.
Recent appraisals show Mainstreet’s portfolio is valued at $911 million, with a 5.6 per cent capitalization rate.
Trading at press time around $22 per share, (it was at $14.75 at the end of 2010) projections are that Mainstreet shares will top $26 shortly as it pursues an aggressive acquisition and value-added strategy.
When it released results for 2011, Mainstreet confirmed it had bought $120 million of rental apartments over the past 18 months in Ontario, Alberta, Saskatchewan and B.C.
“It is important to note that Mainstreet achieved this growth without any equity dilution. Instead, it funded this organic growth through refinancing matured mortgages and financing properties after stabilization,” said Bob Dhillon, Mainstreet’s chief executive and largest shareholder.
Dhillon is quick to distance Mainstreet from its bigger competitors, real estate investment trusts (REITs), which pay out most income in dividends, he explained, while Mainstreet adds value through acquisitions and improvements.
Buy rating
Mainstreet closed 2011 with a per-building net operating income (NOI) increase of 11 per cent. Its portfolio’s vacancy rate fell from 14.1 per cent in 2010 to 8.1 per cent as of December 2011. This is particularly impressive, since about 16 per cent of Mainstreet apartments were still under renovations.
Said Canaccord analyst Shant Poladian: “We are maintaining our buy rating as Mainstreet continues to offer attraction valuation and significant cash flow upside potential.”
Dhillon’s secret to success includes the use of Canada Mortgage and Housing Corp. (CMHC)-insured mortgages; going long-term on loans; “staying hungry” for acquisitions and expanding into Saskatoon and B.C.’s suburban Lower Mainland. Dhillon said Mainstreet now controls 30 per cent of the apartment building mid-market in both Surrey and Abbotsford and has locked up about 10 per cent of mid-range Saskatoon’s rentals.
He started his career buying foreclosed Calgary apartment buildings when he was barely out of his teens, sometimes sleeping in his car in front of the CMHC offices where foreclosed properties could be bought on a first-come, first-serve basis. “I still do the purchase of every building, the debt market and the capital market,” Dhillon said.
“When we buy a building, we set up a budget on the capex [capital expenditures] and we set the market rents for after the renovations.”
Dhillon dismisses fears of exposure on Mainstreet’s $476 million debt if mortgage rates should suddenly jump. The company has locked in all its loans for 10 years with interest rates as low as 2.9 per cent to 3.5 per cent, considered six-decade lows. “Take in the inflation rate and the interest is free,” he said.
Known for its concentration on Alberta and Saskatchewan, Mainstreet is now focused on Metro Vancouver’s suburbs, and sees Surrey and Abbotsford as the trump plays.
Surrey has the lowest apartment unit count per capita in Canada, Dhillon explained, and Abbotsford also has a low supply of apartments, yet both have strong economies, growing in-migration and relatively low prices for apartment blocks. He also likes Abbotsford because the rental vacancy rate is fairly high, at around 6 per cent.
“You should be investing when the apartment vacancy rate is high,” Dhillon said, because that is when the prices are lower.
Japan-born Dhillon – a self-styled “street rat” who grew up as a Sikh in Calgary and Vancouver – is convinced that, due to foreign buyers, house prices in Vancouver will continue to soar, which will force working-class families into the Fraser Valley to rent the apartments that Mainstreet specializes in.
“Canada [real estate] is cheap,” he said. “We don’t realize how cheap it is. Unless we change our immigration laws, the average person will never be able to afford to buy in [the City of] Vancouver,” he said, “Canada is the best country in the world and people want to move here.”
Dhillon believes resource-rich Western Canada is on a straight-up trajectory.
“The real estate cycle in Western Canada hasn’t even started yet; the commodity price cycle hasn’t started yet,” Dhillon said, forecasting that oil will rise to $200 per barrel. Despite its tight apartment market, Dhillon won’t buy in Winnipeg, where he describes the rent-controlled environment as “communist.”
Mainstreet will soon be breaking its western Canadian mould with a plan to launch into the United States, Dhillon confirmed. “I would be crazy not to attack the U.S. market; the only question is how to attack. But it will be significant. When we go into a geographical area in the U.S., we will be a dominant player.”
from Western Investor February 2012