This Calgary real estate company has had a compound book value of 15% for 20 years!

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Canadian real estate is in a precarious position. This year, interest rates are rising as families watch their savings evaporate due to inflation. It’s the perfect recipe to finally take a breather from the country’s overvalued real estate market. Real estate investment trusts (REITs) and property managers should soon feel the effects.

However, one real estate operating company (REOC) seems better positioned than all the others. In fact, the downturn could create more opportunities for this property manager to increase long-term performance. Here is closer Main Street Equity (TSX: MEQ).

Evaluation beaten

Mainstreet has lost about 24% of its value since March. This drop coincides perfectly with the Bank of Canada’s decision to start raising interest rates. In other words, investors worry about the impact of a real estate crash.

These fears are justified for most REITs, REOCs and much of the Canadian real estate sector. However, Mainstreet’s portfolio is relatively undervalued and the stock was not overbought during the boom years. A large portion of the portfolio is based in Alberta, where property prices have been relatively reasonable over the past decade.

Last year, the company reported $5.08 in funds from operations per share. Assuming 15% growth this year, MEQ shares could trade at 20 times FFO. It also trades at 93% of net book value per share. That’s a fair price for a company that’s been growing revenue and free cash flow at a CAGR of 15% for 20 years.

Calgary

Canada’s housing bubble is concentrated in two of the country’s largest cities: Toronto and Vancouver. Mainstreet has little exposure to these inflated markets. Instead, the company’s portfolio is primarily based in Calgary.

Calgary’s real estate market avoided the bubble of the past decade. Property prices are still in line with median income. Meanwhile, the oil boom is likely to boost incomes and employment. If a barrel of crude oil stays above $100, Calgary could experience another boom.

Mainstreet also has exposure to Saskatchewan and Manitoba, where rising food and fertilizer prices are propelling a similar revenue boom. This means that the company’s underlying portfolio is well positioned for the current economic climate.

Student housing

Main Street is also exposed to student housing throughout Western Canada. The company owns and operates purpose-built student rentals near the University of Calgary, MacEwan, Mount Royal and Simon Fraser, among others.

These units are in high demand as the number of international students has rebounded to pre-pandemic highs. Meanwhile, the rental yield per square foot is relatively higher than comparable residential units in these areas.

It is an overlooked and profitable niche. Mainstreet’s early investments here give it an edge.

At the end of the line

The Canadian real estate sector could face a slowdown. However, some regions and niche segments of the market are already undervalued. Student rentals in Western Canada and residential units in Calgary are examples. That’s why Mainstreet Equity Partners should be on your watch list.

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