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TFSA Investors: This Real Estate Value Stock Is Extremely Cheap

Mainstreet Equity (TSX:MEQ) is a Canadian real estate company based in Calgary, Alberta. The company is focused on the acquiring, re-developing, re-positioning, and managing mid-market rental apartment buildings in five major Canadian cities: Vancouver, Calgary, Edmonton, Saskatoon, and Regina.

The company is extremely cheap and has a price-to-earnings ratio of 9.62, price-to-book ratio of 0.80, and market capitalization of $616 million. Low-cost debt is aggressively used at Mainstreet Equity, as evidenced by a debt-to-equity ratio of just 1.4. The company has excellent performance metrics with an operating margin of 52.10% and a return on equity of 8.47%.

Mainstreet’s goal is to become Canada’s top provider of affordable mid-sized, mid-market rental accommodations, which typically includes properties with fewer than 100 units. In pursuit of this vision, the company pursues six steps to build long-term shareholder value: acquisitions, capital improvements, operational efficiencies, value enhancement, financing, and divestitures.

The value creation process includes acquisition deals — identifying and purchasing underperforming rental units at prices well below replacement costs; capital improvements deals — increasing the asset value of Mainstreet’s portfolio by renovating acquired properties; and operational efficiencies — minimizing operating costs through professional management, efficient technology, and energy-saving equipment.

The next stage of the value-creation process includes value enhancement — re-positioning renovated properties in the market as Mainstreet-branded products for higher rents and building and sustaining customer loyalty through high levels of service; financing deals — maintaining a sound capital structure with access to low-cost, long-term Canada Mortgage and Housing Corporation (CMHC) insured mortgage loans; and divestitures — occasionally selling mature real estate properties to redirect capital into newer, higher-potential properties.

The company has reported excellent results over the last two years. In 2018, Mainstreet stabilized 705 units, a company all-time high, and also raised $76 million in 10-year, long-term CMHC insured mortgages at an average interest rate of 3%. The company took advantage of low interest rates and locked in 91% of the mortgages portfolio, as CMHC-insured mortgages at an average interest rate of a record low 3.01% with an average maturity period of six years, which significantly reduced exposure to interest rate risk.

The company achieved 100% organic, non-dilutive growth by acquiring 1,717 units for over $200 million and significantly improved occupancy rate to 93.6% at the end of 2018, up from 89.3% a year earlier. Mainstreet also has been making cost-effective investments in new technology, including a five-year, $2-$3 million investment in a leading software technology firm, Yardi System Inc., which will automate company systems and improve operational efficiencies.

Mainstreet has engaged in huge share buybacks when Bob Dhillion, the company’s CEO and Indian-born immigrant, believed that shares were trading below the net asset value. The company plans to continue to buy back common shares on an opportunistic basis.

With the ongoing stress in Alberta’s economy, Mainstreet has huge potential to build long-term shareholder value by opportunistically buying apartment buildings. The stock has compounded in excess of 17% per year over the last 20 years under the leadership of Bob Dhillon, who owns 40% of the company.

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Fool contributor Nikhil Kumar owns shares of MAINSTREET EQ J.

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