Canadian real estate is in a precarious position. This year, interest rates are rising while families see their savings evaporate due to inflation. It’s the perfect recipe to finally take some steam out of the country’s overvalued real estate market. Real estate investment trusts (REITs) and property managers are likely to feel the impact soon.
However, one real estate operating company (REOC) seems to be better positioned than all the rest. In fact, the downturn could create more opportunities for this real estate manager to boost long-term performance. Here’s a closer look at Mainstreet Equity (TSX: MEQ).
Beaten-down valuation
Mainstreet has lost roughly 24% of its value since March. This dip perfectly coincides with the Bank of Canada’s decision to start raising interest rates. In other words, investors are worried about the impact of a housing market crash.
These fears are justified for most REITs, REOCs, and much of Canada’s real estate sector. However, Mainstreet’s portfolio is relatively undervalued and the stock wasn’t overbought during the boom years. Much of the portfolio is based in Alberta, where property prices have been relatively reasonable for the past decade.
Last year, the company reported $5.08 in funds from operation per share. Assuming 15% growth this year, MEQ’s stock could be trading at 20 times FFO. It’s also trading at 93% of net book value per share. That’s a fair price for a company that’s been expanding revenue and free cash flow at 15% CAGR for 20 years.
Calgary
Canada’s housing bubble is concentrated in two of the nation’s biggest cities: Toronto and Vancouver. Mainstreet has little exposure to these inflated markets. Instead, the company’s portfolio is primarily based in Calgary.
Calgary’s housing 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 income and employment. If a barrel of crude oil remains above $100, Calgary could see another boom.
Mainstreet also has exposure to Saskatchewan and Manitoba, where rising food and fertilizer prices are propelling a similar income boom. This means the company’s underlying portfolio is well positioned for the current economic climate.
Student housing
Mainstreet is also exposed to student housing units across Western Canada. The company owns and operates purpose-built student rentals near the University of Calgary, MacEwan, Mount Royal and Simon Fraser, among several others.
These units are in high demand, as the number of overseas students rebound to pre-pandemic highs. Meanwhile, the rental yield per square foot is relatively higher than comparable residential units across these regions.
It’s an overlooked and profitable niche. Mainstreet’s early investments here give it an edge.
Bottom line
Canada’s real estate sector could face a downturn. However, some regions and niche segments of the market are already undervalued. Student rentals in Western Canada and residential units in Calgary are examples of this. That’s why Mainstreet Equity Partners should be on your watch list.
