Stock pick: Mainstreet Equity Corp (MEQ) buys fixer-upper rentals for double-digit growth

The rent is exactly high enough, it turns out

Chart showing 12-month trailing stock performance for Mainstreet Equity Corp

If you had the option to invest in a real estate company that paid no dividend versus one that did, what would you choose? You’d obviously pick the one that paid a yield. In today’s low interest rate world, high paying real estate investment trusts have done extremely well and a lot of people have bought in to get an income boost.

Since most real estate companies pay a dividend, it’s easy to lose sight of the one that doesn’t. It’s likely you haven’t heard of Mainstreet Equity Corp, a Calgary-based business that takes beaten down apartment buildings in Western Canada, fixes them up and then rents them out. It has no payout and it’s also not a REIT, so it doesn’t get as much attention as some of its peers.

However, a lot of analysts like this company because of its growth, which can be hard to come by in the REIT sector. Mainstreet has seen 14 consecutive quarters of double-digit year-over-year increases in funds from operations and net operating income. In the second quarter—results were released on May 13—it posted revenues of $21.7 million, up 16% over the year before.

Jimmy Shan, an analyst with GMP Securities, was impressed by the results. He wrote, in a May 14 report, that the company was one of the few apartment landlords to increase its net operating income by 5% year-over-year. It did so in the midst of a difficult winter and a rising natural gas price environment.

He also points out that the pace of its acquisitions has remained fairly consistent. It bought 109 units in Calgary and Edmonton for $115,000 per unit and 238 units in Abbotsford, Edmonton and Saskatoon for $90,000 a unit.

Fredric Blondeau, an analyst with Dundee Capital Markets, says that real estate market fundamentals are still strong, especially in Alberta, where 63% of the company’s assets are based. “(Its) units are located in Alberta, which is expected to continue to experience the highest population and economic growth in the country for the foreseeable future,” he wrote in a May 14 report.

He thinks the company will continue to do well going forward. It can increase rent, it will continue to buy more units and its capital needs are fairly limited.

There are some challenges that the company will have to deal with. Rising property taxes and increasing utility costs are the big ones, but it has entered into a natural gas contract that caps future gas prices at $4.50.

The stock is currently trading at $36.50. Shan thinks it could hit $45 over the next 12 months, while Blondeau has a $42 price target on the company.