• Capital Curve
  • Posts
  • Exploring Western Canada Real Estate: Focusing on Mainstreet Equity

Exploring Western Canada Real Estate: Focusing on Mainstreet Equity

The #1 Newsletter for Private Equity

Welcome to Capital Curve. We discuss what does, or does not, make a well-run business.

Western Canada Real Estate

Canada Real Estate News

Higher mortgage rates and a long-term lack of supply of new housing will make homeownership even less affordable.

Rental market conditions are expected to further tighten.

The CMHC expects home prices to decline YoY.

Vancouver Canada Housing:

Rental demand will outpace growth in the purpose built rental supply, so the secondary market will have to accommodate the demand.

Young migrants will flow into Vancouver, but large swathes of aging millennials will delay the move to homeownership. The result: Vancouver Canada Housing market will have to accommodate a larger share of households.

Edmonton housing

Expect annual growth in the average price in Edmonton to be less than 1% in 2023

Reason: a shift in sales toward lower-priced options in the first half of the year

In the second half of the year, home sales at higher price points, particularly in the single-detached segment, should recover and return to their historical share of sales.

Oil and gas prices remaining higher than pre-COVID levels should contribute to a more favorable outcome for the economy through 2025.

Calgary real estate

Calgary’s Real Estate Market will continue to ease from a hotter 2022, but will remain relatively strong and will be supported by continued population inflows.

Affordability in the rental market will decline as vacancies continue to decrease and rents continue to rise.

Mainstreet Equity (TSX:MEQ) has compounded 20% for the last 20 years from $3.9/share in 2003 to about $133/share today.

What does Mainstreet Equity do?

  1. Identify distressed Western Canada Real Estate Market

  2. Buy the building below replacement value (cost to build a similar structure at current prices)

  3. Renovate the property

  4. Lease it out to university students and new entrants in the working class

  5. Refinance the debt

Why are they successful?

Disciplined capital allocators

Western Canada Real Estate. That’s it. MEQ does not look at properties elsewhere, regardless of their success. They buy mid-sized apartment buildings that are too big for small real-estate operators and too small to be included in a REIT.

REOC, not a REIT

MEQ classified themselves as a real-estate operating company.

Now, what’s the difference between a REIT and REOC?

A real-estate operating company does not charge a management fee and does not pay-out a yield to investors. Cash stays in the business to reinvest in growth.

No stock issuance

In 22 years of existence, MEQ has not diluted equity holders to raise capital. In fact, they have bought back shares at times they believed it to be undervalued.

Skin in the game

Bob Dhillon, the CEO of Mainstreet Equity, owns about 45% of the company's shares outstanding. Incentives are aligned.

Is it too good to be true?

No. MEQ has risks.

For one, to what extent does Bob micromanage his employees? What does capital allocation look like without him?

Two. How does long-run inflation allow him to continue buying buildings under replacement value?

That’s it. A serial compounder.

Disclaimer: This is for informational purposes only. This is not investment advice. To consider the merits of an investment, please seek out a financial advisor.