Mainstreet Equity Corp.

8^th Consecutive Quarter of Double-Digit Growth: Mainstreet Equity Corp. (TSX: MEQ) is a residential real estate company in Canada. It is focused on the acquisition, redevelopment, repositioning, and management of mid-market rental apartment buildings in Canadian markets. As on 20 July 2020, the market capitalization of the company stood at ~CAD 619.05 million.

Quarterly Performance: The company has reported the 8^th consecutive quarter of double-digit growth in both revenues and funds from operations in the second quarter. During the quarter, the company witnessed a growth of 11% in revenue and an increase of 10% in FFO. Despite a high number of un-stabilized acquisitions, the company reported a growth of 8% in net operating income. MEQ also reported a stable balance sheet with the liquidity of CAD 170 million.

Key Risks: The halt in economic activity in Q2 has a season of high rental activity, which is likely to be postponed until August. Temporary closure of the Canadian border due to the global pandemic has also restricted the inflow of foreign students and immigrants, potentially diminishing income. The management also believes negative macro-economic forces could have caused short positions in respect to the trading of Mainstreet common stock.

Outlook: Unprecedented challenges from the COVID-19 crisis could usher in a new era for Mainstreet. The company expects the lower costs for acquisitions and debt will drive unparalleled opportunities to organically expand the company’s portfolio. The Board also expects that these opportunities may outweigh any near-term downside operating risks faced by Mainstreet.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: MEQ is of the view that the current downturn is not structural and is likely to return to growth in the coming periods supported by positive immigration policies and a continued flow of foreign students. Mainstreet's mid-market rental rate seems to be perfectly positioned to attract would-be renters in today's market. As per TSX, the stock of MEQ is trading slightly below the average of its 52-week trading range. The stock of MEQ gave a return of 9.67% in the past three months. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, positive outlook, improvement in operating and financial performance and resilience despite the softer market conditions, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 66.21, down by 0.8684% on 20 July 2020.

MEQ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Morguard Corporation

Consistent Occupancy across All Asset Classes: Morguard Corporation (TSX: MRC) is a real estate company that acquires, owns, and develops properties in Canada and the United States. As on 20 July 2020, the market capitalization of the company stood at ~CAD 1.48 billion.

Quarterly Performance (For the Period Ended 31 March 2020): During the three months ended 31 March 2020, total revenue of the company witnessed a slight improvement of 1% to CAD 292.3 million. In the same time span, Net operating income decreased by 1.9%, to CAD 102.6 million primarily due to lower NOI from the retail and hotel portfolios, partially offset by higher NOI from the net impact of acquisitions and dispositions. During the quarter, the company retained a healthy balance sheet with total assets of CAD 11.9 billion. Occupancy was consistent across all asset classes, supporting the Company's business objective of generating stable and increasing cash flow through its diversified portfolio of real estate assets. The Board announced the second quarterly dividend of CAD 0.15 per common share.

Quarterly Performance (Source: Company Reports)

Key Risks: The Company saw the impact of the novel strain of coronavirus on many of its tenants in North America and its stakeholders. The measures to sustain the pandemic including the implementation of travel bans, closures of non-essential businesses, self-imposed quarantine periods and social distancing, have caused an economic slowdown and material disruption to the business.

Stock Recommendation: The unprecedented COVID-19 global event has demonstrated the strength and resilience of the company and has provided greater stability during volatility. MRC has diversified its portfolio and has provided more reliable financial performance over time. As per TSX, the stock of MRC is trading close to its 52-week low of CAD 114.18, proffering a decent opportunity for the investors. On a TTM basis, the stock of MRC is trading at an EV/Sales multiple of 7.5x, lower than the industry average of 16.9x (Financials), and thus seems undervalued. Considering the attractive trading levels, decent financial performance, stability despite the market volatility and growth opportunities, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 131.99, down by 0.00758% on 20 July 2020.

MRC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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