Mainstreet Equity Corp.

Mainstreet Equity Corp. (TSX: MEQ) is a residential real estate company in Canada which focuses on the acquisition, redevelopment, repositioning, and management of mid-market rental apartment buildings in Canadian markets.

Key Highlights:

• Improved Financial Metrics: The company reported continued growth with limited equity dilution over the years, which indicates business resilience. In the recent past, most of the real estate company reported a slide in their rent collection and a shrink in the profitability due to lower consumer income and a rise in the unemployment rate. However, the group maintained its rent collection above ~96% in the recent past, while it fell to ~94% during April 2020.                               

Source: Company Presentation

• Impressive Outlook supported by favourable Macros: The Management indicated that, due to the ongoing economic jolt, the company would be benefited with the lower cost of acquisition and a lower cost of debt. Lower cost of acquisition would lead to meaningful acquisitions due to panic-driven selling strategies within the real estate market. Furthermore, the decline in the interest costs would help the company to report improved profitability in the coming days.

• Elevated Asset Growth: The company reported a higher net asset value over the years, which indicates consistent appraisal of the company’s assets over the years. Net asset value stood at CAD 2.09 Billion as of August 31, 2020, increased from CAD 1.4 billion in FY16.

Source: Company Presentation

Q3FY20 Financial Highlights:

• Total rental and ancillary revenue stood at CAD 37.470 million, higher from CAD 34.693 million. The increase was driven by improved rent income from British Columbia and Alberta regions.
• Net operating income increased to CAD 23.511 million, as compared to CAD 21.327 million in Q3FY19, thanks to a higher income and a marginal increase in property operating expense.
• Profit before Fair value gain and income tax stood at CAD 10.767 million, as compared to CAD 9.256 million in the previous corresponding period (pcp).
• Net profit and total comprehensive income shrank to CAD 10.873 million, from CAD 11.357 million in Q3FY19, due to a loss from change in fair value of CAD 2.527 million, as compared to gain of CAD 5.344 million in pcp.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Increase in the vacancy rate would lead to lower operating performance. Due to various economic reasons, lower consumer spending, higher unemployment rate, etc., the company might see a weak rent collection.

Valuation Methodology (Illustrative): EV to Sales based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The company has maintained its operational performance despite a drastic fall in the rental market on account of COVID-19. However, we believe with the gradual revival in the overall economy coupled with the inflow of foreign students and immigrants; the rental market is expected to recover in the foreseeable future. We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like InterRent Real Estate Investment Trust, Killam Apartment REIT etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 72.4 on November 26, 2020.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

DREAM Unlimited Corp.

DREAM Unlimited Corp. (TSX: DRM) is a real estate company, which operations include segment like Asset management; Stabilized income-generating assets; Urban development - Toronto and Ottawa and Western Canada community development. The group derives its primary income from its Asset Management segment.

Key highlights:

• Strong Portfolio: The group has a strong product portfolio which constitutes ~14,200 of residential units and 11.9 million sq.ft of commercial and retail presence along with ~CAD 8 billion of asset under management. From FY13 onwards, the company has recorded 19% CAGR in book value/share, which is impressive.

Business Metrics (Source: Company Reports)

• Impressive Product pipeline: The company has a 33% ownership interest in West Don Lands, which is nearly completed and would deliver an aggregate 2,286 purpose-built rental units, including 686 affordable, and 300,000 sq.ft of commercial space. The project is under the Province’s Affordable Housing Lands Program and is located adjacent to the Distillery District, Canary District and future Lakeshore East development which in aggregate comprise over 60 acres owned by Dream and its various partners. We believe the affordable housing segment is likely to provide a stable occupancy rate in the coming days.

Q3FY20 Financial Highlights:

• DRM announced its quarterly results, wherein the company reported a lower revenue of CAD 60.485 million, as compared to CAD 64.069 million in the previous corresponding period (pcp). The decline was primarily attributable to a significant decline in recurring income, while a higher revenue from development segment supported the top-line. The decline was due to temporary rent deferrals on account of COVID 19 pandemic.
• Gross margin shrank to CAD 10.418 million from CAD 19.439 million, a year ago due to a lower income and an increase in direct operating costs (CAD 50.067 million versus CAD 44.630 million in pcp).
• The company reported significantly lower net earnings of CAD 4.653 million, as compared to CAD 27.167 million in pcp, primarily driven by a loss from adjustments related to Dream Impact Trust units amounting CAD 10.946 million, as compared to an income of CAD 2.831 million in pcp.

Q3FY20 Income Financial Snapshots (Source: Company Reports)

Risks: Due to the ongoing restriction on account of COVID 19 pandemic, the company reported several setbacks within the company’s Dream Impact Trust segment. Moreover, the company’s Broadview Hotel reported lower traction, primarily due to the ongoing restrictions. Continuation of the above trend would hinder the company’s operational performance.

Valuation Methodology (Illustrative): EV to Sales based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The group’s performance was poor in the third quarter of FY20 against a year-over period. However, easing lockdown restrictions and gradual recovery in the economy would have a positive impact on its future performance. Also, on the daily price chart, its shares registered a technical breakout on November 19, as price breached its long-term resistance level of 200-day SMA and moving higher. A price above the 200-day SMA is generally considered to be a technical strength in any underlying. We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Howard Hughes Corp, Melcor Developments Ltd etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 19.60 on November 26, 2020.

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.