Mainstreet Equity (MEQ.TO): A Zero Dividend Real Estate Company

Dividends or no dividends? Often this debate can be seen in investing articles. Theoretically, a company can reinvest their profits into the business. If it’s a good business with a good leadership team, they should be able to grow that money faster than the shareholder could do otherwise.

That argument often breaks down in the face of reality, especially for companies that are dominant in their fields where they don’t receive a large return on new investment. It also breaks down for companies who make very poor decisions on expansion (like Barrick Gold) that end up in massive write-offs down the road. Sometimes these “growth” companies are bid up to extremely high P/E levels (like technology stocks), which means on a per-share basis, they are not actually re-investing that much money (nor, on the other hand, could they pay much in dividends. Valuation matters).

But it’s still a potentially valid concept, and I’m willing to consider companies that are priced at a discount.

Mainstreet Equity (MEQ.TO)

Enter Mainstreet Equity, TSX: MEQ, a Canadian real estate company. Mainstreet Equity buys undervalued properties, renovates them, adds value and reduces expenses to improve efficiency and rents them out. Profits are reinvested, not distributed. Because MEQ is still small, they have not run into some of the issues above with other non-dividend paying companies. And they’re certainly not overvalued – they trade at a low P/E and a 25% discount to book value despite great growth metrics. Look at some of the numbers below.


  • Market Capitalization: $375 M
  • Revenue: $78 M
  • FFO: $19 M
  • Net Earnings: $63 M
  • P/E: 7.3
  • P/FFO: 21
  • P/B: 0.75

Growth Metrics

  • Revenue Growth: 17%
  • Net Earnings growth: 25%
  • FFO Growth: 55% (20-25% after some adjustments)
  • Shareholder Equity Growth: 14.5%

Despite the high growth, it has been done without significant share dilution. Shares outstanding, fully diluted, are only up 1% year over year.

Overall Impressions

I’ve been tracking MEQ on and off for the last couple of years. MEQ’s business model is very easy to understand. The stock price hasn’t done much at all, but in this case it looks like it has only made them that much better valued as you get two years of growth for free.

On a valuation basis, MEQ is a definite buy. The only metric that is expensive is the P/FFO. MEQ does receive a signficant portion of its net earnings from increases in fair value of the properties. Fair value gains are reasonable for MEQ, in my opinion, because they are reinvesting a lot of capital to improving properties. And FFO growth is well beyond what most REITs are able to produce, which is normally just due to rent increases over time.


MEQ’s competition for investor’s money are REITs which pay out most of their operating income in payments. MEQ seems to be a very reasonable alternative to this model based on their track record. I would consider them a buy at this level given the 25% discount to book value and solid growth. Being a relatively small real estate company, there is plenty of room for them to double or triple in size over the next five to ten years. Shares are liquid enough for individual investors to get into the name, although the bigger funds would have some difficulty acquiring a significant position (advantage: individual investor).

If you have any questions, feel free to comment or send an email to

Investing Thoughts – April 2014

April has arrived. Dividend increases have slowed down, although not unexpectedly – most of the annual reports are out. The next wave will probably start later this month and into May once Q1 results begin coming out.

The TSX has been doing very well this month – in fact, it hit a milestone on 2 April when it surpassed its 5 year high (previously post-crash high was March 2011) – the last time it closed higher was in 2008.

2008-09 seems like a long time ago? Every once in a while you should look at what the indexes did (or your portfolio at the time) to remind yourself what stocks can do in a bear market.

Gold has been pulling back since mid-March. The gold index is down about 13%. Financials and energy have been picking up the slack. You can pretty much track index returns to a tee with those three sectors.

Some of my stocks have been on a tear lately.

High Arctic Energy Services (HWO.TO)

HWO is on fire. I previously invested in them almost a year ago now at $2.48 and added to my position all the way down to $2.08 (and then added to my watch list at $2.03). What interested me was that they were very profitable, traded at a low P/E, had no debt (in fact, a solid net cash position), and were operating mostly in Papal New Guinea, which is at least five years ahead of places like Canada in terms of LNG – they have a major facility coming online this year, and multiple billion dollar integrated oil companies prospecting for natural gas and oil.

Well, HWO just announced a new 2 year contract with a big oil company (InterOil), which is a new customer for them, and are spending $50M on two heli-portable drilling rigs. One of the rigs will earn $30M/year for the next two years. To put this in perspective, they earned about $150M last year, so this is a 20% increase to revenues in one fell swoop, with the potential for another 20% increase if they contract out the second rig. They have enough cash on hand to cover about half the purchase and available credit for the rest – I’ll be checking the numbers but they will only need to borrow $25-30M at most and that will leave them still very low on debt.

HWO closed at $5.30 today after jumping 7% – I have a 125% return plus dividends over the last year on my 8000 shares. I wouldn’t be surprised to see a pullback but I don’t think it will be seeing $2-3 per share again.

Greenstar Agricultural Corporation (GRE.V)

GRE continues its expansion plans. Last year, they acquired a new tomato paste production plant. They also just announced they leased farmland to grow their own tomato pulp stock. These two deals could substantially increase their revenue in the next year. They are reporting results near the end of the month, which should be very interesting. They are also working on acquiring a Canadian distribution company to market their products directly in North America. I believe the stock has pulled back on the expectation of an equity raise to finance the acquisition – the last equity raise was $0.85.

Clarke Inc (CKI.TO)

Clarke is all out engaged in a proxy war with the board and CEO of Sherritt Corporation (S.TO). Sherrit is a $1.3 billion company, much larger than Clarke, but Clarke and their CEO do own over 5% of the shares. Apparently the board of Sherritt hardly owns any shares at all. I think Clarke has a good chance of winning. Clarke itself continues to trade at a substantial discount to book ($11.70+ book to $8.20 share price). Sherritt itself is up nearly 50% since February which could be forecasting good returns Clarke.

Autocanada (ACQ.TO)

The last time I mentioned Autocanada was on 20 March when they passed $50. It’s now 11 April, and they’ve been trading above $60 for the last ten days. ACQ has received the attention of a lot of institutions, and the market cap is now well over $1B which attracts larger funds. ACQ should be added to the S&P TSX Composite index within the next year. This is a big advantage for small investors – anyone could have gotten shares much earlier than the index, who will have to pay a premium to acquire shares. I’m not interested in selling mine, although most of the growth is priced in here and I don’t recommend anyone purchase until there is a major pullback (at least 20% below the high of $66, which means around $55).

If you have any questions, feel free to comment or send an email to

Q1 Watch List Update (+6.2%)

WIth my portfolio update complete, I’d like to cover my watch list. My official watch list currently consists of 10 companies, mostly smaller ones, that are going to be the first on my list if I decide to add a new position or make any changes.

You can always find my official watch list on the same page that has my portfolio. Just keep scrolling down. The whole list is up to date with my Q1 returns.

The Q1 Results

What is interesting is that my watch list has outperformed my own portfolio. The energy and materials exposure is much higher in the watch list, and there is even a gold mining company (which had returns in line with the gold miners index).

I’m not too concerned with meeting or beating the index, but looking at individual results lets me keep an eye on whether there are any bargains out there.

Here are the specific returns:

Ticker Name Yield P/E Payout Q1 Returns
AD.TO Alaris Royalties 4.8% 18 85.7% 1.3%
BDT.TO Bird Construction 5.3% 42 223.0% 10.1%
COS.TO Canadian Oil Sands 6.1% 13 81.4% 17.8%
ENF.TO Enbridge Income Fund 5.2% 17 88.4% 13.5%
MND.TO Mandalay Resources 3.8% 10 38.3% 16.4%
MIC.TO Genworth MI Canada 3.6% 10 36.3% 3.9%
NIF.UN Noranda Income Fund 9.6% 5 48.0% -0.6%
RME.TO Rocky Mtn Dealerships 3.5% 14 49.6% -7.1%
TPH.TO Temple Hotels Inc 9.2% 7 68.3% 4.4%
WJX.TO Wajax Corporation 6.5% 13 85.6% 2.1%
Average 5.8% 15.0 80.5% 6.2%

Top Performers

Gold and energy companies win out here. BDT as well is strongly linked to construction in the energy sector. On 31 Dec, Canadian Oil Sands (TSX: COS) was trading at $20 and had a 7% yield. I nearly jumped and now the yield has returned to 6% while providing anyone who did own it with a nice 18% return in 3 months. Mandalay Resources continues to be the only mining company on the TSX that I really like as they have a very sustainable model and a good dividend.

Worst Performers

Rocky Mountain Dealerships (TSX: RME) is the main one in this category. Their latest results did not impress investors. I have seen a few people picking up shares though. The P/E and payout have both increased in the last three months despite the lower share price due to falling earnings. The only other stock below water (barely) was Noranda Income Fund (TSX: NIF.UN). The yield has actually increased from 9.2% to 9.6% with a stock price dropping from $5.42 to $5.26.

Average Yield, P/E and Payout

All three metrics are worse as a group on this watch list. Bird Construction is the main contributor as P/E and payout have skyrocketed due to low earnings and a higher stock price. But most of these stocks have higher prices now than three months ago, reflecting the general rise in the markets. There is still a 5.8% yield here (down from 6.1%), which isn’t bad and I think sustainable across the board with some increases possible.

Index Returns

As mentioned above, the TSX returned essentially exactly the same as this watch list (6.2%), although this portfolio had much higher dividends and less capital gains than the index.

Final Thoughts

I still like any stock here with a P/E below 15. Mandalay Resources, Genworth MI Canada and Temple Hotels (P/FFO, not P/E, of 7.5) particularly stick out for me. 

If you have any questions, feel free to comment or send an email to