National Post (National Edition)
Thanking the short sellers
Mainstreet benefits from cheap buybacks
Calgary-based Mainstreet Equity Corp. released its fourthquarter and annual financial statements Wednesday as well as announcing the $72-million acquisition of a 641-unit apartment portfolio in Regina, the last major city in Western Canada in which it doesn’t have a presence.
The big number — funds per basic share from operations — was enough of a positive (up by two per cent to $2.88 on a year-over-year basis from 2016) for the stock to trade at an intraday 12-month high of $39.79 before closing up $0.66 at $39.45.
Given the base of its operations, there were some negatives including a slight reduction in funds from operations, a slight jump in the overall vacancy rate, largely because of what the company said were the recent acquisitions of unstabilized assets (Mainstreet’s model is to buy apartments, renovate them and then relet them for a higher monthly rent) and a slight reduction in operating margin.
Longer term there was more to cheer about, said Bob Dhillon, the company’s founder, chairman, chief executive and largest shareholder. “These results prove the resilience and effectiveness of our add-value business model. Over the past three years, we have held to our long-term strategy of growing our portfolio without increasing share capital, which has created real value for Mainstreet and its shareholders,” he said.
That theme was picked up by Jimmy Shan, a GMP Capital analyst. In a note titled ‘Strong Q4: 2017 proves out the resilience of the model,’ Shan said “this is the secondconsecutive year-over-year growth quarter which suggests that earnings bottom was reached two quarters ago.”
In the note, Shan added the company’s B.C assets (30 per cent of the portfolio value) “continue to perform” well at a less than one-percent vacancy while stabilized assets in Alberta “remain in the 8-per-cent to 12-per-cent vacancy range.”
Shan, one of two analysts who has a buy recommendation — the other two rate it a hold — said “three years into the oil correction” that Mainstreet’s 2017 results are “essentially flat from prior peak earnings of 2015.”
More importantly, given Mainstreet’s “strong liquidity position and a willingness to “play offence” Shan believes its “earnings power is material over the medium term and should accelerate if Alberta continues to recover.”
Indeed Shan was so impressed he upped his estimate of funds from operations to $2.80 a share from $2.56; and his one-year target to $48 from $43.25. At $48 the target is close to net asset value.
In its release, Mainstreet spoke of the short position in its stock: As of Nov. 15, 2017, the short position stood 558,215 common shares (the company has 8,835,964 shares outstanding); at June 30 it was 711,600 common shares. While the short position has been larger in the past, “management believes these short positions are partly responsible for the shares trading below NAV,” it said.
In an interview Dhillon expressed a “thank you” to the short sellers, given that over the past year Mainstreet bought back 53,569 shares under its normal course issuer bid program. “They (the short sellers through their actions) artificially pushed the share price significantly below NAV,” said Dhillon.
If Dhillon’s view that the Alberta economy has stabilized is correct and if Shan’s analysis materializes, then the possibility of a short squeeze — when short sellers are forced to cover their position — could be in store. On average 7,500 shares trades each day.
“I am not preoccupied but we are at an interesting crossroads,” said Dhillon.