New Stock Purchased in my $160k TFSA

Today I decided to sell out my entire QSR position in my TFSA after holding it for 3 years, and bought Mainstreet equity corp MEQ instead. I sold QSR at 18% profit, plus 3.5% dividends earned each year, resulting in a 9% annual return, which is ok but lower than what I expected. QSR's growth has slowed down recently and MEQ seems to be a much better opportunity.

MEQ is a real estate corporation and it makes money by buying poorly managed residential properties at cheap prices, fixing them up and then selling or renting them out at higher prices. Here is the reason why I like this company better:

• MEQ has much better long term growth potential. For the past 10 years the company has consistently grown its revenue by 10% per year and FFO (free cash flow for real estate companies) by 14% per year. In comparison, QSR's growth has been slower, and in the most recent quarter, the sales of its major franchises, Burger king and Popeyes, all experienced YoY decline.
• MEQ is 49% owned by the management, creating a strong alignment of interests with shareholders.
• Unlike REITs which pay out most profits in dividends and dilutes shareholders, MEQ is a real estate corporation that retains most earnings and reinvest them to grow the business at a high rate of returns, resulting in significant stock appreciation. The company has never issued additional shares in the past 10 years and has a share repurchase program to buy back 10% of shares outstanding. The management has emphasized to do buybacks only when the price is reasonable.
• MEQ does not only grow through acquiring new properties, it also grew its same asset net rental income by 15% YoY in the recent quarter, with a very low vacancy rate of 2.8%.
• Debt is well managed and interests payment is well covered by the cash flow. In the recent quarter the company earned 40 million operating income and paid 14.7 million in interest expenses. With the interest rate going down, the profitability of the company will only go up.
• MEQ's portfolio is mainly concentrated in western Canadian cities like Edmonton and Calgary, where the rent to home price ratio is much more reasonable. I think there is further potential for growth as more people are relocating to these cities with lower housing costs.
• MEQ is trading at a reasonable price. Price to FFO ratio is currently 22, equivalent to a free cash flow yield of 4.5%. This is pretty cheap for a company growing free cash flow at 14% per year. I expect MEQ stock price to appreciate in line with its free cash flow, at 14% CAGR over the long-term.

Today I only started a small position in MEQ (~1% of the total portfolio). I plan to do more research on the company before committing more capital into this investment.

Comments and Questions

Make sure to leave your comments/questions on my original Blossom post and I will try my best to answer them.

DISCLAIMER: Solofire is not a registered financial advisor. This post contains author's personal opinion only and it should NOT be considered financial advice.