Bob Dhillon is a man who knows what he wants, and right now he wants to be right where he is: in Western Canada buying up mid-tier, add-value apartment buildings.
Listed as a Top 10 gainer among all TSX-listed companies in 2011, Mainstreet Equity Corporation has been consistently leading the Canadian REITs and real estate corporations in shareholder returns for the past decade. Publically traded since 1998, the growing portfolio worth $1.3 billion has just over 9,300 units all concentrated in oil-driven economies like Calgary, Edmonton, Vancouver and Saskatoon.
But not even the oil crash can hamper Dhillon’s enthusiasm for the markets he calls home. In fact, he’s all revved up and steadfast in his plans to stay put exclusively on western soil, at least for the foreseeable future.
“The apartment building universe has two categories,” Dhillon explains. “Tall towers and smaller, three-storey boutique-style buildings. In my cities, 80 per cent of the assets fall into that second category, and those are the assets we buy.”
It’s a straightforward business model driven by the economic principle of supply and demand. For the size of the markets in Western Canada, there is less supply than in eastern cities like Montreal and Toronto. “Calgary only has 34,000 apartment units, Surrey only has 5,500—and these are big municipalities,” he says. “Since the oil crash in 2014, we have had more in-migration in correlation with supply, putting a tremendous amount of pressure on our rental assets. In other words, if Calgary only has a three per cent vacancy rate, well now we have a tsunami of people hitting that three per cent vacancy rate, too.”
A clear vision
Being cognisant of supply and demand, buying low, adding value—that’s the Mainstreet vision at its fundamental core. “We identify and purchase under-performing buildings at prices well below replacement costs,” says Dhillon. “Then we make the necessary capital improvements and reposition the properties for a higher-rent middle market. We are the only ones creating a quality of life for middle class Canadians.”
Unlike most real-estate stocks that focus on more established properties and give investors their cash flow through a real-estate investment trust structure, Mainstreet is a corporation—not a REIT—and as such, it doesn’t pay dividends.
This hasn’t deterred anyone from buying its stock, mind you. According to a report by GMP Securities, Mainstreet’s overall return has outperformed its competitors on the apartment building index, and has been listed as the highest performing company on the Toronto Stock Exchange with overall returns of 1,270 per cent for the last 10 years.
Dhillon, a 40 per cent Mainstreet owner, says that creating value, directing earnings back into the company, is all part of the greater goal. “We have the highest margins on the TSX multifamily index. It is a fixed cost business. Every incremental increase in top-line revenue flows to the bottom line, ensuring all value created remains in the company for the benefit of our shareholders.”
How value is created
One of the factors that really separates Mainstreet from its competitors is the asset class it focuses on. “REITs chase the big apartment towers so we don’t compete against them,” Dhillon notes. “All our acquisitions are small, under-performing properties with 40 to 70 units, usually fixer-uppers with lots of potential.”
But accumulating those ‘fixer-uppers’ means Mainstreet has considerable capital expenses, a process that requires a long-term strategy to make it viable. “We have direct relationships with factories in remote villages in China where we go once or twice a year to buy our materials—things like laminate floors, kitchen cabinets and tiles. We achieve considerable savings this way, often up to 80 per cent.”
Dhillon points out that this cost-savings initiative is of huge importance to his company given that a significant portion of his portfolio is always undergoing renovations. “Some buildings require simple fixes, like fresh paint or new floors, others need a complete overhaul – new boilers, a new roof, insulation, siding, etc. We call this period of repositioning Mainstreet Value Change.”
Value change indeed. According to Dhillon, the company’s aggressive renovation program, which can sometimes occupy up to 13 per cent of his portfolio at once, results in more than just nicer buildings that attract higher rents; it also brings in significant savings due to the improved energy efficiencies.
“From the siding and the insulation, to the new windows and water-saving kitchen taps—all these new features combine to create less wastage and keep operating costs down,” says Dhillon. “So you see, we were green before green was a thing.”
Roots of Mainstreet
Even as a young child, Dhillon had a mind for real estate. He began buying and flipping houses at the age of 19 in order to put himself through university; an experience, he says, that got him hooked.
“For my generation, the dream was different. Everyone wanted to be a real estate entrepreneur. Today you see all these investment bankers and hedge fund managers. Our heroes growing up were guys like Donald Trump,” he says. “We all wanted to grow up and become real estate tycoons. Now, that was just a dream, but the reality was, nobody would give me a job. I had no choice.”
Born in Japan to Sikh parents, Dhillon immigrated to Canada at an early age. He got his MBA from the Richard Ivey School of Business in 1998, and has been on a steady climb to being the dominant player in Western Canada’s rental industry ever since. In fact, the only job he’s ever had has been in real estate.
“What separates me from others, I think, is that I am an immigrant,” he says. “As an immigrant, we came here to be good Canadian citizens. And, part of the good Canadian citizen model is to be entrepreneurial, successful, and driven. My parents lost everything in the coup of Liberia (in 1980) and so we came here as economic refugees. We saw this country as a golden opportunity.”
In July of this year, Dhillon received an RBC Top 25 Canadian Immigrant Award, an honour he downplays, brushing it aside with a joke. “That was a bad year for immigrants,” he says. “They couldn’t find anyone else, so I won out of default.”
He is also a candidate for the Ernst and Young Entrepreneur of the Year Award, which will be announced at a gala sometime this October.
Woes and triumphs
Dhillon’s had a colourful career path, no doubt, but that’s not to say he hasn’t been stung by tough economic times. The market crash in 2008 wasn’t easy on anyone, least of all the real estate community. But Mainstreet persevered with Dhillon guiding the way—a testament, he says, to his strong business model and the fortitude of the industry itself.
“Apartment buildings are a rock solid commodity. People need them. It is a safe asset class in boom times, in recession times, in any given time,” he says. “Apartments will always be a need.”
Despite the current doom and gloom around him, Dhillon looks at the future with a glass half full. With interest rates at an all-time low and the steady rate of in-migration and low vacancy rates, his eye is on the present and the future; on maximizing current opportunities, whatever those opportunities might be.
“The recent slowdown in western Canadian economy is going to give me an opportunity to expand my portfolio in my own backyard,” he says. “Has it become a buyer’s market? No…not yet. But I’m excited by the opportunities I see. I’m excited about interest rates dropping considerably. I’m going to take advantage of those low interest rates and improve our cash flow. This is also a great chance for us to bulk up in our HR department. In times of recession you can really hire some good talent.”
As for how his stocks are faring in the current economic climate, Dhillon shrugs and says, “Obviously we are never happy when a stock drops in value. Nobody is happy with any kind of a drop, but then my job is to maximize shareholder value. The positive aspect in all this is that it’s a great opportunity for Mainstreet to buy back its shares at a significant discount to NAV.”
From the price of his stocks to the procurement of materials, Dhillon’s passion for each and every aspect of his industry is obvious. In fact, it’s so obvious it shines from his face as he ponders his past journey and the challenges he faces in the days and years ahead.
“My business is just too simple – and that’s my biggest challenge,” he says. “We buy mid-tier buildings, and like a plastic surgeon, we reposition the asset. Due to its simplicity, we don’t get enough credit for the business model.”
But simple business model aside, what has been the single most interesting part of his journey so far?
“For me, it’s the capital markets,” he says. “Real estate is fascinating. You can really mould it, like an artist. You can create what you want to create. But learning capital markets was like learning a new language. Luckily along the way I had some great professors, real estate Bay Street Gurus such as Frank Mayer and Jeff Olin, who later acquired 10 per cent of Mainstreet Equity stock.”
Dhillon concludes, smiling, that it’s a unique and exciting time to be in real estate. “Institutional capital is consolidating the real estate market,” he says. “And I am grateful to be part of the journey.”
Erin Ruddy is the editor of Canadian Apartment Magazine.