Is Mainstreet’s management aligned with shareholders?
Yes, Mainstreet’s management team is fully aligned with shareholders. This is best reflected by the high insider ownership amongst management and the board of directors. Mainstreet’s insider ownership equates to approximately 40% of total shares outstanding, most of which is help by its founder and CEO Bob Dhillon. This means that those running the company have a clear incentive to do what is in the best interest of shareholders. Most public companies do not have the same degree of insider ownership as Mainstreet.
Many REITs and REOCs have external management agreement that provide for asset and property management functions. Often fees are paid by the REIT/REOC to management companies which are owned by the executives of the REIT/REOC. This can create an incentive for the REIT/REOC management to undertake actions which may not be in the best interest of the REIT/REOC, but result in fees being paid to the management company. These fees can include acquisition fees, financing fees, and percentage of assets, all of which are incentives for growth regardless of how it may impact the REIT/REOC.
Mainstreet is fully internalized and as such there are no conflicts of this nature. In addition, Mainstreet believes the internalized structure translates into lower costs for the functions provided.
Is Mainstreet a REIT? If not, why?
Mainstreet Equity Corp. is not a REIT, but rather a real estate operating company (REOC). While a legal structure has certain tax benefits, Mainstreet believes it is not conducive to its business strategy.
The primary advantage of a REIT structure is the deferral of taxes. If a REIT pays out the majority of its taxable income to its unitholders, the REIT forgoes paying tax at the corporate level, and its unitholders often can avoid paying taxes on the income in the year received depending on how much is deemed to be treated as return of capital. The portion deemed return of capital reduces the unitholder’s average cost base and capital gains tax is only paid once the units are sold.
Mainstreet has chosen to remain a corporation as its business model is best achieved by retaining its cash flow, which includes not paying a dividend, and growing organically. Mainstreet acquires underperforming properties which require capital investments and take time to reposition, this often translates into negative cash flow as the property is being repositioned. If Mainstreet were paying out the majority of its cash flow, Mainstreet’s ability to acquire such properties would be more limited due to cash flow constraints.
In addition, Mainstreet has grown its portfolio without equity dilution to its shareholders. Again, without the ability to retain cash flow and acquire properties with a higher returns profile, this would not be achievable. That is why many REITs issue equity in the form of additional units to fund new acquisitions, most of which are relatively stable properties. Mainstreet believes its business model achieves superior results over a long period of time.
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