Description

Quick thesis: Boardwalk (BEI) is one of the largest multi-family property owners in Canada. It’s portfolio spans across the country. Roughly 2/3 of units are in Alberta, and because of this BEI’s share price is usually tied to the economics of Oil & Gas and E&Ps. BEI’s fundamentals are much better than the market is discounting, and the REIT is trading at ~10.5x run-rate FFO, or a 6 % implied cap.

Background: BEI is one of Canada’s largest multi-family landlords. It has 32,600 units / 28.7mm sq ft spread across the country. Geographic exposure (by NOI) is roughly 63% Alberta (Edmonton 38%, Calgary 20%), 20% Quebec, 10% Ontario and 7% in Saskatchewan.

BEI’s properties are positioned as the value/affordable option. The average suite size is ~860 sq ft and rents for $1,170/month.

The REIT was founded in 1984 by brothers Sam and Van Kolias, and came public in 1994. The brothers still own ~26% of shares outstanding and Sam still serves as Chairman & CEO. Management’s interests are very aligned with shareholders. Unlike typical REITs, there are no asset management or fees paid to related parties. Sam doesn’t take a salary or fee for his work with the REIT. His economic incentives are the same as if he was a regular shareholder: distributions and capital appreciation.

Opportunity: Because of BEI’s large exposure to Alberta, investors like to classify BEI as a way to get exposure to Oil & Gas through means other than an E&P. In times when energy prices are weak, BEI sells off as if it’s fortunes will drastically decline. During the depths of COVID, BEI’s share price dropped 29% in a single day, and at it’s peak was down 70% from it’s 52w High. Although it has recovered, BEI is still down 32% YTD vs the TSX REIT Index down 7%.

While investors tend to over-react and price in a collapse in rents/occupancy history tells us that BEI’s business model is actually very resilient. From the chart below you can see that during the GFC occupancy was actually up and rents were only down ~2.5% peak to trough. During the more recent collapse in oil in 2016, occupancy dropped 200-300bps while rents dropped 10% peak to trough before recovering back over the next 2 years.

More recently, rents have held in (down 80bps QoQ in Q2) while occupancy is actually at its highest level in 5 years. The net result is same-property revenues were +3.1% in Q2.

At the same time, BEI has been able to reduce opex. As a result, SSNOI was +6.1% in Q2 and NOI margins expanded 200bps to 60.4%. The end result was Q2 FFO of $0.75/sh (ex one-time CFO retirement cost). So at $31.50, the stock is trading at 10.5x P/FFO. Over the past 15yrs BEI has traded at an average 17x P/FFO, and within a range of 9-22x. At 17x run-rate FFO, BEI could be a $50 stock.

Bears will say BEI’s balance sheet is stretched at ~45% D/GBV and 13x ND/EBITDA, but isn’t the main benefit of owning Real Estate is the fact that it is levered?

BEI pays out $1.00/sh in distributions (3.2% div yield) and has one of the lowest payout ratios (as % AFFO) in the Canadian REIT space at 47%.

The company discloses an IFRS NAV of $61.77/sh (at 5.25% cap), putting the stock at 0.5x P/NAV. IFRS NAV allows REITs to adjust NOI for stabilization and give value to undeveloped land. My own NAV estimate gives value only to current in-place rents and occupancy, and nothing for land. At a 5.5% cap, I get a $40 NAV.

Downside case: Let’s say COVID stays around forever and unemployment remains in the teens. Meanwhile, let’s also assume that government’s stop all stimulus programs and rents and occupancy crash. If you run a 15% decrease in rent and 500bps decrease in occupancy, FFO would be somewhere around $1.00/sh. Under a scenario where rents crash it’s probably logical to assume occupancy wouldn’t actually budge, since BEI is the value/affordable option in most cities and would benefit from trade-downs and downsizing. At 15% rent decrease and no occupancy change FFO would still be $1.40/sh and BEI’s payout would be 100%. 

Catalyst

-BEI has been giving regular operating updates. Continued signs of rent collection and occupancy stabilization should help the re-rate

-More government support and stimulus announcements

-Improvement in Energy sentiment