Boardwalk Real Estate Investment Trust (BEI.UN) is a Canadian publicly-traded REIT specializing in the acquisition, refurbishment, management and ownership of multi-family residential communities throughout Canada. It owns and operates more than 200 communities and more than 33,000 residential units with a total net rentable area of 28M square feet. The company was founded in 1984 by Sam Kolias and is headquartered in Calgary, Canada.
The company states that its primary goal is to provide top-quality communities and superior customer service to its residents. The REIT seeks to provide unitholders (shareholders) with reliable distributions of cash each month and to increase asset value through the purchase, sale, development and management of its properties.
Recent Company Performance
Boardwalk acknowledges a difficult economic environment in Western Canada since 2016, combined with a glut of new luxury apartment rentals over the period. It has responded with brand diversification and product/service improvements for new and existing residents. Boardwalk is now extending a pilot project to deliver newly designed and renovated suites based on four principles:
- Efficiency: scalable amounts of renovation that minimize transitional vacancy loss while lowering operating costs
- Supply: Limit and reduce the supply of renovated units to match demand
- Location: Pick only great ones
- Affordability: Maximize standard improvements to continue providing affordable units
As of 2017 Q3, the renovation cycle is leading to rising occupancy rates and rents. The company expects economic conditions to continue to improve and plans to balance renovation of existing units with the introduction of new ones. On this basis, it is forecasting improved results in 2018.
Boardwalk is looking to diversify its portfolio beyond its two stronghold provinces, Alberta and Saskatchewan (ABSK), with an eye towards improving net operating income (NOI) growth and capital appreciation. Management plans to split its portfolio equally inside the ABSK provinces and in other high-growth, undersupplied markets such as Vancouver, Greater Toronto Area, Montreal, Ottawa, Winnipeg, Quebec City and Halifax. To this end, it plans to acquire, develop and/or partner for 10K to 15K apartment units in the new areas while selling off non-core asset in the ASBK region.
The following table shows unit and net-operating-income breakdown by province, as of the end of 2016:
Boardwalk diversifies its brand name over three distinct products:
- Boardwalk Living: These are affordable units with classic suites that emphasize value, reliability and flexibility.
- Boardwalk Communities: Enhanced-value units with choice amenities and modernized suites for residents who want a comfortable and flexible home.
- Boardwalk Lifestyle: Luxury, designer suites with all the modern amenities in a contemporary style favored by wealthier residents. Although this is the smallest segment, it provides the healthies margins.
The company’s renovation program includes standard turnovers ($2,700/unit), partial renovation ($16,000), full renovation ($29,000) and turnkey remodeling ($46,000). Newly renovated units rent significantly faster than unrenovated ones. Accordingly, the average rent rose from $1,070 to $1,091 in Q3.
The return on investment (ROI) on the suite renovation program (measured as the net rent on unrenovated units divided by the cost of renovation) is approximately 8 percent. By creating new net asset value, the $47M invested in the program has grown to $72M, a gain of about 55 percent using a capitalization rate of 5.36 percent.
|Total available liquidity||$350M|
|Debt/asset value (net of cash)||45%|
|Net asset value (NAV) per diluted unit||$59.75|
|Cash per diluted unit||$2.96|
|Weighted average cap rate||5.35%|
|Current trading price/unit||$42.31|
|Return on equity||1.3%|
|Return on assets||0.7%|
|Unit total return||-6.0%|
The medium-term outlook for Boardwalk REIT is mildly positive. Recent price volatility, in which units hit a high of $49.51, creates an opportunistic buying opportunity. The current price of around $42.31/unit is about a dollar below the NAV per unit, which means units are selling at a discount to portfolio value.
Analysts who perform discounted cash flow valuations judge the units to be slightly overvalued, with moderate revenue growth potential but strong earnings growth potential. For 2018, the company will divert some of its dividend stream to capital investment, which has positive implications for revenue growth in the long term. Other positive factors include a relatively low leverage ratio and a good assets/price ratio.
For investors who want exposure to the Canadian residential rental market, Boardwalk REIT merits consideration.