Stock of the Month Part 4 – Boardwalk REIT (BEI.UN) Boardwalk? or More Like Baltic?

Good Morning Everyone!

Thank you for tuning into another Stock of the Month. This month, we will be looking at Boardwalk REIT. They provide rental apartments all over Canada with a majority of their units in Alberta.

The main reason I picked this stock is because I am bullish on the rental market in Canada. Housing affordability in Canada is continuing to deteriorate and I think there will be an overall shift in mindset that home ownership is just not an option for most people and the stigma around renting will eventually fade away. Here is a link below for RBC’s annual housing affordability index if you are interested in reviewing it for your area.

OK so as usual, let’s look at it from the top. As you can see, the stock is at the lower end of it’s 52 week range. This is mainly because of the struggles Alberta has experienced due to the drop in oil prices. Because of the price decline, the yield for the stock is at 5%, which if everything else about the company checks out, is a pretty good dividend. Since I’m a dividend investor, this is of high interest to me for sure but let’s dig deeper shall we?

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Exhibit 1: Geography 

As you can see from the table below, over 60% of Boardwalk units are in Alberta. The second image is a quarterly occupancy breakdown by city. Again, occupancy in Alberta has declined the most but Fort McMurray has increased significantly in the most recent quarter which could be a promising sign, but one quarter of improvement isn’t enough to make that determination.

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Exhibit 2: Rent/Revenue Trends

As you can see, not only has the Alberta situation hurt their occupancy, but it has also hurt the average rents for their portfolio. Quebec, their third largest market however, has seen an increase in operating income growth.

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Exhibit 3: Financial Position

Continuing the theme of Boardwalk’s recent struggles, you can see from the income statement below that their total revenue and profitability has declined in their most recent quarter vs the same quarter in 2015. However, the second graphic tells us that they’re overall access to liquidity is solid and their interest coverage ratio is over 3 and their debt/assets are at 42%. This means that they shouldn’t have any issues with their financial obligations going forward and they have the flexibility to take advantage of opportunities should they arise (which I will discuss soon).

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Exhibit 4: Opportunities

Let’s take a look at a couple of future opportunities Boardwalk has embarked on. The first one is a new 79 unit building in Regina. They’ve been able to complete this project below budget and have it 97% leased out without incentives.

In 2016 Boardwalk acquired 747 brand new apartment units. By doing so, they are decreasing the average age and overall quality of their portfolio going forward. All of those units are in Calgary and Edmonton which tells me that management feels that the economy in Alberta has bottomed out and they are deploying their capital to take advantage of a potential economic recovery in that area.

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I’ve attached a news article below that shows Canada’s GDP rebounding last quarter from the Alberta wild fires. I don’t look too deeply into single economic data points, but it could be a sign that things are starting to improve in Alberta. It’s definitely something to continually keep track of if you invest in Boardwalk.

Exhibit 5 Risks: 

Economic Risk: This is the biggest risk facing them right now. Alberta’s economic struggles have hit their occupancy rates and bottom line. Since they have made further investments in the Edmonton and Calgary area, they are now even more sensitive to the situation out West than before.

Real Estate: Everyone is saying that the Canadian real estate market is over valued. Although Boardwalk doesn’t focus on Toronto or Vancouver, there can still be a risk of general devaluation of real estate across Canada.

Interest Rate: A majority of Boardwalk’s properties are financed by mortgages. Interest rates are at near all time lows right now, but since Trump won the election, rates have been creeping up. This may affect Boardwalk’s ability to finance/refinance their properties at favourable rates, which would cut into their margins.

Over Supply of Apartment Units: With interest rates so low, builders are building non stop which may cause a glut of residential and rental units which can negatively impact the value of Boardwalk’s overall portfolio.

These are the three risks that I felt were the most glaring when considering an investment in Boardwalk. Their entire risk profile can be found in their 2015 annual report.

Bottom Line: I used a lot of exhibits to analyze Boardwalk, but it all comes down to whether or not you are bullish on the economy in Canada, specifically Western Canada. If you are a longer term investor (at least 5 years) with a reasonably high tolerance for risk, I would say this is definitely a company you can consider investing in. You would be receiving a 5% dividend yield as you wait for the economy to rebound. However, if you are skiddish about the future of Canadian real estate market and overall economy, then this is definitely a company you should stay away from. I know this was a lot of information to digest, but I hope my analysis can help you make an investment decision. If you have a specific stock or theme you want me to cover in next month’s Stock of the Month, please feel free to contact me.

Disclaimer: I don’t own any shares of Boardwalk on the date of this writing. All opinions here are my own. Please ensure you evaluate your risk tolerance and objectives before making any investment decisions.

Have a Great Day

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