Boardwalk REIT: When It's Raining Gold, Reach For A Bucket

Summary

• Boardwalk is a very conservatively managed REIT with strong shareholder alignment.
• Its share price already lagged Canadian residential REIT peers significantly due to its Alberta weighting.
• Its share price has been hit by a freight train after the oil price crash and COVID-19 shock in 2020.
• Boardwalk is trading cheaper than 2009 levels and is well positioned for a recovery.
• Over 100% upside in the coming years.

Note: Boardwalk trades OTC under ticker OTCPK:BOWFF. It trades with significantly greater liquidity in Canada on the TSE ticker BEI.UN. Since Boardwalk is a Canadian company reporting in CAD, all numbers discussed are in CAD.

It appears that open-season for cash-carrying investors has arrived. Canadian equity markets are presented with a confluence of events, that they now trade at levels that are depressed to Great Recession levels by many forward earnings metrics. With that said, there are things we can take away from the Great Recession. Deploying capital too early cost many dearly. There are also some sectors that have a very hard time failing in a recession. Residential REITs are a fantastic defensive asset class. If we can find one that got 'hit by a bus' through a downturn that's well managed, that draws my attention rather quickly. Boardwalk presents a better buying opportunity than it did in 2009... that's rather exciting!

Boardwalk's price per door is ridiculously cheap

Source: Boardwalk Q4 2019 earnings presentation

Without any sort of advanced accounting, and simply sorting through Boardwalk's 2019 AIF, we can glean a lot of useful information in valuing this REIT. Boardwalk is sitting on $2.74bn of CMHC insured mortgages, equating to ~$59 of mortgage debt per share, or $83.6k per unit distributed across Boardwalk's 32.76k rental units as of Q4 2019. From there, we can add in market cap to determine what Mr. Market is valuing Boardwalk's apartment units at. At ~$25 per unit, as of May 5, 2020 (a $1.15bn market cap), Boardwalk's being ascribed a value per door of $119k. That is very, very cheap (an implied cap-rate of ~7.75%).

Data by YCharts

Boardwalk REIT has gotten comparatively hammered relative its peers. Note the group moved almost entire in tandem prior to the oil price crash.

Using the Great Recession as a template

In Boardwalk's 2010 AIF, they carried $2.3bn of insured mortgages against 35.27k units (note Boardwalk has shrunk its number of units and its debt has grown since then). However, with an enterprise value then of $4.5bn, vs $3.9bn today, units were being valued then at $127k per door. In absolute $ terms, not factoring inflation or the lower carrying cost of mortgage debt today, Boardwalk trades cheaper than it did coming out of the Great Recession, with an implied cap-rate today of 7.75%. Centurion REIT (not publicly traded), which has posted 390% total returns since its inception in 2009, has been aggressively acquiring western Canadian apartments at <5% implied cap-rate, for reference.

At the bottom of the 2009 depths, Boardwalk traded at ~$22 a share, or with a value per door of $121k. In absolute terms, Boardwalk trades cheaper now than in the depths of 2009.

60% of Boardwalk's units are in Alberta, but it's worth noting that neither rents nor occupancy has melted.

Source: Canada Mortgage and Housing Corporation | Canadian Crown Corporation | tracing 1 Br apartment average rent in Alberta since 1990 | these trends apply to 2 and 3 Br units as well

This ignores the ~20% higher rents since the lows of 2009, and that Boardwalk's units in every other jurisdiction have outperformed their Alberta portfolio.

Management isn't sucking the company dry

I've heard the concern voiced that returns in REITs are often hampered by excessive compensation of the board and executives, often leading to significantly lower returns in REITs compared to directly investing in real estate individually. Boardwalk has one of the most reasonable compensation packages I've seen. Sam Kolias (founder and CEO) draws no salary or any form of compensation from the REIT, instead opting to have Boardwalk create 20 $10k scholarships in the company's name. Base salaries are below the 50th percentile in Boardwalk's peer-group, and and with Boardwalk requiring directors to own $500k worth of shares within 5 years of being appointed to the board, a number of board members will not qualify at the current market price of REIT units. Restricted unit awards have also lost the majority of their value with unit price decline, meaning if the value of the units does not return towards $50, 3 board members (based on disclosed 2019 ownership), will need to buy units on the open market to meet ownership requirements. A quick check on Canadian Insider shows this is already happening.

Boardwalk's lower quality peer is getting taken out at a big premium

For Canadian residential REIT investors that tend to dig through the bargain bin like I do, they're likely well acquainted (and satisfied with their returns) with Northview Apartment REIT (OTC:NPRUF). That REIT bottomed in 2016 with an implied cap-rate of 7.5% (roughly what Boardwalk trades at today). The sky was falling for them. The had a low-quality portfolio, low occupancy, a high debt to book ratio; all objectively worse than what Boardwalk faces today. After renovating their portfolio, reducing their debt ratios and improving occupancy they're being taken private at a 25% premium to an NAV many thought needed to be written down.

There are very a lot of commonalities between 2020 Boardwalk and 2016 Northview. Northview traded slightly at similar implied cap rates to where Boardwalk trades today, with a worse balance sheet and occupancy rates.

Whether the Kolias brothers would be willing to sell their baby is another question. But if Boardwalk were to be taken out at the valuation Northview is (who have similar portfolios with similar balance sheets), it would imply $79.63/share (1.20x NAV), or at a ~4.8% cap rate as Northview sold at, ~$73.

This isn't as far-fetched as it may sound. Boardwalk has traded north of $70 when prevailing conditions in Alberta were better, and Northview has experienced a similar ride. As noted in Boardwalk's investor presentation, transactions of similar units to what Boardwalk owns in its core portfolio (in Edmonton and Calgary) are selling for >$200k per door, which would again imply a $70 valuation per unit on Boardwalk.

This is a generational opportunity to pick up a quality residential REIT with a 3x upside over the coming years.

Residential REITs aren't melting through COVID-19

As I started sifting through REITs on my watch-list during this COVID-induced carnage, it's hard not to notice the difference in rental carnage between real estate classes. H&R REIT (OTCPK:HRUFF) who owns all major asset classes of real estate, noted:

Source: H&R REIT | COVID-19 related update

While it's fair to assume the majority of these missing retail rents will be eventually recovered, it's more interesting to note that multi-residential hasn't been hit to speak of... 95% is the average collection for H&R of that asset class at this time in the month (as confirmed by their IR to me).

Boardwalk is in a similar boat. As of the 13th of April, they'd collected 93% of rents due in March (compared to 95% being their historical average at that time in the month). Only 2% of members applied for a payment plan, who'd also be contributing partial rents during that time.

As per Boardwalk policy, they also have ~$40mm in unencumbered cash sitting on their balance sheet that will cover distributions to investors for almost a year, should there be temporary disruption to rents.

It's also worth noting that Boardwalk's current $1 annualized distribution is the taxable income the REIT must pay out based on their corporate structure. This represents ~40% of the REIT's trailing FFO. While the ~4% yield right now might not seem exceedingly appealing, Boardwalk is a capital appreciation play. What it enabled me to do is purchase Boardwalk on margin, and more than cover the interest accrued with that margin. It is almost inconceivable that the distribution would be cut and gives a margin of safety.

Conclusion

Boardwalk has become a core holding for me through this recent COVID-induced carnage. There are very few investments presenting this safe of a potential double-bagger over the coming years. For those hoping to play an oil recovery, Boardwalk retraces its 2014 highs in the coming years, implying a 200% capital upside (ignoring the respectable 4% yield). The margin of safety with Boardwalk's current multiples has made me feel sufficiently secure to utilize margin. In summary:

Source: 99Designs

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Analyst’s Disclosure: I am/we are long BOWFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.