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$2.3 billion Boardwalk REIT (TSX:BEI.UN) is the proprietor and operator of multi-family rental communities. It owns roughly 200 rental items comprised of greater than 33,000 suites. Whereas rising rates of interest and vitality prices have spooked us all, Boardwalk is dealing with all of this fairly properly. That is evidenced in its first-quarter outcomes.
Let’s take a better look.
Boardwalk’s quarter in a nutshell
The primary quarter of 2022 was characterised by two issues. First, and fairly curiously, it was characterised by sturdy demand momentum. However secondly, and never surprisingly, it was characterised by price inflation.
Funds from operations rose 4.6% to $0.68. This can be a reflection of the more and more optimistic fundamentals that Boardwalk REIT is seeing. For instance, demand in Alberta is rising, whereas provide there stays stagnant. As a reminder, Boardwalk is closely uncovered to Alberta, which makes up 62.4% of its complete portfolio.
The elephant on this room is rates of interest. One can not have a correct and exhaustive dialogue about Boardwalk (and any REIT) with out addressing rising rates of interest. As a result of, by their very nature, we discover that REITs are fairly closely indebted. It’s half and parcel of their enterprise mannequin — a closely capital intensive one whose rewards embody a lifetime of secure and predictable earnings. That is why it comes as no shock that Boardwalk REIT has fallen 14% in 2022.
So, Boardwalk is feeling inflationary pressures from rising rates of interest but additionally rising utility prices. That is exhibiting up within the REIT’s outcomes. Nonetheless, the essential takeaway right here is that Boardwalk continues to enhance internet working margins (58.3% this quarter versus 57.8% final 12 months), regardless of will increase in these non-controllable prices
Boardwalk REIT is undervalued on so many ranges
Boardwalk estimates that its internet asset worth now stands at over $68. Rising occupancies, rising demand, and rising rental charges are supporting this. In brief, the atmosphere in the present day could be very beneficial, and Boardwalk’s share worth just isn’t reflecting this.
Latest market transactions are properly above market valuations. There are lots of issue that spotlight this discrepancy. For instance, the stock of properties is declining, and building prices are rising. This speaks to a continued beneficial provide state of affairs. On the demand aspect, housing costs have risen dramatically, making residence buy much less inexpensive. That is optimistic for leases. As of proper now, leasing momentum is impacting income and working earnings very favourably.
All of this performs into Boardwalk and its valuation. The hole between the corporate’s NAV estimate and the present share costs ought to slender, as these traits hit the underside line.
Lengthy-term progress drivers are sturdy
Canada’s borders are re-opening after the extended COVID-19 shutdowns. That is respiratory new life into Canada’s file immigration targets. This large inhabitants progress can be a key consider Boardwalk’s anticipated success. Already, occupancy in Might is larger than in April. Boardwalk expects this pattern to proceed because the REIT is “firing on all cylinders.”
Additional to this, we now have Canada’s booming vitality sector. We all know that Edmonton and Alberta are lastly seeing a restoration together with rising oil and fuel costs. As we all know, this has put upward strain on Boardwalk’s bills. However, the restoration of this sector may even have a really optimistic impression on Boardwalk given that almost all of its portfolio is in Western Canada. A revival of the vitality trade, means a pick-up in hiring, which suggests extra those who want housing. We will count on market fundamentals for Boardwalk’s western properties to enhance considerably.
