Boardwalk REIT (TSX:BEI.UN) has fallen from October 2014’s high of $71 per unit to under $47, or 33.8%. That was the market reacting to the oil price, which fell from over US$95 in the first half of 2014 to US$45.
After all, about 65% of Boardwalk’s net operating income (NOI) comes from Alberta, which is experiencing the biggest impact of slashed oil prices.
On the plus side, the real estate investment trust (REIT) owns and operates over 200 properties, consisting of 32,000 residential units across 220 communities. Further, it focuses on providing quality service to tenants, maintaining its monthly distributions, and creating value for unitholders.
How low oil prices truly impact Boardwalk REIT
As reported at the end of September, out of the 12 cities that Boardwalk owns properties in, only Fort McMurray’s occupancy rate was in the 80% level in the third quarter. Specifically, its occupancy rate was 81.2% with a revenue decline of 16.8% compared with the start of the year. The second-lowest occupancy rate was 92% in Grande Prairie, but it experienced revenue growth of 3.1%. Both cities are in Alberta.
To put it in perspective, Boardwalk only owns 1.1% of its units in Fort McMurray and 2% of its units in Grande Prairie.
Overall, in the third quarter Boardwalk maintained an average occupancy rate of 96.7%, 1.3% lower than the same period from the previous year. (A 1% annualized change in occupancy rate impacts revenue by about nine cents per unit.) However, its average monthly rent increased by 1.8% in contrast to the average market rent that decreased by 1.8%.
Here is a comparison of the nine months that ended in September 2015 compared with the same period in 2014:
- Rental revenue grew 2% from $353.4 million to $360.5 million
- NOI grew 2.6% from $218.2 million to $223.8 million
- Adjusted funds from operations (AFFO) grew 6.7% from $119.7 million to $127.7 million
- AFFO per unit increased 7.4% from $2.29 to $2.46
- Distributions declared per unit increased 0.3% from $1.525 to $1.529
- AFFO payout ratio reduced from 66.7% to 62.3%
- Interest coverage ratio based on rolling four quarters increased from 3.3 to 3.59
- Operating margin increased from 61.9% to 62.1%
And in same nine-month period, properties experienced growth compared with the previous year:
- Rental revenue growth of 2.3%
- Operating costs increased by 2%
- NOI growth of 2.5%
If anything, these metrics show how strong Boardwalk REIT’s business is, despite low oil prices.
Are Boardwalk REIT’s distributions in jeopardy?
Whether or not a REIT can continue to pay its distributions depends on several factors, including occupancy levels, changes in FFO, and the FFO payout ratio.
I already mentioned that Boardwalk’s occupancy rate remained solid at 96.7%.
From the end of September Boardwalk REIT’s latest FFO-per-unit guidance for 2015 is $3.53-3.58, which would indicate a growth of 4.7-6.2% from 2014. A growing FFO and a conservative payout ratio of about 62% creates a margin of safety for its distributions. So, Boardwalk’s distribution looks safe.
In conclusion
REITs pay out distributions that are unlike dividends. If you wish to avoid the tax-reporting hassle, buy REITs in a TFSA or an RRSP.
Boardwalk REIT gave 2016 guidance that FFO would be, at worst, 3.7% lower than the 2015 FFO-per-unit guidance. With a conservative payout ratio based on AFFO and its ability to maintain high occupancy rates of over 96%, its 4.4% yield is safe.
With the shares now trading roughly $47 per unit, and a price-to-funds-from-operations ratio of about 13.3, I believe the shares are undervalued. However, in the recession of 2008-2009, it traded as low as 10.7.
Director Andrea Stephen just bought 1,500 shares on November 17 at $47.39 per share, equating to a value of $71,085. This further indicates Boardwalk is a good value.
Boardwalk REIT is a quality residential REIT to average in to over time as we watch the resource story play out. However, if lower resource prices continue for an extended period of time, this may have a long-term impact on Boardwalk’s rental and occupancy levels.
