It hasn’t been a good month for Boardwalk REIT (TSX:BEI.UN).
Shares of the owner of more than 33,000 apartments have gotten hammered, falling more than 15%. Most of that move has come in the last few days after the market started to get really bearish on Alberta real estate again; Alberta happens to be the province containing some 60% of Boardwalk’s units.
First it was Dream Office Real Estate Investment Trst, which reported it was writing down the value of its Alberta portfolio by nearly $700 million because of weak occupancy, falling rents, and general economic woes in the province. This reduced the company’s net asset value from more than $30 per share to $23 in one fell swoop.
Boardwalk’s earnings followed after the market closed on Thursday, and they weren’t pretty either. Funds from operations plunged, falling from $0.94 per share last year to $0.76 this year. Adjusted funds from operations fell about the same amount from $0.86 to $0.67 per share. The decrease can be partially attributed to various one-time costs, but the underlying message is clear: Alberta is struggling, and so is Boardwalk.
However, it hasn’t been all bad. Boardwalk’s management team is making some astute moves today that should pay off in the future. Are they enough to create a long-term buying opportunity?
Making smart moves
Management is taking advantage of the downturn in Alberta to make acquisitions in the province for the first time in years.
Like every REIT, Boardwalk is always on the lookout for interesting assets to acquire. But over the past few years, assets in Alberta have gone for a pretty penny as new money flooded into its real estate market. Boardwalk’s management was content to sit on their hands, waiting for valuations to come down before the company would open up its wallet.
We’ve now seen valuations come down, and Boardwalk is buying. Recent purchases include 509 suites in Edmonton and 238 in Calgary, assets that will set it back $144.1 million. Cap rates for these new buys are averaging higher than 5.5%, which isn’t bad in today’s low interest rate environment.
Boardwalk is developing new units too, including three buildings in Regina with some 230 units for a cost of approximately $40 million. The first building is completed.
Management is also taking advantage of lower labour costs for renovations in Alberta and sprucing up many of its properties–a move that should result in higher rents over time.
Additionally, Boardwalk is spending money buying back its own shares, which management feels are undervalued. In the first six months of 2016 the company repurchased 666,000 units in the open market for a total cost of $32.6 million. It also received approval to buy up to 3.7 million more over the next year.
Valuation
Through the first six months of 2016 Boardwalk earned $1.53 per share in funds from operations. That puts it on pace to earn $3.06 per share for 2016.
Shares currently trade hands at $50.39, which gives the company a P/E ratio of 16.5. That doesn’t seem excessively cheap, but Boardwalk has always traded at a high multiple, and the market is probably anticipating an increase to earnings come 2017. Remember, results have been affected by a few one-time items.
On an asset basis, Boardwalk has a net asset value per unit of $63.23. Add on the $3.23 per share in cash it has and we get a value of $66.86 per share. That puts shares at a discount of approximately 32% compared to their true value.
But naysayers are skeptical of that number. The value of the company has gone up more than $1 per share since December 31, 2015, even though many of its peers are writing down the value of Alberta-based assets.
Conclusion
Boardwalk shares are trading at a pretty decent valuation, at least compared to years’ past. Its 4.5% dividend is also easily affordable, even if earnings stay depressed for the time being. And its management team is one of the best in the business.
However, I’d wait to buy until we see some sort of write-down of assets. With some 60% of units in Alberta, it looks like the company will be forced to impair these assets at some point, which could drive shares down even lower.
