Boardwalk (TSX: BEI.UN) owns and operates in more than 200 communities with over 33,000 residential units totaling over 28 million net rentable square feet.
The company looks to provide residents with superior customer service, while providing shareholders with regular monthly cash distributions and increasing the value of the portfolio through value-added acquisitions, dispositions, development, and effective management of Boardwalk’s residential multi-family communities.
The company is very cheap, with a price-to-ratio of just 0.7, a price-to-earnings ratio of 19.74 and market capitalization of 2.21 billion. Low cost mortgage debt is utilized at Boardwalk and the company has a manageable debt to equity ratio of 0.71. The company has mediocre performance metrics with an operating margin of 43.71% and a return on equity of just 4.19%.
The company’s performance in the first half of 2019 exceeded expectations, and revenues were near the top end of the original forecast and expenses below the original forecast.
Management revised the company’s full-year funds from operations (FFO) guidance to $2.45 per share. The company also increased the development budget to $55 million to account for a recent Mississauga apartment acquisition.
In the real estate industry, growth in FFO is an important metric to measure a company’s operating efficiency. The company reported FFO growth of 14% and maintained high occupancy by decreasing tenant incentives. Boardwalk responded to Alberta’s economic downturn by making rental rate adjustments to grow organic revenue.
The most attractive part of Boardwalk is management’s focus on maintaining high occupancy, reducing incentives, managing controllable operating expenses and increasing the value of company assets.
The company determined that limited incentives were required to lease and fill vacant units and hence, Boardwalk expeditiously reduced incentives on lease renewals.
The company opportunistically sold assets, as is evidenced by a recent sale of Chancellor Gate, a 138-unit low-rise asset in Saskatoon for a sale price of $20.7 million, equating to above-average $150,000 per door and a premium to book value.
The company plans to continue selling non-core assets at a premium to book value and deploying capital toward more attractively priced assets with the aim of geographically diversify Boardwalk’s portfolio.
Further, Boardwalk has forged partnerships with RioCan Real Estate Investment Trust to maximize the value of a community in Mississauga, Ontario and develop a mixed-use development with an estimated 470 residential units.
These partnerships have the potential of significantly increasing the value of Boardwalk’s assets and diversifying the company’s portfolio.
RioCan and Boardwalk are finalizing development plans and this would be RioCan and Boardwalk’s first joint venture development. Boardwalk’s is expanding to the Greater Toronto Area (GTA) and other high-growth rental markets with the aim of growing free cash flow at a fast pace.
The investment thesis lies in the opportunity to buy Boardwalk’s stock at a significant discount to net property value. The company has a history of selling assets at a premium to book value and the company trades at a price to book value of just 0.7.
Diversification would lower company risk and Boardwalk executives seem committed to reduce portfolio exposure to Alberta. Management appear to be intelligent capital allocators, which bode well for long-term shareholders.
