Housing Needs More Supply: This Canadian Builder Doesn’t Need Home Prices to Boom

Canada needs dramatically more homes, even if home prices don’t rise.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published October 7, 4:10 pm EDT

Key Points

Bird earns from construction rather than depending primarily on selling houses at higher prices.
Its contracted and pending backlog now totals roughly $12.1 billion.
The business is growing quickly, but the stock’s sharp rally has made valuation the main risk.

Canada doesn’t need another housing boom. It needs considerably more actual houses.

CMHC estimates the country would need between 430,000 and 480,000 new homes annually through 2035 to restore affordability to 2019 levels. Current projections sit closer to 245,000 to 250,000.

That’s almost twice the construction pace, and it exposes an important distinction for investors. Home prices don’t necessarily need to soar for companies involved in building the missing supply to make money. In fact, cheaper homes would be rather helpful.

Concept of rent, search, purchase real estate, REIT — Source: Getty Images

Follow construction, not prices

Traditional homebuilders can depend heavily on selling houses at attractive prices. Falling prices may squeeze margins or convince developers to delay projects. Construction contractors operate differently. They can earn revenue from building apartments, infrastructure, hospitals, industrial plants and other projects for clients without owning the finished property.

That means investors considering housing exposure should look beyond house-price forecasts and ask a different question: Will Canada keep building? CMHC’s numbers suggest it rather desperately needs to. That’s one reason Bird Construction (TSX: BDT) has become interesting for investors buying stocks in Canada.

Build almost everything

Bird is a national construction company operating across buildings, infrastructure and industrial projects. Its residential work includes rental apartments, condominiums, affordable housing and multifamily projects. Bird has completed more than $7 billion of high-rise construction over the past decade and is also expanding modular and prefabricated construction techniques that can reduce building times.

That positions the company to participate if governments succeed in accelerating housing construction. Yet Bird doesn’t need housing alone to carry the business.

It also builds transportation infrastructure, mines, nuclear facilities, industrial projects and data centres. Bell selected Bird this year as a long-term construction partner for its Canadian artificial intelligence (AI) data-centre rollout. So even if high mortgage rates keep condominium pre-sales sluggish, another part of the construction market can pick up the hammer.

A $12 billion pipeline

The diversification is already showing up in Bird’s order book. Second-quarter revenue jumped 22.6% year over year to $1 billion, the first billion-dollar quarter in company history. More than 80% of that growth was organic. Even more interesting is what hasn’t been built yet.

Contracted backlog grew 30.6% from a year earlier, while the adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin increased to 7.1% from 6.5%. For a contractor, backlog provides visibility. It represents work already secured that can turn into future revenue as projects progress.

Bird ultimately wants to reach an 8% adjusted EBITDA margin under its 2027 strategic plan. If revenue keeps growing while margins inch higher, earnings can grow faster than sales. That’s the part I’d be watching.

Considerations

Unfortunately, investors aren’t blind to Bird. The stock recently traded at $83.89, just below its $84.86 record high. The shares have more than tripled from their 52-week low. That leaves the stock around 26 times forward earnings.

Construction also carries execution risk. Cost overruns, labour shortages, delayed projects or badly priced contracts can quickly eat margins. A weaker economy could cause private developers to postpone projects even if Canada desperately needs the buildings.

This isn’t a stock I’d chase simply because politicians promise more housing. Still, Bird’s exposure to residential construction sits beside infrastructure, industrial, nuclear and AI projects. That makes it more diversified than a simple bet on Canadian real estate.

Bottom line

Canada needs nearly twice as much annual housing construction to restore affordability, according to CMHC. Solving that problem requires builders long before it requires higher home prices.

Bird can benefit from that construction push without betting the entire company on houses becoming more expensive. Its $12-billion-plus combined work pipeline already stretches across several growing markets.

The shares aren’t cheap after their enormous rally. A pullback would therefore interest me far more than another housing-price boom.