Our view: Boardwalk REIT (“BEI”) reported FFO/unit of .89, +11% y/y, vs. RBC/consensus of .855/.88. 2023 FFO guidance was increased by 3%. Q2 was positive with operating metrics showing continued sequential improvement. While go forward return potential may not be as good as the +31% YTD, we note that 1) valuation remains reasonable, 2) BEI can convert market rent growth to NOI growth quicker with demand/supply remaining favourable, 3) there is upside to our margin assumptions and 4) BEI's business model looks to retain as much cash flow as possible for growth. Maintain OP; Target $77 (+$3).
Key points:
Operating metrics keep improving: Q2 SP NOI growth of +12.5% was driven by SP-Rev +8.6% and SP-Exp +2.7%. Average occupied rent was $1,326, +2.6% q/q, +8% y/y. Occupancy was 98.3% (+0 bps q/q, +188 bps y/y) and improved further to 98.5% in August. Market rent was $1,495 (+3.5% q/q, +8.9% y/y). Regionally, its AB markets (63% of NOI) are outshining the rest with SP NOI growth of +16.5%, followed by SK +7.5%, QC +6.5%, ON +4.7% and BC+4%. Lower R&M, advertising and bad debts boosted Edmonton growth.
2023 FFO guidance increased by +3%: 2023 FFO guidance was raised again to $3.42-$3.54 (vs. $3.30 to $3.46) based on SP NOI growth of +11.5% to +14% (vs. 9.5% to +13%). The midpoint of guidance is 3% higher than prior guidance. July new lease spreads were +11.6% (+12.8% in AB) and renewals were +5.2% (+8.4% in AB). Given the demand/supply imbalance and affordable rent levels (rent/income of 27% in Calgary & 23% in Edmonton), our sense is that the market could bear this pace of growth for a while.
Estimates & valuation: We are increasing 2023 FFO to $3.47 from $3.39, which implies 11% y/y growth, the highest among CDN multi-res peers. In 2024, we expect 8% FFO growth, more in line with our expectation for peer group average. Our NAV/unit estimate of $69 (+5%) is based on a 4.85% cap rate (+5bps), vs. IFRS reported NAV of $80.98 (+7% q/q) based on 4.9% cap rate on ‘stabilized’ NOI. Our target of $77 (+7%) is based on parity to our 1Y forward NAV.
Have we missed the boat? With the units up 31% YTD, we understand reluctance to add to the name after such a run. While we do not expect 12-month return potential to be as high as this year, we note: 1) BEI trades at an implied cap rate of 5%, 6% discount to our NAV estimate and 20% discount to IFRS NAV; 2) With 73% of its NOI in non-rent controlled markets, BEI has a good conversion rate from market rent growth to NOI growth (MTM opportunity 9%-13%); 3) There is margin expansion upside to our estimates – we are modeling <61% margin over next two years – BEI has a soft target of ~65% by 2027; 4) BEI returning to BEI 1.0 with low payout, retaining cash flow for growth can compound growth better. Maintain OP.