Our View: Boardwalk REIT (“BEI”) turned in a better-than-expected quarter, revised 2023 guidance upwards and posted SP NOI growth reminiscent of the ‘06-‘07 era. If migration pace continues, it is hard to imagine rent growth not sustaining or accelerating. Moreover, with almost 75% in non-rent controlled markets, BEI stands to realize market rent growth sooner than most peers, with 2023E FFO/unit growth of 8% leading the group. Maintain OP. Target price $74 (+$5).
Key points:
“Highest SP NOI growth since 2007” – BEI’s headline nicely captures its past and current state (p.s., highest registered was +19.3% in Q2/07). Q1 SP NOI growth of +13.7% was driven by SP-Rev +8.5% and SP-Exp +1.8%. BEI saw relatively good expense control in the face of accelerating rent. April new lease spreads were +13.8% and renewals were +7.7%. Average occupied rent was $1,292, +6.2% y/y, +1.7% q/q. Occupancy was 98.1% (+10 bps q/q, 257 bps y/y) and improved further to 98.3% in May. Incentives were down 33% y/y and BEI noted seeing hardly any incentives on renewals.
Improved guidance reflects confidence given that we are early into the summer leasing season: 2023 FFO guidance was tightened and raised moderately to $3.30 to $3.46 (vs. $3.25 to $3.45), based on SP NOI growth of +9.5% to +13% (vs. +8.5% to +12.5%).
If migration pace continues, it is hard to imagine rent growth not sustaining or accelerating. Consider this simple math – Q4/22 migration to AB was 41K, following a record high 53K in Q3 (see Exhibit 4). If migration pace keeps up at 40K per quarter, that’s 160K annualized newcomers. At an average 2.6 persons/household, ~62K new units would be required. Currently, there are 34K units under construction in AB. That is a material shortage.
Capital allocation: BEI picked up a new asset in Greater Victoria area, a 124-unit newly built property in Langford BC for $60M ($484K/suite) at 5.1% cap rate (funded by $46.5M 3.9% 7-year mortgage). Property is close to University of Victoria’s West Shore campus.
Election watch: Alberta provincial election is on May 29. Latest poll suggests United Conservative Party (UCP) is in the lead over NDP. Rent control is not part of the election platform for either party.
Best positioned near term: With almost 75% in non-rent controlled markets, BEI stands to realize market rent growth sooner than ON-centric peers, with 2023E FFO/unit growth of 8% leading the group. Our NAV/unit estimate of $66 (+$5) is based on a 4.8% cap rate (+0bps), vs. IFRS reported NAV of $75.85 based on 4.9% cap rate on ‘stabilized’ NOI. Our target of $74 (+$5) is based on 2.5% premium to our 1Y forward NAV. Reiterate OP rating.