November 10, 2022
Boardwalk REIT
Largest Alberta migration trends on record
Our view: Boardwalk REIT (“BEI”) turned in a better-than-expected quarter, showing acceleration in leasing spreads, solid SP NOI growth of 5.2%, positive revision to guidance and material occupancy improvement in its largest market, Edmonton. Alberta is seeing the largest migration trend on record. We can’t help but think that leasing conditions will be robust over the near term. TP $65 (+$1). Maintain Outperform.
Key points:
SP NOI growth solid across the board: SP NOI growth was +5.2% (SP- Rev +4.9%; SP-Exp +4.3%). Most markets saw high-single-digit growth (Calgary growth +9%, Quebec +7.4%, SK +8.4%, ON +8%). Edmonton, which accounts for 34% of the portfolio, was the main drag at +0.2% primarily because of higher property tax assessments and payments in the quarter and higher opex from increased rental activity.
But Edmonton is a great news story: Edmonton occupancy has improved materially to 97.4% in October, +134 bps from Q3/22, +300 bps from Q2/22, +417 bps from Q1/22. The market is nearing a point where there is pricing power. BEI noted that the Edmonton market feels like 2012-2014. We checked – Edmonton SP NOI growth in those years were: 2012 +6%, 2013 +9%, 2014 +5%. BEI also noted that Edmonton new supply is more balanced, unlike the post-2014 period when there was significant new condo supply that turned into rental. Rentals.ca shows Edmonton registering rent growth of 5% for one-bedroom and 9.4% for two-bedroom apartments in October.
With many markets now at 99% occupancy, leasing spreads have turned up meaningfully: New lease spreads +9%, renewal +4.6%. AB new lease spreads +9.7%; renewal +5.7% (this compares with +6.8% and 5% in Q2/22). Loss-to-lease increased slightly from Q2/22 even as rent growth is being captured. Loss-to-lease sits at $56m, with incentives continuing to decline at $7.5M, -21% y/y.
2022 FFO mid-point guidance +1.3%: 2022 FFO range of $3.08 to $3.15; SP NOI guidance growth of +3% to +5%. We are modeling +6% FFO growth in 2023 – higher financing costs (4.3% for 10 years) being headwinds.
Capital allocation: BEI remains active on its NCIB having acquired $3M in Q3/22, $11M in Q2/22 and $7.6M in Q1/22. BEI acquired a Calgary asset in the quarter, but we do not expect it to be overly active on acquisitions.
Maintain OP rating: Our NAV/unit estimate of $58 (+$2) is based on a 4.8% cap rate (+5bps), and implies price/suite of $180K. This compares with IFRS reported NAV of $71 (+2% q/q) based on a 4.9% stabilized cap rate. Our TP of $65 (+$1) is based on parity to our 1Y forward NAV. With record migration trends into Alberta in recent quarters (see Exhibit 4), we can’t help but think that leasing conditions will be robust over the near term.