Back To The Future
Our Conclusion
Boardwalk REIT (BEI) printed an unsurprisingly strong Q3/23 beat, driven by
robust and accelerating rental lifts in the REIT’s key market of Alberta. The
absence of rental controls in the majority of the REIT’s portfolio continues to
drive superior growth (and indeed relative valuation), leading to ~12% SP-
NOI growth. Occupancy remains at essentially stabilized (read that as full)
levels, and further growth will likely come through the aforementioned rental
lifts, as well as through turned suites in provinces that still have rental caps in
place. In a “blast from the past”, BEI has the unique, and well deserved,
distinction of being one of the very few REITs to have fully recovered to (and
through) pre-pandemic levels. It is against this backdrop that its superior
operating fundamentals may be accurately (and justifiably, we believe)
reflected in the premium valuation relative to peers. We are increasing our
price target to $73.50 (from $70), maintaining an arguably conservative parity
with NAV. BEI remains Neutral rated, reflecting the current relative valuation
premium and lower distribution yield, coupled with an above-average near-
term growth profile; in essence, we believe Boardwalk is where it deserves to
be. Concurrent with the quarter, we are releasing our 2025 estimates.
Key Points
Q3/23 Results: FFO/unit of $0.96 was slightly ahead of our $0.93 estimate
and consensus of $0.94. SP-NOI was up a healthy 12.1% Y/Y on an 8.9%
increase in property rental revenue, partially offset by a 3.6% increase in
operating expenses. By market, Alberta was the REIT’s strongest, posting
SP-NOI of +15.8%, while its BC portfolio (less than 1% of NOI) trailed at
+2.8% as rental rate restrictions capped growth. Portfolio-wide occupancy
picked up 122 bps Y/Y to an effectively full 98.5%.
Leasing Activity: In the REIT’s key market of Alberta, new leasing spreads
were ~12%, with an impressive ~8% being achieved on renewals. We note
that there is no rent control in Alberta, and current rents (relative to income
levels) remain some of the most affordable in Canada, despite recently
growing leasing spreads. Considering rents have remained substantially
below inflation-adjusted levels since 2014, we expect strong leasing spreads
and high leasing velocity through our forecast period.
Balance Sheet: Debt to GBV was 43.1%, a 210 bps decrease Y/Y. Reported
IFRS NAV came in at $82.07 compared to consensus NAV at $70.00. We
expect upward NAV revisions across the Street on the strong NOI figure and
increased guidance. The REIT attributed the increase to an increase in
investment properties. The REIT’s liquidity remains strong at ~$253MM and
~96% of the REIT’s mortgages carry CMHC insurance.
Revised Outlook: Concurrent with the quarter, Boardwalk both tightened
and slightly raised its 2023 FFO guidance to a range of $3.52 to $3.60 (from
$3.42 to $3.54), which compares to the current consensus estimate at $3.49,
suggesting an upward revision to broker estimates.