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$2.3 billion Boardwalk REIT (TSX:BEI.UN) is the proprietor and operator of multi-family rental communities. It owns roughly 200 rental items comprised of greater than 33,000 suites. Whereas rising rates of interest and power prices have spooked us all, Boardwalk is dealing with all of this fairly properly. That is evidenced in its first-quarter outcomes.
Let’s take a more in-depth look.
Boardwalk’s quarter in a nutshell
The primary quarter of 2022 was characterised by two issues. First, and fairly curiously, it was characterised by robust demand momentum. However secondly, and never surprisingly, it was characterised by value inflation.
Funds from operations rose 4.6% to $0.68. This can be a reflection of the more and more constructive fundamentals that Boardwalk REIT is seeing. For instance, demand in Alberta is rising, whereas provide there stays stagnant. As a reminder, Boardwalk is closely uncovered to Alberta, which makes up 62.4% of its complete portfolio.
The elephant on this room is rates of interest. One can not have a correct and exhaustive dialogue about Boardwalk (and any REIT) with out addressing rising rates of interest. As a result of, by their very nature, we discover that REITs are fairly closely indebted. It’s half and parcel of their enterprise mannequin — a closely capital intensive one whose rewards embrace a lifetime of secure and predictable earnings. Because of this it comes as no shock that Boardwalk REIT has fallen 14% in 2022.
So, Boardwalk is feeling inflationary pressures from rising rates of interest but in addition rising utility prices. That is exhibiting up within the REIT’s outcomes. Nevertheless, the necessary takeaway right here is that Boardwalk continues to enhance internet working margins (58.3% this quarter versus 57.8% final yr), regardless of will increase in these non-controllable prices
Boardwalk REIT is undervalued on so many ranges
Boardwalk estimates that its internet asset worth now stands at over $68. Rising occupancies, rising demand, and rising rental charges are supporting this. Briefly, the setting right this moment may be very beneficial, and Boardwalk’s share worth isn’t reflecting this.
Current market transactions are properly above market valuations. There are lots of issue that spotlight this discrepancy. For instance, the stock of houses is declining, and building prices are rising. This speaks to a continued beneficial provide state of affairs. On the demand facet, housing costs have risen dramatically, making house buy much less reasonably priced. That is constructive for leases. As of proper now, leasing momentum is impacting income and working earnings very favourably.
All of this performs into Boardwalk and its valuation. The hole between the corporate’s NAV estimate and the present share costs ought to slender, as these tendencies hit the underside line.
Lengthy-term development drivers are robust
Canada’s borders are re-opening after the extended COVID-19 shutdowns. That is respiratory new life into Canada’s document immigration targets. This enormous inhabitants development can be a key consider Boardwalk’s anticipated success. Already, occupancy in Might is larger than in April. Boardwalk expects this pattern to proceed because the REIT is “firing on all cylinders.”
Additional to this, we’ve got Canada’s booming power sector. We all know that Edmonton and Alberta are lastly seeing a restoration together with rising oil and fuel costs. As we all know, this has put upward strain on Boardwalk’s bills. However, the restoration of this sector can even have a really constructive affect on Boardwalk given that almost all of its portfolio is in Western Canada. A revival of the power business, means a pick-up in hiring, which implies extra people who want housing. We are able to count on market fundamentals for Boardwalk’s western properties to enhance considerably.