Boardwalk: Best Value In Apartment REITs (OTCMKTS:BOWFF)

All values are in Canadian Dollars, unless otherwise noted.

Boardwalk Real Estate Investment Trust (OTCPK:BOWFF) surprised us with a spectacular Q2 and at the same time upheld our long thesis from June. We had felt strongly that this residential REIT was being unfairly discounted by the market due to the oil war and the pandemic, however, we’re still expecting Q2 to show some battle scars. We had left our readers with:

We think Q2 results will have the worst of the impact and we can go from there to extrapolate the annual results better. Property expenses will trend higher but refinancings at lower rates should offset some of this impact. However, whichever way we cut it, valuing this residential REIT at this valuation is a travesty in our opinion. We think the fair price without visibility into the Q2 results is around $50 based on its tangible book value. We will continue to buy until it reaches that price or the Q2 results are released, whichever comes first and then take a pause to reassess.

Source: Boardwalk REIT: Steady As She Goes

It gives us great joy to admit that Boardwalk proved us wrong. We expected at least some fallout here and Boardwalk has not had any issues whatsoever. Yes, the Government of Canada’s support plans helped, but even then, the results had a “normal” feel about them. That it managed to have a great Q2, when the economy was in the throes of the pandemic, makes us eager to see its performance for the rest of the year. The price has stayed about the same in this duration, but we are now even more confident in our bull case. The low price just provides more opportunity to load up.

The REIT

Boardwalk Real Estate Investment Trust is a real estate investment trust that owns and operates residential buildings across Canada, namely in the provinces of Alberta, Saskatchewan, Ontario, and Quebec.

Source: Q2-2020 Presentation

Q2-2020

Boardwalk showed a year-over-year increase in both funds from operations (FFO) and the adjusted funds from operations (AFFO). The increase in FFO was primarily as a result of higher revenues alongside overall lower costs including maintenance capex.

Source: Q2-2020 Financial Report

With the Q2 results out, Boardwalk’s streak of FFO increases reached its ninth consecutive quarter. Boardwalk was able to achieve this as its occupancy climbed once again.

Source: Q2-2020 Financial Report

The REIT did have to bump up incentives, and occupied rent moved a little lower. But those negatives were offset by lower interest costs and higher revenues from more units being available for renting during the quarter.

Distributions

Boardwalk maintained its distribution but that should not come as any surprise due to its low payout ratio.

Although 3.3% is nothing to scoff at with interest rates providing no comfort. This one once again gets the lowest danger level rating on our proprietary Kenny Loggins Scale.

A low danger rating implies a less than 15% probability of a dividend cut in the next 12 months.

Debt Financing

Boardwalk lowered its weighted average interest rate from 2.73% at last quarter-end to 2.71%. It should be noted that all of the refinancings in Q2-2020 were at superlative rates.

Source: Q2-2020 Financial Report

The current 5-year rates at 1.10%-1.25% are a big improvement over Boardwalk’s upcoming maturities.

Source: Q2-2020 Financial Report

It also noted that it is monitoring the interest rates and will be ready to convert its short-term floating rate debt to longer term fixed rate mortgages to reduce interest rate risks.

It also comfortably met its interest coverage requirement of 1.5X as stipulated by its Trust agreement.

Source: Q2-2020 Financial Report

In terms of liquidity, Boardwalk is well positioned for the balance of the year.

Source: Q2-2020 Financial Report

Rent Collection

The REIT also hit it out of the park for rent collections, with it achieving collections in line with the pre-Covid era.

Source: Q2-2020 Presentation

Conclusion

The price has not gone anywhere since we last wrote on it, but we believe this REIT has proved itself to its naysayers. Boardwalk is trading at 10X funds from operations (FFO), the lowest valuation we are aware of for this company. Boardwalk is also trading at a decent discount to its liquidation value. The REIT believes its liquidation value is over $61.00 per share, while we think it would be hard-pressed to find a buyer over $50.00. But both numbers are far above the market price. We think this should be bought with both hands. If the market disagrees, so be it, we get to buy more of it at these fire sale prices.

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Disclosure: I am/we are long BOWFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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