Real estate investment trusts, or REITs for short, are becoming extremely popular among Canadian investors.
Not only do Canadian REITs expose them to real estate without having to deal with realtors, down payments, and annoying mortgages, it gives them access to lucrative distributions due to the fact a REIT has to pay the bulk of its earnings back to investors.
The pandemic has made a lot of REITs attractive from a pricing standpoint, but it’s important you know what you’re looking for. One popular Canadian REIT is Boardwalk REIT (TSE:BEI.UN), and in this article I’m going to go over why it might be one of the cheapest real estate investment trusts available today. Lets get started.
Boardwalk REIT (TSE:BEI.UN) dividend and REIT analysis
Boardwalk REIT is a Canadian apartment trust that owns and operates more than 33,000 residential units that make up over 28 million in rentable square feet.
Although the company does have assets in Saskatchewan, Ontario, and Quebec, the bulk of its property is located in Alberta. The submarkets in and around the cities of Calgary and Edmonton account for the vast majority of the trust’s profile.
According to S&P Global, multifamily (AKA apartment) REITs have outperformed all other sector of public REITs over the last 20 years. Their performance plus their simplicity – everyone knows how renting an apartment works – puts apartment REITs among investor favorites.
Boardwalk REIT is the cheapest REIT in the sector
Market Cap: $1.27 billion
Forward P/E: 10.31
Dividend Growth Streak: 0 years
Payout Ratio (Earnings): 37.62%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 0.00%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
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There are three good ways to value an apartment REIT – price per door, cap rate, and price-to-AFFO (Adjusted Funds from Operations).
Fortunately, Boardwalk REIT is cheap on all three metrics.
An apartment REIT’s price per door is just that, it represents the price investors are paying for each apartment unit a REIT owns. By buying Boardwalk today you are buying each apartment unit for around $125,000.
Compare that to the average condo price in Edmonton – $167,000 – and you can see that you can buy apartments cheaper through this REIT than you can any other way.
If you wanted to buy a condo as a rental investment in Edmonton, you’d be paying a lot more than the $125,000 you pay for an apartment owned within Boardwalk.
38% of Boardwalk’s portfolio is in Edmonton and over 40% of Boardwalk’s apartments are in cities with much higher condo prices than Edmonton.
If Boardwalk traded at $150,000 per door – still much lower than condo prices in the cities it operates in – units would be over $39 a share. At the time of writing, Boardwalk currently trades for just over $27 a share.
Cap rate is a common method of valuing real estate
For a REIT, it compares the REIT’s net operating income (NOI, which is essentially the gross margin of the real estate) against it’s enterprise value (the REIT’s market cap plus it’s net debt). For cap rates, higher means cheaper.
The market is currently valuing Boardwalk at over a 6% cap rate. Almost everywhere in the country, apartment buildings trade for cap rates lower than that.
Again using Edmonton as our base point, only the cheapest apartments trade at 6%, according to the CBRE Group, which publishes research on real estate valuations.
At a 5.5% cap rate – still the low end of values in Edmonton and elsewhere – Boardwalk would be worth $38.
AFFO is essentially the REIT equivalent of free cash flow, and is the best indicator of how much money a REIT is making.
So, how is Boardwalk REIT doing in terms of AFFO?
Because of the stability and simplicity of apartment REITs, they tend to trade for high multiples of AFFO.
Boardwalk trades at the lowest valuation of the group; while other apartment REITs are trading at 20x AFFO or higher, Boardwalk’s valuation is less than 12x.
Even if Boardwalk traded at $36 per unit, it would only be trading at 15X AFFO.
No matter how you value Boardwalk, it is too cheap and the price could be higher in a few years.
The market values Boardwalk cheaply because of its exposure to Alberta, which most of its peers do not have.
But even with Alberta’s economy, Boardwalk is growing faster than other multifamily REITs
In the 2nd quarter of 2020, Boardwalk grew its normalized FFO per unit by 10.3%. That was the highest growth of any apartment REIT.
Boardwalk has one of the highest yields in the sector at 3.6%, and it has the lowest payout ratio. In 2020 so far, Boardwalk’s distribution was just 37% of its FFO, compared to most other apartment REITs with payout ratios around 50%.
The low payout ratio means investors are getting a safe yield and that Boardwalk has lots of cash flow to reinvest.
This will allow it to continue its fast growth, with the possibility of distribution increases in the future.
While the market doesn’t like Alberta apartments, Boardwalk is using its excess cash flow to buy apartments in other parts of the country.
As an example, this month Boardwalk bought 226 apartment units in Kitchener, Waterloo, and Cambridge.
The Kitchener-Waterloo region is much more attractive than Alberta due to the area’s universities and colleges, and the growing tech sector there.
As Boardwalk diversifies more and more away from Alberta, the market will start to price it closer to the valuation of its apartment REIT peers.
Boardwalk REIT trades at the lowest valuations in one of the most popular sectors in the market. Despite it’s low valuation, it is growing faster than its sector and has probably the safest distribution. Another REIT of note, this one specializing in office properties is Dream Office REIT (TSE:D.UN).
By any conservative valuation metric, Boardwalk REIT should be at least $36 (over 30% upside from today’s price), and probably much higher. While you wait for the market to wake up, you get a very safe 3.6% yield by buying today.