CA - Boardwalk: Mission Accomplished Again

• We gave a buy rating to Boardwalk as it cratered to 52-week lows.
• The stock rebounded nicely, and the Q2-2022 results gave the price an extra boost.
• We examine the valuation again and tell you where we stand.

All values are in CAD unless noted otherwise.

Boardwalk Real Estate Investment Trust ( BOWFF ) has made it a habit to overshoot our price targets. The last time we wrote on it, we had a bullish rating with a price target of $48. While the stock has been on an upward trajectory since that piece, the Q2 results sent it zooming past our target.

There were a lot of reasons to love this apartment REIT a month ago. We summarized them in our conclusion.

Our last change in rating on Boardwalk was in August 2021 (see Mission Accomplished ) as we moved to a hold. The stock is 15% lower and the NOI is higher. Our primary risk is better discounted today, and we are seeing valuation get to an appealing aspect. Boardwalk's low payout ratio gives it a lot of flexibility, and it can deleverage with cash flow. It does not hurt that insiders are seeing value as well. We are upgrading this to a buy with a $48.00 CAD price target for BEI.UN ($37.50 for BOWFF, OTC security). Key risk remains that interest rates move even higher and further than our pessimistic assumptions.

Source: Boardwalk: 4 Reasons To Consider A Buy

With almost a 20% return on price in one month and in light of its Q2 results, we are ready to revisit this one. Something's got to give: our price target or our rating on this stock.

Q2 Results

Boardwalk delivered strong revenue (4% year over year) and same property revenue (3.4% year over year) growth. Passing on rent hikes has not been an issue with occupancy levels so high and the housing market becoming completely unaffordable. Net operating income, or NOI, climbed 4.2% over 2021 while same property NOI growth came in at 2.8%. The same property NOI may have seemed a little weaker, but in the face of brutal inflation, we think this is a remarkably impressive result. Operating margins actually expanded in this climate, and that is pretty much a slap in the face to anyone bearish on this company.

Funds from operations (FFO) leveraged this, as we have seen again and again from Boardwalk, and we got a 5.6% jump.

Adjusted FFO (AFFO) was even more impressive at an 8.1% increase. If all of that did not impress you, then you got to see AFFO per unit (yes, above were gross numbers) move up just a shade above 10%. This was accomplished by Boardwalk's accretive share buybacks.

All of these numbers also boosted Boardwalk's calculations of net asset value or NAV per share, and the latest quarter saw this breach $70 to the upside.

Outlook

Q2-2022 was marked by Boardwalk doing practically everything right. But there are some things outside of its control. We are talking about the direction of interest rates, and the 3.7% on the 10-Year CMHC rate is quite an eyesore.

Notable here is that none of Boardwalk's maturities come even close to that rate. Boardwalk showed the 5-year rate in this graph and did not even bother with the 10-year rate. That would have made the comparison even more daunting, with the 10-year rate over 4.3%. This of course is why Boardwalk has lost some ground from its 52-week highs, but it is only a concern if rates move higher still. We think the portfolio can handle 4.0% or even 4.5% on the 5-year rate. Granted, it won't be extremely pleasant, but it can be dealt with. But if we keep going further past that, we are likely to see some significant pain.

On the revenue side, Boardwalk showed the tightening market and the rent increases, which continue to offset interest rate pressures. When viewed in isolation within this quarter, clearly the apartment market fundamentals are winning against the rate changes. We will see more pressure in 2023 if we keep refinancing the sub 3% mortgages at 3.7%.

Verdict

Boardwalk raised the low end of its guidance.

You can see the little back and forth dance above on the FFO per share from the original guidance, the Q1-2022 pullback and now the boost. The key takeaway is that Boardwalk maintained its numbers through a very challenging period. Based on all of this, we are boosting our fair value to $52.50 at about 17X 2022 FFO. This is a jump from our $48 numbers just a little while back. The stock has almost caught up to that, and we don't see big prospects for capital appreciation here. Hence, we are downgrading this to a hold. Interest rate jitters and/or recession fears might set up a better buy point down the line, and we will be on the lookout for that.

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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