Boardwalk Real Estate Investment Trust (“BEI-U CN” or “Boardwalk”) is the largest owner of apartment rental
units in Canada with significant exposure (71% on a weighted unit basis, 79% on a “stabilized property” NOI
basis) to Canada’s oil producing regions.
Boardwalk is an ‘easy’ to borrow REIT short with short interest under 1%, a dividend yield of 3.4%, a large
$C3.1bn market cap, trading at the highest valuation of all Canadian REIT peers (on any metrics, but on a
P/AFFO basis: 20x 2014 P/AFFO, 19x 2015 E Mgt’s P/AFFO) and above the sector’s 15 year average (~16x
P/AFFO). Boardwalk is down only ~15% from its all time peak in October of $70 and faces numerous
headwinds driven by a weakening Alberta economy.
Boardwalk’s large Alberta exposure will be a drag on earnings in 2015 due to impact from the recent
commodity correction. This impacts Boardwalk in several ways, most importantly: 1) reduced oil and gas prices
will result in a recession in Alberta with local energy companies having layoffs, less work for energy service
companies (more layoffs), as well as less revenue for the province (energy drives Alberta’s GDP, so less work
for infrastructure projects, more layoffs, etc…), and 2) a reduction of in-migration to Alberta from other
provinces seeking commodity related jobs. In-migration has been the growth driver in Alberta’s population (and
thus apartment rental rates) pre-commodity correction.
Simply put, Boardwalk has large Alberta exposure, is valued above peers, trades near its historic stock high just
as Alberta enters a recession. We see Boardwalk worth the mid $40s (similar levels to where the stock traded in
2010/2011), a 30% return from the current $60 price with limited risk against the short thesis.
Company
Founded in 1984 by Sam Kolias (chairman and CEO of Boardwalk REIT) and his brother Van Kolias (Senior
VP of Quality Control of Boardwalk) the brothers got their start via a $50,000 loan from their father. The loan
was used to buy apartment real estate in Alberta and Saskatchewan. Currently Sam and his brother Van Kolias
are at #81 of the top 100 richest people in Canada, via Canadian Business 2006.
As of 12/31/14 58% of Boardwalk’s portfolio in terms of weighted average apartment units was located in
Alberta (16% in Calgary, 36% in Edmonton, 1% in Fort McMurray, 2% in Grande Prairie, and 3% in Red Deer)
with an additional 14.1% in Saskatchewan, another oil rich province.
Among the entire apartment REIT industry in Canada, Boardwalk has the highest amount of exposure to
Alberta. The trade is based on Boardwalk’s Alberta exposure, as we see Alberta entering a recession in 2015
and Boardwalk undergoing a similar scenario to previous recessions in Alberta.
Alberta
Alberta is Canada’s energy province. Alberta accounts for 78% of Canada’s oil production (2013, 80% of which
are oil sands projects) and 69% of Canada’s natural gas production (2013). The energy sector (which includes
mining as well as oil and gas) accounted for 22.1% of Albert’s GDP in 2012 and 72% of the province’s exports.
In terms of investment projects, oil sands alone accounted for 53% ($C 110bn, many of which are having their
growth initiatives scaled back as oil sands on average require a break even oil price of $65/bbl
) of all major
investment projects in Alberta. Oil and gas is easily the economic driver in Alberta.
In terms of people, according to StatCan Alberta has a population of 4.1MM (estimated as of 10/1/14), or 11.6%
of Canada’s total population. In 2014, mining, quarrying, and oil and gas extraction employed 175,300 people,
considering Alberta in 2014 had a 72.7% Labour Force Participation Rates, it suggests 5.9% of the labor force
was involved in the mining, quarrying, and oil and gas extraction segment. This is misleading as it omits related
industries (servicers, linked construction, etc…etc…).
A thorough review of how energy impacts Alberta was completed via the Alberta Competitiveness Review in
20102 and stated that the oil and gas industry impacts 50% of the Alberta economy and directly or indirectly
employs one out of seven (14%) people in Alberta, with a substantially greater impact in sectors such as
hospitality, transportation, food services, construction, and real estate. Every one dollar invested in oil and gas
provides three for Albertans in economic activity. The drop off in oil / gas prices has guided Alberta’s 2015
budget to forecast a $C4.991bn deficit in 2015 and only to return to surplus in 2017, based on WTI of
$54.84/bbl in 2015-2016 and $62.80/bbl in 2016-207, and just under $84 by 2019-2020.
The current drop off in commodity prices has driven Alberta unemployment to 5.5% for March 2015 (the
highest since September 2011), up from 4.5% in January 2015, with 20,000 natural resource jobs cut in the past
6 months. 3
The unemployment rate in Alberta will continue to rise in 2015, with continued losses from the
energy space (the highest paid sector in Alberta).
WTI vs Alberta Unemployment Rate
1 Boisvert, David and Contreras, Guido” Economic Impacts and Labour Market Trends 2015.” Research, Policy and Strategic Partnerships Jan 1, 2015: Electronic.
2 Canadian Association of Petroleum Producers. “Alberta Competitiveness Review 2010.” Mar. 11, 2010:. Electronic.
3 BNN. “Just how bad were the job losses in Alberta.” March 13, 2015: Electronic
