Boardwalk Real Estate Investment Trust (BEIUN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Boardwalk Real Estate Investment Trust First Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on May 10, 2023. I would now like to turn the conference over to Eric Bowers. Please go ahead.

Thank you, Brian, and welcome to the Boardwalk REIT 2023 First Quarter Results Conference Call. With me here today are Sam Kolias, Chief Executive Officer; James Ha, President; and Lisa Smandych, Chief Financial Officer. Please note that this call is being broadly distributed by way of webcast. If you have not already done so, please visit bwalk.com/investors, where you will find a link to today's presentation as well as PDF files of the Trust's financial statements and MD&A. Starting on Slide 2, we would like to remind our listeners that certain statements in this call and presentation may be considered forward-looking statements. Although the expectations set forth in such statements are based on reasonable assumptions, Boardwalk's future operation and its actual performance may differ materially from those in any forward-looking statements. Additional information that could cause actual results to differ materially from these statements are detailed in Boardwalk's publicly filed documents. I would like to now turn the call over to Sam Kolias.

Thank you, Eric, and welcome, everyone, to our Q1 2023 conference call. Starting on Slide 4. Our performance with our GAAP and non-GAAP measures of FFO per unit profit and net asset value and unitholder equity, all seeing an increase from the same quarter of the prior year or December 31, 2022. Slide 5, our culture. From our humble beginnings in 1984, our resident members are at the top of our organization. Our leaders put our team first and our team puts our resident members first. The rest takes care of itself. Slide 6, our strategy. To create value for all our stakeholders begins with our people. We are so grateful for our extraordinary team who continues to innovate and deliver our places, homes for our resident members where love always lives. In turn, this leads to leading earnings performance, which we believe will continue to result in strong total returns for our stakeholders. Our strategic focuses are significant organic growth from utilizing our proven team and platform that focuses on operational excellence to optimize NOI growth. When we pair this with the current improvements in apartment rental market fundamentals on a solid foundation of some of the most affordable rents in Canada, we're well positioned to continue to accelerate on our organic growth trend. Accretive capital recycling focuses on opportunistic investments into acquisitions, development and investment into our own high-quality existing portfolio with a tactical unit buyback when appropriate. These opportunistic investments, combined with our operational optimization have positioned Boardwalk for increasing asset values within Boardwalk's diversified and high-quality multifamily portfolio. Our solid financial foundation provides flexibility on our balance sheet with our growing free cash flow and with CMHC insurance on 96% of our financings, which provides access to low-cost mortgage capital with reduced renewal risk. Slide 7, we are delivering solid growth. Boardwalk's existing exposure to strong rental demand, nonprice controlled markets with record in-migration, significant organic growth as Alberta has some of the most affordable rental rates in the country with limited new supply versus demand from both international and interprovincial migration. Our solid financial foundation and partnership with CMHC allows us to provide some of the most affordable rents in Canada with rising interest rates, making homeownership more expensive and rising construction costs, all widening the gap between our replacement cost of our assets and our current evaluation. Construction levels in our core markets remain low relative to anticipated household formation with record high in-migration into our core Alberta markets. Our largest market, Edmonton, ended last month was under 1% availability contributing to our solid performance. Apartment rental fundamentals continue to improve with higher revenues as a result of inflationary adjustments, coupled with essentially no new incentives on new and renewing leases. All of our markets now have high occupancy and strong apartment rental fundamentals. Slide 8 shows the significant magnitude and scale on a historic level of all-time record high in-migration into our largest region, Alberta, from both interprovincial and international migrants calling Alberta home. This significant migration reflects the affordability that Alberta provides relative to other provinces, coupled with higher job vacancies. Slide 9 shows strong overall employment growth in Alberta, along with how diversified new jobs are helping with the diversification of the Alberta economy. Slide 10 shows some headlines that reflect a diversifying economy for Alberta. Some economists predict Alberta will avoid recession. In addition, there are many major projects under development in the province of Alberta, which will further promote more job opportunities in the future. Slide 11 shows our large presence in affordable and nonprice controlled markets with Alberta and Saskatchewan representing 62.4% and 10.4% of our portfolio, respectively. Boardwalk has the highest concentration of nonprice controlled apartments among our public peers. Boardwalk's current mark-to-market, which includes the reduction of incentives averages CAD 152 per suite and equates to approximately CAD 59 million of revenue opportunity. Slide 12 shows our high affordability in our core Edmonton and Calgary markets with rents well below 30% of median rental household income. To the right of the affordability chart is a graph which shows occupied rents in Alberta are at similar levels to Q3 2015. There remains a significant gap between occupied rents and the change over consumer price index over the last 8 years. Boardwalk rents continue to provide exceptional value versus consumer price index over the last 8 years. Slide 13 shows a significant imbalance between strong demand or in migration versus supply or new builds with demand or migration accelerating further in our core Edmonton and Calgary marketplaces, far outstripping new supply. To the right, a graph showing how high population growth or demand of housing is growing versus new supply. Slide 14 shows high occupancy as a result of strong apartment rental fundamentals in all our key markets. Move-outs versus last year are also dropping as our retention and value proposition increases. It is important to compare same month over previous month last year because of seasonality. Slide 15 shows our key operational metrics with high occupancy, lower incentives, higher occupied rents, resulting in higher revenues for the quarter. Slide 16 shows steady net new and renewal rental rates. Year-over-year, we have seen a significant improvement. Existing lease spreads or renewals are strategically moderated to keep providing resident-friendly affordable housing options in our core markets while lowering our costs and steady operational results, a win-win for all our stakeholders. Slide 17 shows a 1.6% sequential quarterly revenue gain lower than the 2.2% and 2.3% from the last 2 quarters, reflecting Edmonton's quarter-over-quarter high occupancy. Market rents have increased now in Edmonton, reflecting high occupancy and no vacancy in most of our communities, which is increasing sequential revenues in the current month and upcoming quarters in Edmonton. We would now like to pass the call on to Lisa Smandych, who will provide us with an overview of our portfolio performance and balance sheet. Lisa?

Thank you, Sam. Moving to Slide 18. For Q1 2023, same-property net operating income increased by 13.7% as compared to Q1 2022, with revenue growth of 8.5%. Edmonton, the Trust's largest market, saw revenue increase by 8.8% in Q1 2023 as compared to Q1 2022. Operating expenses increased by 1.8% in Q1 2023, primarily the result of increased wages and salaries and insurance costs, while mild weather resulted in a moderate increase in utilities as compared to Q1 2022. Moving to Slide 19. Administration costs increased by CAD 2.1 million in Q1 2023 as compared to Q1 2022. The increase was attributable to bonus accruals reported in Q1 2023, which were not accrued in Q1 2022, retirement costs associated with the senior operations leader, travel costs, Software-as-a-Service costs as well as increases in the cost of professional fees. In addition, inflationary wage adjustments were made at the beginning of 2023. Lastly, deferred unit-based compensation increased due to an increase in the number of participants as well as the cost of the program. Slide 20 illustrates Boardwalk's mortgage maturity schedule. Our mortgages are well staggered, with approximately 96% of our mortgage balance carrying NHA insurance through the Canada Mortgage and Housing Corporation. This insurance remains in effect for the full amortization of the mortgage, and in addition to carrying the government of Canada's backing provides access to financing at rates lower than conventional mortgages with the current estimated 5-year and 10-year CMHC rates of 3.9% and 3.75%, respectively. While current interest rates are above the trust maturing rates, the trust maturity curve remains staggered, reducing the renewal amount in any particular year. Mortgage financing continues to be a low cost of capital available to the trust. Lastly, the trust had an interest coverage of 2.91% in the current quarter. Slide 21 summarizes our 2023 mortgage program. Overall, we have renewed or forward locked CAD 197 million as well as secured CAD 19 million in new financing at an average rate of 4.4% and an average term of 4 years. Included in these financings is CAD 106 million of conventional mortgage financing, which was renewed on shorter terms to allow them to be replaced with CMHC financing upon next renewal. In addition, the Trust obtained CAD 46.5 million of CMHC financing at 3.89% and a 7-year term for its recent acquisition, which James will discuss. Current underwriting criteria in our most recent submissions to CMHC and our lenders has remained in line with our historically conservative estimates. Moving to the right of the slide, we provide a summary of Boardwalk's available liquidity. The Trust is well positioned with approximately CAD 48 million in cash and subsequently funded financings as well as an undrawn CAD 196 million operating line. This approximate CAD 244 million in liquidity provides the Trust with a flexible financial position. Slide 22 illustrates the Trust's estimated fair value of its investment properties, excluding adjustments for IFRS 16, which totaled CAD 7.1 billion as of March 31, 2023, as compared to CAD 6.8 billion as at December 31, 2022. The increase in overall fair value is a result of increases in market rents at select sites and communities as market fundamentals improve. Per estimated fair value of approximately CAD 207,000 per apartment door remains well below replacement cost. Moving to Slide 23. In consultation with our external appraisers, the capitalization rates or cap rates used in determining Q1 2023 fair value were unchanged from Q4 2022. As it does every quarter, the Trust will continue to review completed asset sales transactions and market reports to determine if adjustments to cap rates are necessary. Most recent published cap rate reports from CBRE in Q1 2023 suggests that the cap rates being utilized by the trust for calculating fair value are within their estimated ranges. In addition, the trust cap rates used in estimating fair value remain at a positive spread to interest rates. I would now like to turn the call to James Ha to highlight our capital allocation, acquisitions, developments and the trust exceptional value. James?

Thank you, Lisa. As we move into discussing our recent capital deployment initiatives, our regular listeners will note that we have moved our matrix of capital sources and uses to the appendix of this presentation. There are no changes to our relative view of sources and uses at this time, and we will update our stakeholders should a change occur. Our maximum cash flow retention strategy remains key to our ability to opportunistically invest and compound returns for our stakeholders. And as a result, our growing cash flow is increasing our available capital for deployment while also organically improving our leverage metrics. For larger opportunities that may arise, CMHC insured mortgage financing continues to represent an attractive source of capital. Additionally, noncore asset dispositions allow for capital recycling opportunities similar to our approach over the last several years. Each of these capital sources can be utilized to fund opportunities such as our value-add capital improvement program, strategic and accretive acquisitions, new development in undersupplied housing markets and the opportunistic use of our normal course issuer bid. For the first quarter, we're pleased to share an update on our capital uses starting on Slide 24, which provides an update to our progress on our value-add repositioning and renovation program. Our common area and amenity renovations have positioned our communities to offer the best value, service and experience to our resident members and are a key contributor to Boardwalk's success in both competitive as well as strong market conditions. 2023, our team is targeting 11 common area and amenity renovations to further enhance our portfolio and product offering, resulting in over 60% of our total suites benefiting from our repositioning program. In addition, our suite renovation program continues to be opportunistically used to improve and enhance our offering for residents. Boardwalk's existing vertically integrated platform provides us with the unique ability to quickly and cost effectively complete these renovations. With limited availability and the current strong demand for housing, our ability to reduce days vacant are a significant differentiator of Boardwalk communities. By measuring vacancy by the day, we are able to ensure that much-needed housing is made available to Canadians looking for a new home. With low availability in our markets, an additional initiative we are undertaking is the conversion of existing storage and administrative spaces within our communities into rental suites. This initiative aligns with our platform optimization and to date, we have identified approximately 25 units that we are targeting to return to the housing market. By investing small renovations to turn suites from administrative use back into rentable units, we will add much needed additional housing in our communities. We look forward to sharing more detail and information on this in our coming quarters. On Slide 25, we are pleased to announce the opportunistic acquisition of the View, a recently built 12-storey tower with 124 residential units and over 8,000 square feet of ground floor retail. Located in the rapidly growing Greater Victoria market, this new community features large suites, high-quality finishes and is well located in central Langford with close access to the University of Victoria's West Shore campus. As of the closing date on April 25, the View was 94% occupied with year 1 projected cap rate of 5.1%, providing immediate accretion and growing cash flows. A big thank you to our team for sourcing and closing on this strategic and opportunistic acquisition and a warm welcome to our newest Boardwalk resident members in Victoria. On Slide 26, we provide an update to our ongoing development pipeline to add much-needed housing in supply-constrained markets. The lease-up of the first tower of our 45 Railroad development continues to progress on schedule with full lease-up anticipated to occur by the end of summer and at rental rates at the upper end of our original expectations. Our team continues to progress on construction of the second tower and is scheduled for delivery in the fourth quarter of 2023. The project remains on time and on budget. Our Victoria development pipeline presents an opportunity for the Trust to add and contribute housing, while also creating strong value for our stakeholders. Aspire is our first of 3 developments in Victoria. Excavation is nearing completion for this 234-unit development, which is located adjacent to our existing Aurora community that remains fully occupied with strong rental demand for any units that become available. On Slide 27, we highlight the exceptional value that Boardwalk's Trust units represent at yesterday's trading price, which implied a value of approximately CAD 181,000 per apartment door. This compares favorably to the substantive transactions that have occurred in the external market. Our NAV of CAD 75 per trust unit equates to just CAD 207,000 per apartment door and represents an exceptional opportunity relative to market pricing and remains well below the increasing cost of replacement. On Slide 28, Boardwalk's trading price equates to an attractive 5% cap rate on our trailing NOI and provides a significant spread to the current cost of mortgage capital and transactional cap rates in private markets. With favorable fundamentals, strong leasing trends and leading NOI growth in our portfolio, this cap rate represents exceptional value and growth for our stakeholders. Moving on to Slide 29. Our first quarter operating performance was at the upper end of our original forecast range for the period. This allows the Trust to provide an update to our 2023 guidance that takes into account our strong performance to date, while also incorporating the positive accretion from its acquisition of The View subsequent to the end of the quarter. As a result, Boardwalk is tightening and upwardly revising our 2023 same-property NOI growth range to 9.5% to 13% and FFO per unit guidance of CAD 3.30 to CAD 3.46 per trust unit. Our Boardwalk team is committed to leading in transparency and we'll continue to update our stakeholders in the event of any change in conditions that may materially impact our forecast. On Slide 30, our Board of Trustees has confirmed our monthly cash distribution of CAD 1.17 per trust unit on an annualized basis for the next 3 months. Our distributions have increased by 8% since last year and aligns with our growing cash flow, while maintaining our industry low payout ratio, providing significant cash flow reinvestment and positioning Boardwalk with ample capital for growth. Lastly, on Slide 31, we are proud to have released our latest ESG report that highlights how we are putting the we into ESG, working together to positively impact our communities. Our ESG report can be found on our website, bwalk.com/investors. This concludes the formal portion of our presentation and would now like to open up the line for questions. Brian?

[Operator Instructions] The first question, we have Jonathan Kelcher with TD Cowen.

First question, and congrats on the good start to the year. The first question, I just want to talk a little bit about renewals and incentives. In Alberta, you guys are getting really good growth continued into Q2 on renewals. How much of that is just incentives burning off?

Jonathan, it's James. With regards to our renewals, as you can see in the spreads, we continue to see that move up into the right. It's a combination of incentives declining as well as market rents being adjusted over the last several quarters. And so with those renewals, you're seeing spreads increase in line with -- or at least on the same trajectory with -- as our new leasing spreads as well.

And then, Sam, I think you mentioned in your prepared remarks that incentives are basically gone right now, but average -- the average is still around CAD 120 a suite. Like how low do you think that can go? Like I don't think it's ever been close to 0 -- it's never really been close to 0, but how long do you think that can go?

The history shows it has been in the few million dollar range like the CAD 2 million, CAD 3 million range. So that's how low it's gone in the past. We looked at a lease the other day in Edmonton, for example. The market rent was CAD 1,200 roughly, and the incentive was about CAD 150. And the renewal, essentially, we saw a market rent adjustment to CAD 1,300 and an incentive for CAD 75 with one of the renewals. And so the new net amount really affected 0 incentive, but because we want to show our goodwill to our existing resident members, and that is accounted for in an incentive between the market rents in the marketplace versus the net rent our members, especially our longer-term resident members realize a benefit by renewing with us and savings versus what new residents would pay with no incentives. And so that's one odd example. And the only reason we looked at that is because we hardly see any incentives at all in all our renewals. So for the most part, renewals have 0 incentives. There's always exceptions, there's always flexibility and as per our first slide, our resident members are at the top of our organization. So we do everything to make our boss happy.

And then just secondly, on -- I guess this is more on new leasing. You're sitting at 98% or 98% plus. How do you balance maximizing your revenue growth between occupancy and pushing rents. And I'm less concerned about the market with no rent control because that's fairly easy to catch up on. But maybe some of the markets you have where there is rent control, how do you think about that?

Sorry. The question is where there is rent control versus non-rent controlled?

Well, yes, like where there's rent control, maybe you want to let the occupancy drift down a little bit in order to try and push on new leases because you might not get that unit back for 3, 4, 5 years versus where there's no rent control if the market rents go up 7%, 8%, 9%, you can catch that the next year anyways?

We're having strong demand in all our markets. And so when a rent control department becomes available, we're seeing much higher adjustments because the in-place rent is artificially low because of rent control. And so we are seeing much higher adjustments and we adjust to market rents in our rent control regions in London and Quebec. In our non-rent controlled markets, we follow consumer price index as much as we can. Why? Because over the long term, 10, 20, 30 years, rents essentially track consumer price index. So why does that help us? It essentially takes out the uncertainty and the inefficiencies of an open and competitive market for resident members, first and foremost, can depend on a more inflationary CPI adjustment. And then for us and our bottom line, it increases retention, it lowers our expenses. And at the end of the day, we can provide a much better NOI and bottom line and return for our investors. And so it truly is a win-win approach. It's more of a long-term approach. It is absolutely beneficial for both our residents and our investors. And that's what we've learned over the last 40 years that we've been providing affordable housing.

Your next question comes from Kyle Stanley with Desjardins.

So just, I guess, a little higher level question. But I mean having managed a significant portfolio in Alberta for decades now, how does the current leasing environment compare with the period post GFC and maybe pre the oil price decline or other past periods of elevated leasing in the province?

It'd be very similar to the late '90s, where we saw similar lack of new supply and elevated new in-migration and rent adjustments that were as significant or as high. So we'd have to go back quite a ways. Post GFC, we saw strength, but not like the late '90s. And this period right now, we have never seen it this high ever. As per the charts in the in-migration, there has never in a period of our 40-year history and even going back in the '60s when we still answered the phone for our parents and apartments for rent, people looking for apartments in the late '60s. We have never seen a market more tight and more people move into our province versus the amount of new supply that we're building ever really in our lifetime.

Kyle, it's James. I would just add, it's certainly a huge differentiator we are experiencing on the ground here in Alberta is the diversity that's occurred, right? Sam talked about in his prepared remarks, some of the employment growth that we have. If you look back at that over the past several years, we're seeing growth in pretty well all industries here in Alberta. And so that's -- we believe that's going to provide more sustainability to our province going forward and place Alberta onto a different trend path going forward.