For someone who says he's made a lot of mistakes in his life, Sam Kolias is an awfully successful guy. Mr. Kolias runs Boardwalk a multifamily REIT that, unlike most of its competitors, is thriving in a bleak economy.
To be fair, Mr. Kolias probably hasn't made more mistakes than others. He just owns up to them.
Whatever his secret is, it's working. Boardwalk units have done very well for investors. And although they sport what looks like a paltry 4-per-cent yield, the units are attractive for anyone looking for safe, sound and stable income, largely from the best provincial economy in the country, Alberta. The downside seems limited, given a low payout ratio and a very healthy balance sheet. And investors are hard-pressed to find a better-managed REIT.
It's not in the details that Boardwalk stands out. It's in the big picture. Many, if not most, REITs are slaves to investment banks. They desperately have to grow because they effectively pay some of their distributions by raising new equity. And to raise equity, they have to keep their distributions high. And to keep their distributions high, they have to defer expensive maintenance on their properties so the cash can be sent to investors. And because they have deferred maintenance, they have higher tenant turnover and a big, growing, but unseen liability that has to be paid one day. And because they do so much banking business, these time bombs get overlooked by the analysts at the banks that underwrite them.
These REITs are more about financial engineering than creating long-term value, in other words, and when you talk to the people who run them you often get treated to an alphabet soup of FFO, NOI, cap rates and the rest of the jargon they trot out to try to impress you - all of which is easy to manipulate with equity market shenanigans. There's precious little vision.
Boardwalk, one of the first apartment REITs, is different - and it's no coincidence Mr. Kolias and his brother own a quarter of the stock. Ultimately, this is the one of the best reasons to invest in this REIT.
Boardwalk has basically stopped acquiring. If anything, it's selling properties, but mostly the portfolio isn't changing.
One of the "mistakes" Mr. Kolias claims to have made was predicting the financial crisis too early, which made him start battening down the hatches earlier than might have been necessary.
That doesn't seem like a mistake today. Despite falling cash flow, the balance sheet is very strong with $226-million in cash and much more available liquidity. The gross book value of the properties is probably half of what it would cost to replace them. The REIT pays out a very conservative amount of its cash flow. In other words, that 4-per-cent yield masks the richness of the business. It could easily be higher. In fact, Boardwalk is paying a special dividend and has bought back $150-million of stock in the past three years and is still at it.
Mr. Kolias says he'll expand the business "organically." By raising monthly rents by just $30 a unit, for instance, which is not aggressive, he could add almost 10 per cent to his funds from operations per unit (a measure of profitability). To do that with acquisitions would mean adding thousands of units, and it would be risky, as acquisitions always are.
"You can never be too good," he says, "but you can be too big." Hence the focus on keeping tenants happy: "There's not a shortage of anything except good service and quality."
This is not the language analysts and portfolio managers are accustomed to, but it does translate into hard cash.
Michael Smith, the man on real estate at investment dealer Macquarie, is a big Boardwalk fan. He recommends buying the stock because it has good management, a strong balance sheet that can be used to create wealth in a number of ways, and exposure to rising rents, especially in Alberta. One of big winds in Boardwalk's sails, he says, is a favourable supply and demand pattern.
Few rental properties are built any more; the economics favour condos, which are nonetheless a competitor to the rental operator. But they're not breaking ground on a lot of condos these days. Meanwhile, Alberta, where Boardwalk earns the bulk of its income, is attracting more and more international and interprovincial migration.
That bodes well for rents, which appear to have bottomed. Mr. Smith, an old hand in real estate, isn't fussed by the lack of M&A activity at Boardwalk. He sees value, and once you scratch beneath what looks like a low yield, it's easy to agree with him.