Boardwalk: Housing a Profitable Portfolio

The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.

Lacklustre Performance

Established in 1984, Boardwalk is a Canadian open-ended real estate investment trust (REIT) that manages more than 200 high-, medium-, and low-density residential buildings in Alberta, Saskatchewan, Ontario, and Quebec. Boardwalk went public on the Alberta Stock Exchange in 1994 and officially transitioned into a REIT in 2004.

Based on unit price performance, Boardwalk has had the worst trailing twelve month return relative to comparable Canadian residential REITs. At the end of February 2019, the company’s share price had depreciated by 9.6 per cent over the preceding twelve months while the S&P/ TSX Capped REIT Index rose by 12.4 per cent. This underperformance can largely be attributed to the recent oil downturn as the majority of Boardwalk’s property portfolio is concentrated in Western Canada, with heavy ownership in Calgary and Edmonton.

A Benign Status Quo

Although Boardwalk’s core end market of Alberta has enjoyed continued population growth, housing starts are down more than 60 per cent from their 2014 high, suggesting that the market may have been overdeveloped. A depressed energy sector paired with a potential oversupply of properties has potential to result in a nearterm erosion of funds from operations and net operating income in the apartment REIT sector.

In an effort to quell investor concerns over the portfolio’s regional concentration and its energy exposure, Boardwalk has begun to employ a long-term strategy of geographical diversification into markets including Toronto and Vancouver. Through this expansion into what management sees as secularly high-growth markets, Boardwalk plans to develop a portfolio nearly equally balanced between Alberta and Saskatchewan, and other markets. With Calgary and Edmonton rental income currently constituting 59 per cent of total net operating income, such diversification is justifiable. However, in the context of rising interest rates, increasing regulation, and past price appreciation in Toronto and Vancouver, the risks associated with this expansion strategy outweigh the possible benefits of such diversification.

The Opportunity

Venturing into the Purpose Built Student Accommodation (PBSA) sector, informally known as “student housing,” is a promising opportunity for Boardwalk. The company already has the managerial infrastructure and expertise in place to execute on this opportunity.

Several macroeconomic trends are beginning to shape PBSA as a desirable sector. Over the past 10 years, Canadian universities’ aggregate student population has grown by a compound annual rate of 2.2 per cent, surpassing the 1.2-per-cent compound annual growth the general Canadian population saw over this same time. To accommodate a larger student body, postsecondary institutions such as the University of Toronto have been seeking out joint ventures with real estate developers to construct student residences. Canadian universities are also increasing their international student enrolment, as foreign students’ tuition payments have become increasingly important to universities’ bottom lines. International student enrolment increased by 11 per cent in the 2016 to 2017 school year, further fuelling the increase in demand for post-secondary accommodation.

The fragmented PBSA market in Canada presents a rare opportunity for Boardwalk to capitalize on the gap in the real estate market. Boardwalk’s core expertise lies in the management of apartment buildings, a type of property not too dissimilar from PBSA. The company could quickly and feasibly develop the capabilities required for success.

Furthermore, the PBSA sector will act as a natural hedge to Boardwalk’s existing strategy. In a recession, post-secondary enrolment tends to rise—people logically seek to increase their education and credentials in order to be more competitive in the volatile job market. Consequently, more student housing accommodations are needed and vacancy rates within the student housing sub-sector decrease. For this reason, student housing is often deemed “recession resistant.” The potential to exploit this natural hedge is especially beneficial in the context of an oil price downturn, providing a stable revenue stream to offset poor performance in core Western Canadian properties.

Foreshadowing Success

The larger size of the American PBSA market has led to the formation of several dominant players, which can serve as an example for Boardwalk. One of these is American Campus Communities (ACC), a REIT that owns more than 150 residential buildings and more than 30,000 units across the U.S. Its locations are strategically chosen to serve students attending a specific university and it has excelled in this space, having grown wholly-owned net operating income by a 23-per-cent compound annual rate since 2005.

ACC pursues public-private joint ventures, wherein post-secondary institutions lease their land to private REITs in exchange for the construction and operation of student housing. The REIT also operates a wholly-private model focused on off-campus housing. Given the similarities between the U.S. and Canadian real estate markets, Boardwalk should aim to replicate ACC’s success north of the border. While the U.S. PBSA industry is less attractive to new entrants because of higher industry consolidation and declining post-secondary enrolment rates, opportunity continues to abound in Canada.


Aging university dormitories and reduced government funding suggest that post-secondary institutions will have difficulty satisfying future student housing demand. Thus, as seen in the U.S., it is prudent to initiate lease partnerships with post-secondary institutions. By outsourcing student housing to an experienced and reputable third party, universities can focus on their core competency of providing quality education.

In addition to these partnerships, Boardwalk should further diversify its strategy by pursuing purely private developments, creating a defensible market position. Mimicking ACC’s U.S. success, Boardwalk should seek off-campus properties relatively close to universities. Moreover, to minimize operating and administrative expenses, Boardwalk should prioritize the concentration of properties in select cities as opposed to immediate geographic diversification. While initial operational establishment of administrative functions in these new cities will incur significant capital expenditure, these fixed cost centres will prove scalable in the long-term.

While the overall strategy recommendation is generally geographically agnostic, it is advisable that Boardwalk stay away from large metropolises such as Toronto and Vancouver and instead focus on “university towns” such as London, Hamilton, and Waterloo. Doing so would mitigate the macroeconomic risks of near-term property devaluation given the price appreciation Canada’s metropolises have seen. In addition, there is intense institutional capital competition for residential assets in these regions, serving to increase acquisition prices and reduce returns. Instead, target geographies should possess high projected enrolment growth rates, reasonable property valuations, post-secondary institutions open to joint venture partnerships, and relatively fragmented PBSA markets.

The aggregate university student population in London, Hamilton, and Waterloo stands at approximately 130,000. Assuming 80 per cent of this student population lives in PBSA and that the average monthly rent between the three cities is $690 per bedroom, the dollar value of the total addressable market amounts to $861 million annually. A mere five-per-cent market capture results in potential annual revenues of $43 million. If this market capture occurs after one year, approximately 10 per cent of Boardwalk’s total revenues would stem from PBSA. This represents a stream independent of the company’s core operations that would help achieve the REIT’s nearterm objective of diversifying revenues. This illustrates the potential for the natural hedge to comprise a significant portion of Boardwalk’s top line.


Because students tend not to remain in one geography for a long period of time, PBSA properties see increased turnover and higher churn rates. Assuming students in a four-year undergraduate degree spend three years in a PBSA property, churn rates would stand at 33 per cent, substantially higher than typical of residential properties. While the higher churn may be more managerially intensive, Boardwalk must simply acknowledge it as a necessary part of the strategy and draw on its existing operational experience to minimize the associated costs. There is a benefit associated with this turnover; leases are effectively marked-to-market upon each tenant’s departure, so rental rates can be regularly adjusted to reflect prevailing market rates.

Because Boardwalk has concentrated on select geographies, there is furthermore the risk of unexpected legal and regulatory issues arising. This risk is inherent in any form of real estate development but amplified in pursuit of new and unfamiliar ventures. Establishing joint ventures with universities will help to mitigate any unexpected roadblocks; Boardwalk could make use of the university’s experience in developing PBSA properties.

Despite the benefits of such a shift in strategy, the decision would likely be met with resistance from investors. Entry into the PBSA market represents a substantial divergence from Boardwalk’s historical Western Canadian focus and it will need to develop additional competencies to ensure success. However, in the long term, the resulting revenue stream diversification will make the stock more resilient to a commodity-sensitive Canadian economy. In communicating the strategy to unitholders, Boardwalk’s management should acknowledge the strategy’s risks and clearly explain its end goal of increasing revenue stability.

Building Up PBSA

While real estate is generally seen as a safe asset, Boardwalk’s current portfolio has proven too volatile for investors’ liking and the REIT’s shares have been punished. This Canadian PBSA opportunity will provide a natural hedge to the cyclical volatility of Boardwalk’s Western Canadian assets and the REIT’s existing management capabilities will serve well in helping the company expand into this new type of residential property. Given the proven success of this business model in the U.S. market, Boardwalk can establish itself in the Canadian PBSA market