Who is Shorting Boardwalk REIT (BEI.UN)?

Investors (mostly from the US) have made Boardwalk REIT the most-shorted asset in North America as of August of 2016. We are talking about a Canadian real estate investment trust which has a consistent track record, is run very conservatively, and where management owns significant equity (25% of float, as of Q1 2016).

The most plausible arguments for shorting Boardwalk are:

  1. Oil has gone down by more than half, and most of what Boardwalk owns is in Alberta, the oil capital of Canada (Alberta is like Texas but colder; switch from football to hockey and you’ve got the idea).
  2. Canadian real estate is overvalued. Vancouver and Toronto are firmly in bubble territory, and Alberta was heading towards it — until oil started going down (Alberta oil is mostly from “oil sands” and is expensive to extract, so when oil price goes below USD 55 per barrel or so, you’re losing money even if capital expenditure is paid for).

So guys do some math, find a way to short both oil and Canadian real estate, and bingo, they can feel like Michael Burry or Steve Eisman.

Boardwalk’s price, in Canadian dollars, was enjoying a nice ride in 2011–2014, with a bump related to the 2013 flooding in Calgary that left a lot of landlords holding the bag, and Boardwalk is Calgary’s largest residential landlord. In May/June of 2013 the unit peaked around CDN 66, the worst after the flood was around CDN 55, and then it shot up all the way to CDN 71 in October of 2014.

Then the oil crash started, and people understood Alberta was in for a bumpy ride. And Canadian real estate kept inching higher, to the point that there is an absolute disconnect between what people earn and how much houses cost.

Boardwalk took a sharp downturn. From that peak of CDN 71, which were around USD 63 at the time, to CDN 40 in January of 2016, which were less than USD 30 (the Canadian dollar itself went from parity with the US dollar in early 2013, to less than 70 cents in early 2016).

Now, there was little in the fundamentals to warrant any of this. Did occupancy rates go down? Yes, by a bit (97.5% to 97.1% year over year, per 2016 Q1 report, slide #4). People rotate in and out of rentals; during a downturn, some have left Alberta to look for jobs elsewhere, but that seems to make barely a dent on population figures. Also, rental prices may experience a lull because there’s less money to go around (average rent went down from CDN 1,152 to 1,124 year over year, per same source).

Yet, smart guys were realizing all over the place that Canadian real estate is fragile, so their next step is scanning for short opportunities. Instead of shorting a lot of owners’ equity, let’s look for a major landlord. The problem is, maybe two obvious negatives (an economic downturn and high house prices) do make a positive, as more people in Alberta may want to rent instead of own their residence. And guess who will be there to profit from your decision? Landlords who can offer you a rental unit at CDN $1,200.

So my fictitious alter ego decided to short the shorts, and increase his BEI.UN exposure at every downturn. (That takes nerves of steel, but my alter ego has a lot of good qualities.) Right now the stock is sitting at 56-something as of Aug 5, 2016. He’d be at a slight cumulative loss if it weren’t for the distribution (a fancy name for dividend when it comes from a REIT), which has grown to 4% yearly yield plus surprise bonuses two years in a row (an extra CDN 1.40 per unit on Dec 2014 and 1.00 per unit on Dec 2015).

Considering the fundamentals, in his opinion BEI.UN was, and remains, a nicely humming dividend machine. Actually, for those who want to bet on both oil and the loonie coming back, this is one heck of a place to go long.

For more: Boardwalk’s financial reports are available here. For comparable Canadian mostly-residential REITs, look for CAN.UN and NVU.UN.