You probably heard the news that Boardwalk REIT (TSE:BEI.UN) is reducing distributions from $2.25 to $1.00.
It is over 55% reduction.
But, when I compare to my overall passive income, cut is just less than 2%.
This is not the first time I am experiencing a distribution cut. During the oil crash, three of my holdings (CVE, COS and KMI) reduced their dividends payments.
Later, I sold CVE and COS and recorded lost and continue holding KMI. At the same time, I purchased SU in high 20s and later sold it in low 40s. All balanced out well.
Recently, General Electric (GE) was in my portfolio, but I sold it before its dividend cut and redeployed the capital to purchase another stock.
If you notice carefully, there are some connections in my dividend cutters. All of the stocks (except GE) are somehow related to OIL.
Boardwalk REIT (TSE: BEI.UN) is one of Canada’s largest owner or operator of multi-family rental communities and it owns and operates over 220 properties with around 34 000 rental units.
BEI.UN is primarily focused on Alberta and Saskatchewan, and these two provinces hit hard by oil downturn, so does this REIT.
The distribution cut was not surprising, given the fact that the REIT had a high payout ratio amidst a down trend in FFO per unit.
BEI.UN was almost paying 100% of its Fund from Operation (FFO). Thus, it was struggling to handle its renovation expenses and growth projects.
After the reduction, the payout ratio will be around 60% (distribution / FFO), which is more sustainable.
What I am going to do with my BEI.UN units?
At this moment, I am not going to make any changes. In my view, management made a right decision to reduce distribution and believe that the revised payout ratio will provide flexibility to focus on the units’ renovations and geographic diversification of the portfolio.
In Q3/17 report, management has unveiled a strategy to reduce Alberta & Saskatchewan exposure to 50% and focus to other high growth locations like GTA, Vancouver, Ottawa, Montreal, etc.
Distribution reductions will help the trust to grow and diversify its portfolio at low cost of capital, instead of digging deep into debt.
I continue believe in the management team. They’ve done a great job in the past. Therefore, I continue hold the BEI.UN units in my portfolio. I may consider adding few more units if its price drop below $30.
According to Q3/17 report, Net Asset Value (NAV) of the trust unit value is $62.71. Therefore, average value of its apartment is around $170K.
If I sell my holding now, it is like selling $170K worth of apartment unit for $135K.
Mainly investors own REITs for income purpose. Reduction is little hard to take for those solo rely on these income.
Diversification is the key minimize the impact from these types of scenarios.
Like many investors, I was lazy enough to buy rental properties and handle all the landlord duties. Instead, I purchased these REITs and collect my monthly rents.
Let’s say I have two apartment units. One tenant refused to pay my rent, damage my apartment unit and left. It is like 50% reduction in my rental income (aka distribution cut) and some cost for renovation (aka price drop). All I can do is accept the fact and take 50% cut until find a new tenant.
I am in similar situation with Boardwalk REIT. Instead of two units, I have so many units and the reduction is less than 2% of my overall passive income. And, no need to do the renovations works and look for new tenants.
All I need to do is just sit back and monitor the situation.
From my previous experience, I expect that BEI.UN may experience a selling pressure for sometimes. This may give a tiny downward pressure in my overall portfolio value. As a long-term investor, I am ready to take risk and handle these types short-term shocks.
Please note the information posted on this website is the opinion of my own and should not be considered as professional financial advice. I am not a financial professional, and I can buy, sell, or hold any investment at anytime.
Any transactions I publish on this website are not recommendations to buy or sell any securities or investments.
Please do your own research or consult with a qualified financial professional before even considering using the information obtained from this website.