3 VERY Different Ways to Play Canadian Energy


Alberta may not be back to its former self, but it sure looks like it is getting off the mat.

It always starts with jobs, especially in Alberta. Here the news has turned positive for the first time in years. Unemployment in Alberta dropped to 7.2% in February.

Source: economicdashboard.alberta.ca

Unemployment is now below the pre-pandemic level.  It is even below the rate in Ontario.  It may be hard to believe but unemployment in Edmonton is 6.9% – or 0.8% lower than Toronto!

Over 90,000 jobs are now vacant and available in Alberta.  This is 50% more than there was in April last year.

Other measures are showing similar strength.  Retail sales – something that had been stagnant for years – has seen a noticeable uptick in the last 6 months.

Source: economicdashboard.alberta.ca

Finally, the real estate market – again a sector that has been flat for years – is starting to turn up.

The Calgary Real Estate Board (CREB) said in February that “thanks to persistently strong sales, inventory levels in the city eased to the lowest levels seen since 2006”.

January saw 2,009 homes sold.  This compares to end-of-period inventory of 2,620.

That means that inventory in Calgary is only a little over 1 month of supply – and sales always ramp through the spring.

Edmonton real estate is a bit further behind Calgary but there are early signs of strength there as well.  According to the REALTORS Association of Edmonton (RAE), sales in January were up 13% YOY.

It is no secret what is driving the upswing.  As much as Alberta is trying to diversify its economy, the economy still goes as energy prices go.

Today, with WTI over $90 and natural gas over $4, the outlook is looking better than it has in a long time.

I expect the bonuses in Calgary to start hitting bank accounts right about now.  After years with no bonuses, I expect employers to richly reward to their staff.

Put it all together and it is time to look at Alberta again.  Especially companies tied to Alberta real estate.

I’ve come up with 3 names for you – one mid-cap and two small-caps.  Two of these names have direct ties to the real estate business, while the other stands to benefit from a return to normal and a better Alberta economy.


Boardwalk REIT


Living in Vancouver, I am no stranger to a strong real estate market.  House prices and rents in Vancouver seem to only go one direction – up.

That strength, which has traditionally been centered on the lower mainland and the GTA, broadened out last year to cities like Montreal, Ottawa and Guelph.

This year it looks like that will extend to the Prairie provinces, with Alberta being the first in line.

Boardwalk REIT (BEI.UN – TSX) is my mid-cap play on Alberta.   Call this the safe way to play the boom.

Boardwalk was founded as a Calgary-based apartment REIT in 1984.  While they operate rental apartments across Canada, more than half of their footprint lies in Alberta.

Source: Boardwalk December Investor Presentation

Boardwalk operates a simple business.  They own apartments, usually centrally located in medium to large cities, and they rent out the suites.

What I like the most about Boardwalk is that it’s not obvious how cheap it is.

A quick scan of brokerage reports shows that Boardwalk (BEI in the chart below) scans middle of the pack in terms of net-asset-value per unit.

Source: RBC Capital Markets

But this comp misses the point (something RBC to their credit recognizes, giving the stock an Outperform).

NAV is calculated on past sales.  In Alberta, apartment prices have been depressed for years because Alberta’s economy has been in the dumps.

But this is beginning to change. 

Boardwalk showed the following slide in their investor presentation.   You can see the difference between where the stock price is and where the unit NAV would be if their whole portfolio traded at the price of recent real estate transactions.

Source: Boardwalk REIT December Investor Presentation

Sales prices of rental properties are rising for one reason – it is a much tighter rental market than it has been for years. 

When oil prices swooned and unemployment in Alberta shot up to double-digits, Boardwalk was making concessions.  They were offering a free month to new renters.

But now occupancy at Boardwalk is back to 96-97% at the Q3 seasonal low-point.

That means rent concessions are a thing of the past.  Going forward Boardwalk should benefit from gradual rent increases.  In Alberta, unlike much of Ontario and BC, there are no rent-controls.

We are already seeing this happen.  In Q3 incentives declined and new lease spreads, which is the monthly rent of a new lease compared to the rent of the lease it is replacing, turned positive for the first time in years.

Source: Boardwalk Q3 Investor Presentation

Meanwhile prices have plenty of room to rise.  Rental affordability in Alberta is better than anywhere else in Canada.

Source: Boardwalk Q3 Presentation

Maybe most important, Boardwalk is seeing a growing trend of “move-ins”.  These are out of town renters.  Boardwalk described on their call that  they are seeing “more Canadians move back to Alberta and Saskatchewan”.

Source: Boardwalk Q3 Presentation

REITs trade on a metric called capitalization rate, or cap rate for short.  Cap rate is essentially the net operating income of the company divided by its market capitalization.

At $55, Boardwalk is trading at a cap rate of 4.84%.

Source: Boardwalk Q3 Presentation

This is a big discount to their Eastern peers, where the cap rate averages in the mid-3’s.

That made sense when oil was in the dumps and unemployment in Alberta was near double digits.

Not as much now.

Consider that when oil boomed in the early 2010’s cap rates in Alberta were below Ontario and Quebec.

I don’t know if we get all the way back there, but I think it’s a decent bet that the gap narrows.


Big Rock Breweries


My second name and first small-cap gets away from the real estate theme.  Big Rock Breweries (BR – TSX) stands to benefit from western prosperity and a truly “open” summer.

Big Rock operates breweries in Calgary and Vancouver.  The company started in Alberta and it remains the core of its business.

Big Rock has had a tough go of it since 2014. 

Source: Big Rock Breweries Investor Presentation

In 2014 the oil industry was booming.  Big Rock was the premier name for beer and Alberta was just the sort of place that drank a lot of it.

But then came the headwinds.  The oil prices collapsed.  Competition came from newly minted craft brewers.  And then the biggest hit of all – the beer tax.

It wasn’t called a tax.  It was a “mark-up”.  Different sized brewers pay different sized mark-ups to the Provincial Government for each beer they sold.

In March 2015 the NDP announced changes to the mark-up which lumped Big Rock in at the same fee rate as large brewers like Molson Coors and Heineken.

Suddenly Big Rock was uncompetitive.  They were being treated like a big player but they had small player costs.

Retailers passed through the higher rate to consumers.  Big Rock beer was suddenly more expensive.  Sales slipped.

Big Rock tried to maintain their market share by reducing their wholesale price.  But that destroyed their margins.

Big Rock’s EBITDA margins, which had averaged mid-to-high teens from 2010-2013, fell to 4-6% in 2015-2017.  The stock cratered from a high of $19 to under $5.

At the end of 2019, with a Conservative government in place, Big Rock finally got a reprieve.  In October of 2019 the Conservatives announced a reduced and more graduated markup, one that meant a reduction in Big Rock’s fees to the Alberta Gaming, Liquor and Cannabis (AGLC) of close to 50%.

That alone could have started the turnaround.  But of course, we all know what happened shortly after.  COVID hit, restaurants and pubs closed down and oil prices tanked.

While the Alberta economy did poorly in 2020, Big Rock was still able to take advantage of the reduced mark-up and begin to right the ship.

EBITDA margins recovered back to the double-digits (still well below the 2010-2013 level).  Sales began to grow even as keg sales (sales to restaurants and bars) did not.

Flash forward to today and Big Rock has several things going for it.

First among them is that Big Rock is no longer constrained by paying large fees to the AGLC.  A quick look at the numbers shows how those fees hammered the company for nearly 6 years, and how their removal coincides with the start of a recovery

Source: Big Rock Financial Statements

Second, Alberta has been first to rip off the pandemic restriction band-aid.

Big Rock should see on-premise sales ramp again.  Keg sales help both top and the bottom line because packaging costs of kegs are lower than bottling and canning.

A truly “open” summer season would also benefit Big Rock as it would mean a tourism revival and more visitors to big beer drinking events like the Calgary Stampede.

Third, the rising oil price is bound to buoy Alberta sales.  Alberta booms coincide with more corporate events, more lunches out, and more alcohol consumption.  Albertans seem to understand that their booms won’t last.  They do their best to take advantage of them while they can!

Big Rock trades at a discount to their closest peer in the public market Waterloo Brewing (WBR – TSX), a brewery serving the Ontario market.

Source: Company Documents

But really, Big Rock should trade at a discount to Waterloo Brewing.  Waterloo Brewing has been consistently delivered higher margins and better cash flow than Big Rock.

Over the last 5 years it has been the better operating company – hands down.

But there is another way to look at it, and that is the idea I have here.  Big Rock is a classic turnaround.  Big Rock has seen all the headwinds I mentioned above.  And those headwinds are disappearing, one by one.

If Big Rock can take advantage of these tailwinds, the stock has some catching-up to do.


Genesis Land Development


For my final pick I’m heading back into real estate – this time to home building – with Genesis Land Development (GDC – TSX).

Genesis is a home builder in Calgary.  That’s right, they only build in Calgary and its surrounding area. 

I know, its odd.  When I came across this company, I scratched my head and asked – why is this company public at all?

But it is.  Genesis generates revenue from land development and selling homes.  Forward orders of homes drive future growth.

Genesis owns land and lots throughout Calgary and Airdrie.

Source: Genesis Land Development Investor Presentation

They own 681 acres of land in Calgary.  That land has the potential for 4,577 future lots.  In the last year Genesis has been adding more lots, 240 of them, which they purchased from 3rd party developers.

Genesis is currently building out houses in 5 communities in Calgary in addition to those 3rd party communities.

Source: Genesis Land Development Investor Presentation

That gives them a big runway of inventory.  Genesis sold 225 lots and homes last year, they will do 250+ this year.  Current inventory is enough for nearly 20 years of home sales at the current build rate.

But I suspect the build rate is going to rise.  We are seeing that already.  In the first 9 months of the year Genesis saw a 22% YOY increase in home orders, from 138 to 168.

That has put the outstanding inventory of home orders well above the levels it has been for the previous couple of years.

Source: Genesis Land Development MD&A’s

Genesis did a rights offering in December, raising $30 million at $2 per share.

Two things about this offering.  First, there was HUGE management participation – 11.3 million shares went to directors and management (they were already big holders of over 65% of the shares).

Second, Genesis doesn’t seem to have needed the money.   They had $29 million of cash at the end of Q3.  That makes me think Genesis is expecting to either ramp their home building or make some large land purchases.

Like my other two picks, the stock is trading on the Alberta of the past few years, not the Alberta of the next few.

If I’m right, returns will accrue via dividends.  Genesis pays out a dividend that has varied a lot over the years depending on the performance of the business.   It has been as high as 46c per share in 2017 and was nil in 2017.

Source: Genesis Land Development AIF

So far this year Genesis has earned 16c EPS in the first 9 months.  That puts the stock at about 12x earnings.

Another way to look at the stock is on the value of their real estate holdings.

Genesis carries their land at the lower of cost or fair value.  At the end of Q3 Genesis held $210 million of real estate on their balance sheet. 

Real estate is the main balance sheet asset.  It is the primary contributor to the book value of $235 million (they also have $21 million of debt and ~$59 million of cash post rights offering).  Genesis has a market capitalization of $146 million. 

That pegs Genesis at ~0.62x book, which seems awful cheap given the tightness of the Calgary housing market.

I have anecdotally heard of other Calgary builders (not Genesis) raising prices on new homes $25k per month the last few of months.

My back-of-the-napkin math suggests every $25,000 of price increase would mean an extra 10c EPS to Genesis on an annual basis.

While there is no guarantee Genesis will realize those kinds of gains, if they did, the stock, which is already reasonable, begins to look extremely cheap.

So there you have it.  Three plays on Alberta.  You put it all together and Genesis, like Big Rock and Boardwalk, look well positioned to take advantage of a recovering economy in Alberta.  It is something to be hopeful for, because right now Canada needs all the good news it can get!