I Rent(ed) With Boardwalk Communities - answer to Ms. Hunt

Lynn Hunt wrote on the wall:

I believe Boardwalk to be a very responsible corporate citizen, acutely aware of its social responsibility. Because of its level of awareness, Boardwalk has many policies in place which reflect social responsibility to the community, such as self-regulated rental increases; having an internal subsidy program which provides support to residents who will suffer financial hardship due to a rental increase; providing buildings specifically dedicated to the needs of seniors; working with Government and social agencies to ensure availability of private/public subsidized housing - reducing waitlists for Government built and subsidized housing; and commitments to charities through funding & volunteer efforts, by the company and its associates.
Boardwalk employees are not only encouraged, but required to show respect for residents, associates and the community, and to do their very best every day to meet the needs of residents.

Boardwalk's primary responsibility is to serve it's shareholders, who should be very happy if they invested last year, perhaps not so happy if they invested in the last couple of months.

Their Code of Conduct and their social programs serve only to provide Ms Hunt with the sort of spin fodder required to protect the share price. But they are pretty much token.

To be fair, apart from rent, my rental experience with Boardwalk has been not bad. While the management has been slow at repairing vandalized hallway walls, the cleaning staff keeps picking up the broken dry wall. While $4 to wash/dry a load of laundry feels like a gouge, the machines seem to be kept in good repair.

But when it comes to money, the rent, I've never felt so unwelcome. I don't need a subsidy. I just need flexibility so I don't have to get a payday loan. Lack of flexibility costs me $60 to $90 a month. At the start, what I got from Boardwalk was that I need to talk to them if I was going to be late. I did that. Then I got that I better pay it at the first or else. Then I got a bill for a letter they wrote. I've always paid my rent. It's never gone past 10 days and I've managed to pay a month in advanced once. Not a word about subsidy programs. Not a word about how we can make this easier. Instead, they up the pressure with letters from lawyers and arbitrary charges.

If you pay your rent, not much they can do about you. But if you have any challenges, they want you out. After all, they could rent my unit for another $300 or $400 a month. Why would they want me to stay?

Sorry Ms Hunt, the social responsibility, social programs, and the subsidy programs are just shareholder whitewash.

$1,600/mo. magic number for builders

Boardwalk is wanting to squeeze twice as much out of the market before it would consider new developments. Historically, I wonder how much Boardwalk has actually built as opposed bought. In a tight housing market, the difference is significant. Growth through acquisition does not increase the supply of housing. In fact, I would expect that consolidating the apartment inventory into fewer hands would accelerate the runaway rental rates.

Why doesn't Boardwalk want to increase the supply of apartments? Wouldn't they want to make more money? Or are they considering the cost of building? What I think is the real reason requires some basic business knowledge.

Boardwalk is a public company. Public companies are excellent vehicles to get projects funded, to enable you to do things that you would be unable to do otherwise. Our economy and our world would be a worse place without public companies.

The reason public companies are so great is that the public market gives the investors liquidity. Stock can be traded. In a private company, how is the value of a share calculated? Who can buy it? What are the rules? How do I sell my share in the company? The public market provides the vehicle to trade the stock. It answers the need of the investor to be able to buy and sell the stock as he sees fit. Without that liquidity, investors would be too scared to invest.

However, this also means that public companies have, in a way, two business objectives: to make widgets and to increase the value of their stock. Serious issues can befall the executives of a company that fail to protect the value of the stock.

Let's hold onto that thought for a moment and look at something else.

Let's suppose that you make widgets to sell. Widgets have a certain cost that is a function of production and other factors. How much you can sell a widget for is a function of supply and demand. Your profit is the difference between what you sell it for and the cost.

Let's say you can make a widget for $5. When you bring 100 widgets to market, you find that you can get $10 per widget. You're making $5 per widget - excellent! You get me to invest into your company so that you can increase your production to 500 widgets. However, you haven't decreased the cost of production the next time you go to market. The second time at market you sell 400 of the 500 widgets for $8 each.

Should I be happy with your business? The first time to market your profit was $500. The second time to market your profit was $700. 40% increase in profit! Nice. But not quite. Your profit per widget (PPW) the first time was $5. Your PPW for the second time wasn't $3. Generously, you can say it was $1.75 ($700/400) but you still have the 100 widgets in inventory. If you've saturated the market or if the widgets have a short shelf life, your PPW is $1.4 ($700/500).

Thus, by increasing your production, you've reduced your PPW from $5 to $1.4! Wow, your shareholders are not going to be happy with that. And as your shareholder, I want answers. How are you going to reduce costs to maintain the PPW? After all, I bought into your business based on a $5 PPW. I'm going to be very worried that the value of my stock in your company is going to drop like your PPW. In fact, I'm already calling my broker to sell.

The story isn't done yet. You have a plan to cut the cost of your widget production by 80% but it's going to require a new factory - big bucks. To raise the big bucks, you're planning on selling shares. But, when you talk to the brokerage firms, you find that the bottom has fallen on your stock. Everybody is selling and nobody is buying. Unable to raise money on the stock market, you are unable to build the new factory. Moreover, you are unable pay your employees or the mortgage on your existing factory. You're out of the widget business. (The story doesn't end there... but it goes way beyond the scope of this article.)

Even though you could sell the widgets at a profit, when you lost the confidence of the investment community, you were dead.

How does this relate back to Boardwalk? Take a look at the following graphs.




See how the stock price has risen sharply from April 03 to May 07? See the volume of trading over the same period of time. There are people who are making a huge boat load of money on this stock. Relieving the demand for apartments would adversely affect the value of their stock. People who bought at $50 are going to want to see the trend continue. Right now, they are a bit nervous as they have already lost a lot of money. More supply? Rent controls? They want none of it. Especially more supply. More supply means that the profit per widget may go down.

Boardwalk is in a hard spot right now. They have performed very well. But at some point, the will hit the wall. They can't increase their inventory by building. There are only so many apartment buildings in Alberta and I bet their prices are going through the roof so the growth through acquisition might be a problem. Boardwalk's challenge will be to figure out what to do when they hit the wall. Perhaps they have already hit it as, right now, it looks like the stock price as flattened out a bit.

But one thing for sure, increasing their inventory through building will not be part of their plan.