Sam Kolias VITAL STATISTICS: Boardwalk Real Estate Investment Trust ADDRESS: 1501 1st Street S.W.Suite 200 Calgary, Alberta, Canada, T2R 0W1 PHONE: (403) 531-9255 WEB SITE: www.boardwalkreit.com TICKER: TSX: BEI.UN KEY EXECUTIVES: Sam Kolias, chairman and CEO; Robert Geremia, president 52-WEEK HIGH: 52-week high: $50.95 52-WEEK LOW: 52-week low: $24.04 MANAGEMENT:

By Jennifer D. Duell

When Sam Kolias and his brother Van were pondering names for their new apartment venture, they looked to the definitive source on real estate—the Parker Brothers board game Monopoly®.

The brothers picked "Boardwalk" because it "was the most valuable piece of property on the board," says Sam Kolias, chairman and CEO of Calgary-based Boardwalk Real Estate Investment Trust (TSX: BEI.UN). Van Kolias is now senior vice president–quality control at the company.

What started out as a small, family-run company has grown into Canada's largest multifamily REIT with more than 260 apartment communities in 18 markets across five Canadian provinces. The portfolio, which consists of 35,800 units, is valued at $2 billion CAN as of May 2007.

"We always had big plans to grow and increase the portfolio, but it was impossible to foresee the scale and the magnitude we're at currently," Kolias says. "We've learned that it's better to buy and hold rather than buy and trade."

Market Timing

In 1984, Kolias was having a hard time finding work as an engineer in Alberta. His father encouraged him and his brother to start their own company and even co-signed the loan for their first apartment complex, a 16-unit property in Calgary they purchased for $280,000 CAN. (Today, one of those units alone sells for $300,000 CAN as a condo.)

"We made the same amount of money in six months that I would have made in five years as an engineer," Kolias says. "I've never looked back."

At the time, Canada's real estate markets were relatively unsophisticated, particularly for apartment investing. There weren't a lot of data, and the market was inefficiently priced so that apartment complexes were selling for $10,000 CAN per unit one month and $20,000 CAN per unit a month later, Kolias says.

With his engineering background, Kolias started tracking Alberta's apartment inventory, documenting all trade and sale prices. That information helped Boardwalk make smart acquisitions, he says, but it didn't prevent the team from making some mistakes.

"We have realized that timing is really important," Kolias notes. "We made moves that were too soon and were in markets where we created very little value even though we invested a lot of work."

Boardwalk went public in 1994 and converted to a REIT in May 2004. "Being a REIT lowered our cost of capital by approximately 15 percent," says President Robert Geremia.

Boardwalk REIT’s portfolio consists of 35,800 units and is valued at $2 billion CAN as of May 2007.

Runaway Rents

In its first year as a REIT, Boardwalk reported rental revenues of $282.5 million CAN, net operating income (NOI) of $180 million CAN and funds from operations (FFO) of $75.5 million. Since then, the company has grown all those numbers significantly. For 2006, rental revenues were $319.4 million CAN, an increase of 7.7 percent; net income increased 10 percent to $192.1 million CAN and FFO increased 22 percent to $91.4 million CAN.

In the first quarter of 2007, Boardwalk reported FFO of $22.8 million CAN and FFO per unit of 40 cents compared to FFO of $17.2 million CAN and FFO per unit of 32 cents for the same period the previous year. "Our FFO-per-share growth is the strongest per-share growth in the apartment industry and in North America," Kolias says. "We have a rare combination of exceptional growth and value."

During the first quarter, Boardwalk signed new leases at an average of $1,015 per unit and renewed leases at an average of $881 per unit. "Market rents are moving much faster than the leases we have in place," Geremia says. In fact, the potential between occupied rents and market rents totaled $50.5 million CAN, at the end of 2007's first quarter.

During that time, Boardwalk saw its same-property rental revenue grow 10.6 percent. Operating expenses increased 5.7 percent, resulting in an increase in NOI of 14.2 percent compared to the same period the previous year.

"Rents are going up because of the cost of home ownership," Geremia notes, pointing out that Canada does not allow home mortgage interest expense to be deducted. On average, rental rates for Canadian apartments have increased approximately 30 percent in the last 12 months.

Therefore, affordable housing is a growing concern for Boardwalk and other multifamily owners. That's why the REIT has a self-imposed restriction on rental rate increases of $150 CAN per year for existing leases and no increases for residents who can prove financial hardship. The REIT has no self-imposed rental rate restriction for new leases, and 45 percent of the REIT's leases turn every 12 months.

Boardwalk is Canada’s largest multifamily REIT with more than 260 apartment communities in 18 markets across five Canadian provinces.

Seizing Opportunities

Historically, Canada's rental rates didn't justify new construction, which is one of the reasons why Boardwalk and most of its competitors have focused on acquisitions. "It's been 20 years since we've had any development," Geremia says. "However, we are seeing significant condo development. To counter that, we are embarking on a development phase."

Alberta, in particular, is attractive for development, although Boardwalk isn't jumping in with both feet. Geremia points out that most of Boardwalk's existing communities have several acres upon which new units can be constructed. "We're in the best position to take advantage of development opportunities—because we already own the land, we're going in with 30 percent lower cost."

Currently, the REIT is working with architects and land planners to determine which properties are suitable for higher densities. Over the next three years, Boardwalk expects to invest $100 million CAN to $150 million CAN in development, Kolias says. However, he is quick to add that Boardwalk will continue to focus the majority of its resources on acquisitions.

Over the next three years, Boardwalk expects $100 million to $150 million in development.

Adding Value

Last year, Boardwalk acquired 1,103 units for $88 million CAN and sold off $20.7 million CAN worth of assets. This year, the REIT's goal has been to acquire 1,000 to 2,000 units for a total cost of approximately $200 million CAN, Kolias says.

As of late June, Boardwalk already had acquired 1,703 units for $207.4 million CAN and had only sold one 51-unit property for $5.9 million CAN. In February it closed on its largest acquisition to date—the $143.5 million CAN West Edmonton Village, a 1,176-unt community in Edmonton. The complex traded at a 5.47 percent cap rate.

Currently, the REIT is focused on expanding in the strong Western Canadian markets, particularly in the Lower Mainland and Victoria areas in British Columbia; the entire province of Alberta; and the major centers in Saskatchewan. The company also is looking for deals in Eastern Canada, but isn't ready to consider the Greater Toronto area, Kolias says. "Toronto's rental market fundamentals are flat with no NOI growth to slightly negative NOI growth in some locations," he says. "Buying anything significant in Toronto would be dilutive to our high growth, strong rental fundamentals in the West."

As part of the REIT's efforts to add value through its existing portfolio, Boardwalk is converting a 90-unit apartment complex in Calgary into condos. The condo conversion is now 50 percent sold out, with units selling for an average of $320,000 CAN—significantly higher than the targeted sale price of $260,000 CAN. The company is using the proceeds to do a stock buy back.

Kolias says that it's a no brainer to sell condos and buy back the company's shares on the stock market. "We think the stock is undervalued and trading at a significant discount to replacement cost or what the private market is paying for real estate. By buying back our stock, we're reassuring our shareholders and the market that the best is yet to come."