Poised to Benefit from Falling Rates and Rising Rents – Resuming Coverage

Report Highlights

• At the end of Q1-2024, YEG owned $127M in real estate investments, including 10 residential projects totaling 518 units, and one commercial project spanning 28,036 sq. ft. All properties are in good condition, requiring no substantial renovations or maintenance work in the near-term.

• In Q1-2024, occupancy of residential units increased 3 pp YoY to 98%, and the average monthly rent per unit increased 8% YoY to $1,471.  

• Over the next three to five years, management is focused on growing the portfolio to $500M+. 

• YEG’s forward EV/EBITDA is 16.3x vs the sector average of 20.9x. 

• The Bank of Canada slashed interest rates by 25 bp today, and signaled further cuts are likely on the horizon. Given the expected downward trend in interest rates, we project lower cap rates, and significant property value appreciation for YEG this year. In addition, organic rent growth should drive revenue and EBITDA in the coming quarters. 

*See last page of this report for important disclosures, rating and risk definitions. All figures in C$ unless otherwise specified.

Management Background 

YEG went public in 2020 through a reverse takeover. It was formed by the Yorkton Group, which has 30+ years in property management, construction, condo land development, leasing, brokering, and hotel operations. According to management, senior management has been involved in hundreds of transactions totaling over $1B. 

30+ year track record in real estate

Source: FRC/Company

The CEO is the largest shareholder

Investment Strategy

YEG focuses on multi-family rental properties capable of potentially generating  steady cash flows, and capital gains. Management’s key objectives include:

• Expanding through strategic acquisitions of multi-family residential properties in cities experiencing robust population growth, with initial emphasis on B.C. and Alberta

• Increasing rental revenue through organic growth, development, repositioning, renovations, and optimization strategies

• Maintaining a maximum portfolio loan-to-value ratio of 85%

• Over the next three to five years, management is focused on growing the portfolio to $500M+. 

Building a portfolio capable of potentially generating steady cash flows, and capital gains

Portfolio Summary

At the end of 2023, YEG owned $127M in real estate investments, up 132% YoY, primarily driven by acquisitions

Property valuations increased by $4.2M in 2023, attributed to increased rent and occupancy, partly offset by higher cap rates

YEG’s portfolio includes 11 projects, including 10 residential projects totaling 518 units, and one commercial spanning 28,036 sq. ft 

Source: FRC/Company

YEG owns 100% equity in its projects

In Q1-2024, occupancy of residential units increased 3 pp YoY to 98%, and the average monthly rent per unit increased 8% YoY to $1,471

The following sections summarize YEG’s projects. 

Key Highlights 

10 residential projects totaling $5.5M in NOI, valued at $115M, or $251k/unit

Three residential projects in Edmonton, totaling 375 units valued at $80M, or $214k/unit

The average cap rate is 4.9%

Four residential projects in Fort St. John, B.C., totaling 83 units valued at $12M, or $150k/unit

The average cap rate is 6.0%

Source: FRC / Company

Three residential projects in interior B.C. totaling 60 units valued at $22M, or $368k/unit

The average cap rate is 3.7%

Source: FRC / Company

One commercial/retail project in Edmonton, with RBC (TSX: RY)  as the anchor tenant

All properties are in good condition, requiring no substantial renovations or maintenance work in the near-term

Financials

In 2023, residential units accounted for 89% of YEG’s revenue (85% in 2022)

Source: FRC / Company

2023 revenue was up 133% YoY, primarily driven by property acquisitions

EBITDA was up 251% YoY

EPS turned positive (from -$0.001 to $0.03)

In 2023, net revenue increased 0.9 pp YoY to 4.7% of investments, driven by increased rent and occupancy 

Net profit improved YoY from -1.7% to -0.8% of investments 

While gross margins align with the sector average, EBITDA margins are notably higher, primarily attributed to relatively low G&A expenses

Source: FRC/Company

Debt to capital was 80% at the end of Q1-2024 vs the sector average of 52%; we note that relatively new companies have high debt levels as  acquisitions are primarily financed through debt

As equity builds through potential gains in property valuations, and equity financings, Yorkton's debt to capital should trend lower

Source: FRC / Company

Source: FRC / Company

None of the outstanding options/warrants are in-the-money

Sector Outlook

We maintain a positive outlook on the Canadian multi-family residential market, buoyed by strong rental demand, elevated property prices, challenges in affordability due to high mortgage rates for new homebuyers, low unemployment rates, and a growing influx of new immigrants and international students.

Source: WOWA

As of May 2024, residential prices in B.C. were up 1% YoY

Prices in northern B.C. were up 8% YoY

Prices in Edmonton were up 4% YoY

Canada Interest Rates

Source: Trading Economics

Although interest rates will likely continue trending lower, we believe they will remain significantly above their historic average in the near-term

Canada Unemployment

Source: Trading Economics

Unemployment levels are trending higher, but remain near historic lows

Number of Immigrants in Canada (000’s)

Over the past two decades, Canada's allure as an immigration destination has been rising steadily 

The federal government is targeting 485k new immigrants in 2024, and 500k in 2025, up from 472k in 2023

Number of Immigrants in Canada (000’s)

Source: Statista

The federal government is targeting 485k new immigrants in 2024, and 500k in 2025, up from 472k in 2023

Vancouver Residential Real Estate – Vacancy Rate

Source: Statista

Vacancy rates in Vancouver are currently at historical lows

In Edmonton, vacancy for rental apartments dropped from 4.3% in 2022, to 2.4% in 2023, the lowest in a decade

B.C. tops the list for highest rents nationwide, with AB experiencing the fastest rent growth last year

 In B.C., annual rent increases for existing tenants are capped at a set percentage, currently tied to inflation. However, in Alberta, there is no legislated cap on rent increases, allowing landlords to raise rent without limitations. The 2024 rent increase limit for residential tenancies in B.C. is 3.5%. YEG's overall rent growth in B.C. will be slightly higher after factoring in rent increases for tenant turnovers. In Alberta, consensus forecasts indicate 5%-10% growth in rent in 2024, compared to 16% last year.

Despite the sharp increase in interest rates, cap rates for multi-family units have only risen by 0.5 pp in the past two years

As interest rates will likely continue trending lower, we believe  cap rates could potentially decline 0.25 pp in the near-term, driving up property valuations by 5.5%

Source: Cushman and Wakefield

As interest rates will likely remain higher than levels seen in H1-2022, we do not foresee cap rates declining by the full 0.5 pp gained in the past two years

FRC Projections and Valuation

Source: FRC 

We anticipate revenue/EBITDA growth will come from increased rents

As mentioned above, we anticipate property valuations increasing by 5.5% from now until the end of 2025

For conservatism, we are not assuming any acquisitions in our EPS estimates, and valuation models

Source: FRC / S&P Capital IQ

YEG’s forward EV/Revenue is 9.9x vs the sector average of 10.7x

YEG’s forward EV/EBITDA is 16.3x vs the sector average of 20.9x

Applying sector averages to our revenue and EBITDA estimates, we are arriving at a fair value estimate of $0.30/share

We are resuming coverage with a BUY rating, and a fair value estimate of $0.30/share. A key strength of Yorkton is its experienced management team. We believe the multi-family residential market is one of the most attractive segments in Canadian real estate in the near term. Given the expected downward trend in interest rates, we project lower cap rates and significant property value appreciation for YEG this year. In addition, organic rent growth should drive revenue and EBITDA in the coming quarters. 

Risks 

We believe the company is exposed to the following key risks:

•  Investments in real estate are typically affected by macroeconomic conditions, and the health of local real estate markets

• Like all real estate companies, YEG utilizes leverage to amplify returns

• Interest rates 

• A downturn in the real estate sector could negatively impact the performance of YEG's portfolio

APPENDIX