Strong Rental Demand and Cap Rate Compression Fuel Positive Outlook

Report Highlights

• At the end of Q3-2024, YEG owned $130M in real estate investments, including 10 residential projects totaling 518 units, and one commercial project spanning 28,036 sq. ft. Property valuations rose 1% QoQ due to higher rents and lower cap rates. We continue to anticipate property valuations increasing by 5.5% across 2024 and 2025, primarily driven by lower cap rates.
• We expect further rate cuts by the Bank of Canada due to slower GDP growth, high unemployment, and cooling inflation. We believe organic rent growth should drive YEG’s revenue and EBITDA in the coming quarters.
• We maintain a positive outlook on the Canadian multi-family residential market, buoyed by strong rental demand, elevated property prices, and challenges in affordability due to high mortgage rates for new homebuyers.
• YEG’s forward EV/revenue is 10x vs the sector average of 13x, an 18% discount.  

Price and Volume (1-year)

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

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

30+ year track record in real estate. The CEO owns 73% of YEG’s equity. Building a portfolio capable of potentially generating steady cash flows, and capital gains

YEG owns 100% equity in its projects

Portfolio Summary

At the end of Q3, YEG owned $130M in real estate investments, up 32% YoY, primarily driven by acquisitions . While tenant turnover led to a slight QoQ dip in average rent and occupancy in Q3, management pointed out that rents were higher at the end of the quarter

As  a result, property valuations increased 1% QoQ, or $1.5M, in Q3 (1% in Q2 as well). We continue to anticipate property valuations increasing by 5.5% across 2024 and 2025, driven by lower cap rates

Q3 net revenue was flat QoQ, and up 26% YoY. In Q3-2024, residential rental revenue accounted for 92% of revenue (88% in Q3-2023)

The following sections summarize YEG’s projects (no major changes QoQ). 

10 residential projects totaling $5.8M in NOI, valued at $118M, or $227k/unit. Three residential projects in Edmonton, totaling 375 units valued at $83M, or $221k/unit

The average cap rate is 5%

Four residential projects in Fort St. John, B.C., totaling 83 units valued at $13M, or $153k/unit. The average cap rate is 6.25%

Three residential projects in the rest of B.C., totaling 60 units valued at $22M, or $369k/unit. The average cap rate is 3.7%. One commercial/retail project in Edmonton, with RBC (TSX: RY)  as the anchor tenant

Financials

Net revenue was flat QoQ, but up 26% YoY, primarily driven by property acquisitions, missing our estimate by just 1%. EBITDA was flat QoQ, and up 34% YoY. EPS was up 13% QoQ, missing our estimate by 3% 

Annualized net revenue was relatively flat at 4.5% of investments. Net loss (excluding property valuation gains and unusual items) declined slightly QoQ, from -(0.04%) to -(0.03%) of investments 

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

Debt to capital was 79% at the end of Q3 vs the sector average of 53%. As equity builds through potential gains in property valuations, and equity financings, YEG's debt to capital should trend lower

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

FRC Projections and Valuation

As Q3 aligned closely with our expectations, we are not making any material adjustments to our full-year projections

Sector multiples are down 5% since our previous report in August 2024. YEG’s forward EV/EBITDA is 18.0x (previously 17.7x) vs the sector average of 20.3x (previously 22.4x)

Applying sector averages to our revenue and EBITDA estimates, we are arriving at a fair value estimate of $0.32/share (previously $0.34/share)

We are reiterating our BUY rating, and adjusting our fair value estimate from $0.34 to $0.32/share. Given the expected downward trend in interest rates, we project lower cap rates and significant property valuation gains in the coming 12 months. 

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 
• Property-specific risks such as vacancy rates, and unexpected maintenance or repair costs

We are maintaining our risk rating of 3 (Average)

APPENDIX