• Property valuations were up 1% QoQ, attributed to higher residential rent (up 1% QoQ) and occupancy (up 1 pp QoQ). We continue to anticipate property valuations increasing by 5.5% across 2024 and 2025, driven by lower cap rates.
  • Since June 2024, the Bank of Canada has reduced interest rates twice, and we anticipate further cuts, prompted by easing inflation and a softening job market. 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/EBITDA is 17.7x vs the sector average of 22.4x, a 21% discount.  

 

Price and Volume (1-year)

 

  YTD 12M
YEG 22% 15%
TSXV 3% -2%

 

Investment Strategy

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 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. 

 

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

YEG owns 100% equity in its projects. At the end of Q2, YEG owned $128M in real estate investments, up 32% YoY, primarily driven by acquisitions 

Property valuations increased by 1% QoQ, or $1.4M  in Q2 (nil in Q1), attributed to increased residential rent and occupancy. We continue to anticipate property valuations increasing by 5.5% across 2024 and 2025, driven by lower cap rates

 

Q2 revenue was up 2% QoQ, and 36% YoY.  The following sections summarize YEG’s projects (no material changes QoQ). In Q2-2024, residential rental revenue accounted for 91% of revenue (88% in Q2-2023)

 

Key Highlights 

10 residential projects totaling $5.7M in NOI, valued at $116M, or $254k/unit. Three residential projects in Edmonton, totaling 375 units valued at $82M, or $218k/unit

 

The average cap rate is 5%. Four residential projects in Fort St. John, B.C., totaling 83 units valued at $13M, or $151k/unit

 

Three residential projects in interior B.C., totaling 60 units valued at $22M, or $368k/unit. The average cap rate is 3.7%

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

 

Financials

Q2 revenue and EBITDA were in line with our estimates. Revenue was up  36% YoY, primarily driven by property acquisitions

EBITDA was up 58% YoY. EPS turned positive (from -$0.001 to $0.01), but was 8% lower than our estimate due to higher interest expenses

Net profit improved YoY from -0.38% to -0.04% 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 Q2 vs the sector average of 52%.  As equity builds through potential gains in property valuations, and equity financings, Yorkton's debt to capital should trend lower

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

 

FRC Projections and Valuation

Given the increase in rent and occupancy in Q2, we are raising our 2024 EBITDA estimate while lowering our EPS estimate, as interest expenses were higher than anticipated in H1 

 

 

YEG’s forward EV/Revenue is 10.3x (previously 9.9x) vs the sector average of 11.3x (previously 10.7x)

Applying sector averages to our revenue and EBITDA estimates, we are arriving at a fair value estimate of $0.34/share (previously $0.30/share

We are reiterating our BUY rating, and adjusting our fair value estimate from $0.30 to $0.34/share. We believe that higher rent/occupancy will drive YoY revenue growth in the coming quarters. Additionally, given the expected downward trend in interest rates, we project lower cap rates and significant property value appreciation in the coming 12 months.  

 

Risks 

We are maintaining our risk rating of 3 (Average)

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