RE Royalties and Sustainable Energy

An opinion piece by Nico Popp (Apaton Finance GmbH).

The Canadian financing specialist RE Royalties is taking a unique approach in the renewable energy sector. The company provides capital to developers of solar, wind, hydroelectric, energy storage, and biogas facilities and, in return, secures revenue-based license fees in the form of royalties. RE Royalties' portfolio comprises over 100 licensing rights designed to mitigate direct construction and operational risks by providing contractually fixed gross revenues from power purchase agreements. With a market capitalization of approximately CAD 15 million, RE Royalties must be considered a small-cap company. Unlike Munich Re, for example, RE Royalties is far less able to weather operational difficulties. This is likely one of the reasons the company has made several adjustments in recent quarters.

With a market capitalization of around CAD 15 million, RE Royalties is considered a small-cap company. Unlike a company such as Munich Re, RE Royalties has far less room to absorb operational difficulties. This may also explain why the company has made several adjustments to its business in recent quarters.

To become more resilient and be more flexible in capitalizing on operational opportunities, management adjusted its dividend policy. For years, RE Royalties maintained a quarterly dividend of CAD 0.01 per share, which, when share prices were falling, led to dividend yields that at times exceeded 10%. Since these distributions were not always covered by free cash flow, the company decided to adjust: RE Royalties shifted its distribution policy from quarterly payments to an annual distribution and explicitly prioritized reinvestment in new projects. While this realignment represents a minor setback for dividend hunters, it is likely to provide the company with long-term stability and operational flexibility.

RE Royalties: What Is the Upside?

It is well known that RE Royalties possesses proven expertise in renewable energy projects across various regions of the world. Despite the large number of successful projects, the company has so far been unable to achieve strong growth or attain a high market capitalization. For this reason, among others, the company commissioned PricewaterhouseCoopers Corporate Finance some time ago to identify ways to unlock potential within its otherwise successful business model—management did not even rule out a sale. Since many banks deliberately avoid getting involved in smaller renewable energy projects, there should be a market for RE Royalties. This is all the more true given its track record of more than 100 royalties. RE Royalties' stock remains exciting despite the new dividend policy—a breakthrough is in the air.

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