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RE Royalties Hosts Q2 2023 Earnings Call

RE Royalties Ltd. (TSX.V: RE) , hosted the second quarter conference call and live webcast on Tuesday, August 29, 2023 to discuss the second quarter results along with a question-and-answer session with analysts and investors.


Please find the Q2 financial highlights summary, transcript and recording of the conference call below.




Key business and financial highlights for Q2 2023 include:

  • In May 2023, the Company acquired a royalty on 100MW of output from a wind project located in Alberta, Canada ("Alberta Wind Project") for $940,000 Canadian dollars. The Alberta Wind Project is owned by a major independent power producer with a power purchase agreement with a large corporate off taker. The Company will receive average annual royalty payments of approximately $132,000 per year, payable monthly for a period of 12 years.

  • Teichos Energy LLC sold the Jackson Center Solar Project Phase 1 and 2, and subsequently repaid the outstanding loan and repurchased the royalty for US$1.15 million (“Teichos Repurchase). This gain has been recorded as a component of revenue and income for Q2 2023.

  • Quarterly revenue and income, including the share of income from the Company's investment in OCEP for the three months ended June 30, 2023, of $3,437,000, an increase of $2,250,000 or 189% over the similar period in the prior year.

  • Year-to-date revenue and income, including the share of income from the Company's investment in OCEP for the six months ended June 30, 2023, of $5,262,000, an increase of $3,418,000 or 185% over the similar period in the prior year.

  • Quarterly gross profit, including changes in fair value of financial assets and share of income in OCEP, for the three months ended June 30, 2023, of $3,349,000, an increase of $2,213,000 or 195% over the similar period in the prior year.

  • Year-to-date gross profit, including changes in fair value of financial assets and share of income in OCEP, for the six months ended June 30, 2023, of $5,139,000, an increase of $3,466,000 or 207% over the similar period in the prior year.

  • Quarterly Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)1 for the three months ended June 30, 2023 of $2,156,000, an increase of $1,384,000 or 179% over the similar period in the prior year.

  • Year-to-date Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)1 for the six months ended June 30, 2023 of $3,502,000, an increase of $2,742,000 or 361% over the similar period in the prior year.

  • Quarterly net income after income tax for Q2 2023, of $1,123,000, an increase of $897,000 or 398% over the similar period in the prior year.

  • Year to date net income after income tax for the six months ended June 30, 2023 of $1,681,000, an increase of $2,005,000 over the similar period in the prior year.

  • Cash and cash equivalents of $17,716,000, including restricted cash.

Transcript:


Company Participants

  • Melanee Henderson - IR

  • Bernard Tan - CEO

  • Luqman Khan - CFO

  • Peter Leighton - COO


Welcome everyone to RE Royalties second quarter 2023 conference call. Joining us today are Bernard Tan, CEO; Peter Leighton, COO; Luqman Khan, CFO.

All company executives will participate in the Q&A session after the management’s formal remarks.


As usual, before we get into opening remarks by management, I would like to remind our listeners that our comments and answers to your questions will contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. For further information on these risks and uncertainties I encourage you to read the cautionary note that accompanies our second quarter MD&A and the related news release, as well as the risk factors particular to our company.


I would also like to point out that we will use various non-GAAP measures during the call. You can find explanations and reconciliations regarding these measures in the related news release.


Following opening remarks, we will address some previously submitted investor questions, as well as those that come in through Teams. If you would like to submit a question, please use the Q&A function in Teams. If we do not get to your question today, please email info@reroyalties.com and we would be happy to follow up with an answer.


Now I would like to turn the call over to CEO, Bernard Tan, please go ahead.

Bernard Tan

Thank you very much, Melanee, and good afternoon, ladies, and gentlemen.


Thank you for joining us today, and welcome to the RE Royalties 2023 Second Quarter Results Conference Call. As Melanee pointed out, we have certain forward-looking statements today, and I would draw your attention to our disclosure and our materials on this and certainly reaffirm that we seek safe harbor to our comments today.


Joining me today is our Chief Operating Officer, Peter Leighton, and Chief Financial Officer, Luqman Khan.


I will highlight some of the key accomplishments for the quarter and will then pass it over to Luqman to discuss the financial results, and Peter to discuss our updates on our portfolio of investments and backlog, and we will wrap it up with questions from the audience.


For the second quarter of 2023, we continued our path of growth and increasing the Company’s revenues, income, cash flow and EBITDA.


We acquired a royalty in May on 100MW of output from a wind project located in Alberta, Canada. This wind project is owned by a major independent power producer with a power purchase agreement with a large corporate off taker. This project was also recently commissioned, and we will receive average annual royalty payments of approximately $132,000 per year for a period of 12 years.


We also want to congratulate our client, Teichos Energy, on the successful sale of their Jackson Center Solar Project. Our partnership with Teichos is a clear example of how royalty based financing is able to support the evolution of a solar project and to help our clients realize their business goals.


Earlier this month, we also completed an investment with Cleanlight, a high-growth clean technology company and manufacturer of mobile solar-battery systems including solar lighting towers ("Solar Towers"), and solar-hybrid battery generators ("SolBox"). Cleanlight was founded in 2019 in response to customer needs in the mining sector for off-grid lighting and communications towers without the cost, emissions, and maintenance challenges of diesel-powered options. Cleanlight's Solar Towers are priced competitively to diesel options, passing significant fuel and maintenance cost savings on to the customer in addition to environmental benefits. The US$3.2 million loan and royalty acquisition will allow Cleanlight to further expand and grow their customer base in Latin America.


With the $17m in cash available on our balance sheet, and several exciting opportunities currently under due diligence, we expect to complete a few more transactions for the remaining half of the year and to continue expanding on our financial results to date.


So, with that, I'd like to turn it over to Luqman and discuss the financial results of the quarter.

Luqman Khan


Thanks Bernard. Good afternoon, everyone.


Since the additional capital raised by the Company in the previous quarter remained largely undeployed in the second quarter, there was no significant change in the Company’s royalty revenue and finance income in the second quarter of 2023, as compared to the first quarter of the current year.


The Company recorded a net income of C$1.1 million during the second quarter of 2023, representing a ~100% increase from the first quarter of the current year, and a 400% increase from the same period of the prior year.


The Company’s net income in the second quarter was mainly attributable to a gain of ~C$1.5 million recorded upon the buyout on the Jackson Center royalty.

The Company’s total expenses increased in the second quarter, mainly due to ~C$200k recorded in share-based payment expense relating to share-based award granted by the Company to its directors, officers, employees, and consultants in May 2023.


In the second quarter of each year, the Company’s expenses are typical higher due to the timing of its annual financial statements and related audit fees.

In the second quarter of 2023, the Company’s marketing expenses also increased as a result of expenditure incurred in relation to the Canadian Climate Investor Conference held in June 2023.


The Company incurred finance expenses, for the full quarter, relating to the Series-3 Green Bonds issued in the first quarter of the current year.

The Company maintained its quarterly cash distributions at C$0.01 per share in the second quarter.


I will now turn it over to Peter to discuss the existing portfolio as well as the pipeline of opportunities.

Peter Leighton


Thank you, Luqman, and thanks to everyone for joining us today.

We currently have 111 royalties under contract covering projects that generate solar and wind energy, projects that convert waste to energy, storage projects and energy efficiency projects. Cumulatively these represent approximately 377 MW of clean energy capacity and generate approximately 936 thousand MWh of clean energy. This is enough clean energy to power approximately 125 thousand homes, offsetting approximately 411 thousand tonnes of CO2 emissions annually.


We continue to make progress converting our project pipeline and backlog into royalties under contract. Bernard has already spoken to the wind royalty we purchased in Alberta during the second quarter and the closing of our investment in Cleanlight earlier this month. In addition to these new investments, we have approximately $100 million of investment opportunities where we are in the process of completing detailed evaluation and analysis. Our backlog, which we define as investments where we have executed term sheets, currently stands at $40 million. These are projects where we are in detailed due diligence, including site visits, with the clients.


This backlog includes the following opportunities:

1. Acquisition financing to enable a renewable energy operator to acquire a portfolio of operating run-of-river and wind projects in Canada.

2. Construction financing for a solar project currently under development in Alberta, Canada.

3. Equipment financing for a renewable natural gas project in California, United States.

4. Equipment financing for a renewable natural gas project in Missouri, United States.

5. Construction financing for a portfolio of solar projects in South Asia.


These opportunities under evaluation are still subject to completion of due diligence, definitive documents, conditions precedent for each transaction and approval of the Company’s Board of Directors. There is no assurance that any of the opportunities under evaluation will result in a completed transaction.

I will now pass back to Bernard for final comments.

Bernard Tan


Thank you Peter and Luqman. I would like to thank everyone for the time they took to join us on the call today. That concludes the formal part of the conference call and we will now turn it over to Melanee for submitted questions.


1. Question: In 2021-2022, RE added approximately 35 new royalties to its portfolio. That’s a monthly average of 1.5 royalties. The pace has slowed down in 2023. Why?


Answer: [Bernard] While the pace in the number of royalties has slowed, the value – meaning the $ generated from new royalties has not. For instance, we count the Cleanlight royalty as one royalty, even though we receive a royalty on each Solar Tower or Solbox that Cleanlight sells. Royalties can come in different sizes and value, some will be smaller like rooftop solar, while some may be larger, like the Cleanlight one.

2. Question: In the last conference call’s prepared remarks, it was said that “the additional capital raise from our Series-3 will give us the runway to complete a number of targeted investments that we have executed term sheets for and are currently under due diligence.” As of now, much of the aggregate gross proceeds of the last green bonds has yet to be invested. Why?


Answer: [Bernard] We currently still have $16 million in cash to invest. For the most part, the targeted investments we mentioned in the last call are mostly the same opportunities and we are still undergoing due diligence or legal documentation on these opportunities. We expect one or two of them to be completed in the coming months. These opportunities are sometimes tied to certain milestones or condition precedents, such as completion of an acquisition or the receipt of a key document like a power purchase agreement, so we typically don’t close until those CPs are reached.

3. Question: Wages and benefits increased by 43% compared to 2022. Please talk about the team RE is building.


Answer: [Luqman] Compared to last year, we have added two additional staff members to assist with our financial reporting, investment management and investor relations on our expanded portfolio. Wages also increased due to inflationary pressures for most of our existing team. In terms of headcount, we don’t expect any material changes moving forward as we now have the internal capacity to continue to grow our portfolio without additional personnel.

4. Question: The last quarterly revenue and income included the share of income from the Company's investment in OCEP. How much did the Outagamie royalty yield in the last quarter?


Answer: [Luqman] The return from the Outagamie investment is the same for this quarter and the last quarter. For the first six months of 2023, we recorded C$442K in revenue and income from the Outagamie investment related to interest payments. The royalty does not start paying until the loan is fully repaid.

5. Question: How much did the Nomad royalty yield in the last quarter?


Answer: [Luqman] For the quarter, we recorded C$264K in revenue and income from the NOMAD investment.

6. Question: In the last results’ call, Luqman Khan said that the credit loss for the FuseForward Facility was due to delayed payments and that RE was “currently working with FuseForward to catch up these outstanding payments”. In the Q2 2023 MDA it is said that “There was no change in the expected credit loss of $473,000 relating to the FuseForward facility.” Are we to conclude that this amount will be the total loss? Are other losses expected?


Answer: [Bernard] There has been no change to the Fuseforward facility as we are awaiting the completion of Fuseforward recapitalization plan. Currently, we do not expect any further losses and the amount recorded previously was our best estimate at that time. Fuseforward currently continues to generate revenues from their solution sales and we are optimistic that they will be able to catch up on our outstanding payments.

7. Question: The company's royalty interest in the Jackson Center Solar Projects was bought out for $1.53 million. The royalty was created through $5.5 million loans. Is 25% of a loan a fair estimate of a royalty’s value?


Answer: [Peter] The answer does depend on each individual transaction, client, type of project, location, and remaining life of royalty. However, I would say that for similar solar transactions that we have done in the past, such as the Belltown investment, 25% is a reasonable approximation.

8. Question: Deploying capital in 2023 has been slower than last year. What are the reasons for this? When do you expect to have deployed the remaining cash balance? How does RE see its growth in the second half of the year? In 2024? In 2025? What are RE’s coming milestones?


Answer: [Bernard] While we had a great quarter and first half of the year, internally, we see that as only the baseline to build upon. Notwithstanding the Teichos repurchase, we currently have $16 million in cash available and a lot more than that to invest in. Our portfolio of investments have been yielding in the high-teens in terms of return, so we are confident we can continue to replicate that with our new opportunities. If you do the rough math, you can see that once that capital is deployed, that is an approx. $2-3 million in revenues and margin to our baseline. In our MD&A, we have listed a number of opportunities that we are in advanced stages on. While we confident some if not all of them will eventually close, the tricky part is when. My best estimate currently is that 1 or 2 will close later this quarter and 1 or 2 next quarter.

9. Question: What, if any, are your plans to a) do another green bond raise and b) another equity raise in either 2023 or 2024. What is your target ratio between equity and debt?


Answer: Under our current green bond indenture, we have an upper limit of 75% debt and 25% equity. Currently we are nowhere close to that upper limit and have an additional approximately $45-50 million in debt capacity. We don’t have any plans to raise equity in the near future as the share price is far too low. Depending on timing of deployment on the remaining cash, and timing of opportunities, our best estimate is we will likely look at a potential green bond raise in late 2023 or early 2024.


Feel free to let me know if you need further clarification or if you have additional questions related to this conference call transcript.


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