RE Royalties: The Speedboat Among Financiers

An opinion piece by Tarik Dede (Apaton Finance GmbH).

The cleantech sector also has royalty models. Solar and wind farms are ideally suited to this financing model, since they typically run for 20 years and continuously generate energy that can be sold. The sector is currently even enjoying a special boom. For one thing, prices in the solar sector keep falling. For another, the massive build-out of AI data centers in the US is fueling a special boom of its own, since the energy supply is seen as one of the bottlenecks to growth, as industry figures such as Nvidia boss Jensen Huang keep pointing out.

RE Royalties has existed since 2016 and has by now invested more than CAD 80 million in a broadly diversified portfolio of over 27 assets. The Canadians are far smaller than a Franco-Nevada, yet they are well positioned with more than 130 individual projects. The internal rate of return on the capital deployed is also impressive. According to the company, it has averaged more than 19% since inception. The company's reliability shows up in its pipeline, around 41% of which currently comes from longstanding business partners. Management under CEO Bernard Tan is aiming to build a portfolio that generates recurring and, ideally, long-term cash flows. Besides the classics, solar and wind, the portfolio also includes battery storage, renewable natural gas and hydropower. Not least, the company also invests in infrastructure projects for energy efficiency.

RE Royalties pursues two approaches to financing its partners. One is to traditionally acquire long-term royalties and provide capital in return, which then secures a certain share of revenue over 20 to 25 years. Alongside that, the company also supports companies with bridge loans, which typically have terms of one to three years. The competitive landscape here is manageable: RE Royalties focuses on the niche of financings between CAD 10 and 20 million. Large lenders such as banks or private equity funds usually consider these projects too small. With this approach, the company is growing continuously - over the past five years, revenue has increased by an average of around 60% a year.

RE Royalties COO Peter Leighton presented the business model at the International Investment Forum: https://www.youtube.com/watch?v=5dQvcZkFR7E

For investors, the stock is above all a strong dividend play. The company has now been paying out reliably for more than two years. In the most recent quarter, it paid one Canadian cent per share. Annualized, that works out to a current dividend yield of more than 10%. Such high yields are rarely found on the market these days. What pleases shareholders, however, the management sees as a problem. That's because the high payout yield is a result of the low market cap, which currently stands at just CAD 17 million. Management itself holds almost a quarter of the shares (around 24%) and naturally wants the share price to rise. RE Royalties is therefore currently working with advisors from PricewaterhouseCoopers on a review of its strategy. As part of this process, the board will examine a broad range of potential alternatives, including, among others, a sale of the entire company, strategic partnerships, co-investments, or optimizing the capital structure through equity or debt financing. Management views this as a "natural evolution," since the company is about to enter its eleventh fiscal year and wants to position itself for future growth. One option here is longer-dated bonds. So far, the company has financed itself mainly through so-called green bonds with a five-year term. Royalties, by contrast, have durations of 20, 25 or 40 years. At this level, and given the strategic options on the table, RE Royalties stock offers investors plenty of potential. Anyone looking for a high dividend yield will find it here.

Read the full article here.