RE Royalties Ltd. (RROYF) Q1 2023 Earnings Call Transcript

RE Royalties Ltd. (OTCQX:RROYF) Q1 2023 Earnings Conference Call June 1, 2023 4:00 PM ET

Company Participants

Melanee Henderson - IR

Bernard Tan - CEO

Luqman Khan - CFO

Peter Leighton - COO

Conference Call Participants

Melanee Henderson

Good afternoon, and welcome everyone to RE Royalties First Quarter 2023 Conference Call. Joining us today is Bernard Tan, CEO, Peter Leighton, COO, Luqman Khan, CFO. All Company Executives will participate in the Q&A session after the Managements formal remarks.

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

I would also like to point out that we will be using various non-GAAP measures during the call. You can find explanations and reconciliations regarding these measures in related news release. Following opening remarks, we will address some previously submitted investor questions as well as those who come through teams. If you'd like to submit a question, please use the Q&A function in Q&A. If we do not get to your question today, please email us at info@reroyalties.com, and we'd be happy to follow up with you with the answers.

Now I'd like to turn the call over to the CEO Bernard Tan. Please go ahead.

Bernard Tan

Thank you, Melanie. And good afternoon, ladies and gentlemen. Thank you for joining us today and welcome to the RE Royalties 2023 first quarter results conference call. I would point out first, we have many 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 COO Peter Leighton, and CFO, Luqman Khan.

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

The first quarter of 2023 continue to be another quarter of great progress in the evolution and growth of the company. We saw our highest quarter of revenue and income and continued the trend of growing our cash flow and EBITDA. We completed the offering of our Series-3 Green Bonds and issued a total of 16,423 Canadian dollar Green Bonds at 1,242 United States Dollar Green Bonds for aggregate gross proceeds of over C$18 million. The Series-3 Green Bonds will have a maturity date of Jan 30 2028 and bear interest at a rate of 9% payable quarterly.

This 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. We also completed an additional investment with Teichos Energy, an existing client in February of this year, for $1.8 million U.S. on Phase 2 of the Jackson Center Solar Project in Pennsylvania. We are pleased to see that success the Teichos team has made on this project and we valued your trust in us helping them reach their goals for this project.

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

Luqman Khan

Thank you, Bernard. Good afternoon, everyone. I will start with the financial position. During the first quarter of 2023 the company's total assets increase by approximately C$14 million, representing a 33% increase during the quarter. This increase was mainly a net effect of cash raised from the Green Bond financing and cash used and repayment of certain convertible notes. The proceeds from the new Green Bonds issued were partially utilized during the quarter in advancing additional loans including the second loan to the Teichos Energy as mentioned earlier by Bernard.

The company's loan and royalty portfolio increased by approximately $3 million, with the issuance of new debt there was a corresponding increase in total liabilities. Total equity also increased as the company recorded a net income during the quarter.

Also, the company issued certain company's compensation warrants in relation to the Green Bond offering that are recorded within equity at their fair value. In terms of operating results, in the first quarter, the company recorded C$1.8 million in income and revenue. This represent 225% increase compared to the first quarter of the prior year. This increase was a result of approximately C$17 million in additional investment completed in 2022.

The increase in net income held the company to record its highest net income so far, that can be as EBITDA for the first quarter was C$1.3 million. I would like to highlight here that our MD&A includes reconciliation and related disclosure for this non-GAAP measure.

Finally, I would briefly link the foregoing discussions with the company's cash flows. During the quarter cashews in operating activities was mainly due to changes in working capital. This include an increase in the balance of a reserve maintain to cover six months of interest payments on the Green Bonds. Note that the cash reserve is maintained with the trustee as per the Green Bond indenture.

Cash used in investing activities represent the aggregate amount of loans advanced in the normal course and as mentioned earlier. Cash provided by financing activities included the net proceeds from the Green Bond offering. Cash used in financing activities, on the other hand, included prepayment of convertible notes, cash distributions to the company's shareholders and interest payments to the bond holders.

With that, I will now pass it back to Bernard.

Bernard Tan

Thank you, Luqman. Peter, will now provide some updates on our existing portfolio and a brief discussion on our backlog.

Peter Leighton

Thank you, Bernard, and thanks to everyone for joining us today. Currently have 110 royalties under contract, covering projects that generate solar and wind energy, projects that convert waste energy, storage projects and energy efficiency projects. Cumulatively, these represent approximately 331 megawatts of clean energy capacity and generate approximately 779,000 megawatt hours of clean energy. This is enough clean energy to power approximately 101,000 homes offsetting approximately 317,000 tons of CO2 emissions.

There are three specific investments that I would like to note given that our progress during the last quarter. The first one Switch Power, has completed the commissioning of their fifth Battery Project in Ontario, meaning that all of our storage projects with Switch are available to reduce energy consumption from the Ontario grid during peak hours of peak energy demand.

Secondly, Outagamie Clean Energy Partners have completed construction on their farm waste methane capture project at a dairy farm in Wisconsin. The biogas from this animal waste is now being upgraded and delivered to the natural gas system to displace traditional natural gas and diesel transportation fuel.

And thirdly, Revolve Renewable Power company has completed the commissioning of all three of their Cancun battery storage projects. These projects will enable Revolves hotel operator customer to time shift their energy consumption to off peak hours driving substantial reductions in energy costs.

I would also like to provide an update on our current project pipeline and backlog. We look at about C$1 billion are the projects on an annual basis a combination of new projects with existing clients and new projects with new clients. These projects span the diversity of the renewable energy industry. We currently have approximately C$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 scientists, historically we have a closing rate of approximately 70% of all projects we get to the executed term stage we ended up funding.

I'll pass back to Bernard for final comments and wrap up.

Bernard Tan

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

Question-and-Answer Session

A - Melanee Henderson

Okay, so our first question is, please explain the loss brought about by the derecognition of a company's interest on FC OCEP investments LLC?

Luqman Khan

Thanks, Melanee. For clarity, this amount was recognized in the year-end financial statement as opposed to the Q1 financials. In reality, this amount represents purely accounting adjustment, and there is no cash implication on impact on the company. The background on this adjustment recorded in last year is as follows.

When we first completed the OCEP investment in March 2022, despite the fact that we had 97% interest in the economics of the investment accounting rules dictated that we did not have control of the entity. In August 2022 we amended the investment agreement to provide us with full control under the definition of IFRS.

This amendment triggered a fair value event which resulted in accounting loss, despite of there was no change in economics for the company or the status of the project. As mentioned by Peter the construction of this project is now complete, RNG is being produced and methane gas is being upgraded to transportation fuel and investment is performing as expected. Thank you.

Luqman Khan

Next question, Melanee.

Melanee Henderson

Thank you, Luqman. And the next question is, please explain the credit loss relating to fuse FuseForward Facility?

Luqman Khan

Thanks, Melanee. Similar to the previous question, this amount was recorded in the year-end financial statement and not in the Q1 2023 financials. The credit loss or the FuseForward Facility was due to that a delayed payment caused by our working capital and constraints, which in turn was caused by a recent acquisition that FuseForward may. We are currently working with FuseForward to catch up these outstanding payments and we expect a resolution in the coming quarters. On a conservative purposes, we took a provision to the facility last year. Thank you.

Melanee Henderson

Thank you, Luqman. The third question is, can you explain why the quarterly royalty revenues has remained relatively flat compared to the financial income?

Bernard Tan

I'll take that question, Melanee. So in the past two years, we have added approximately 35 new royalties to our portfolio. In 2022 alone, we established several new additional royalties with Outagamie, NOMAD, Revolves, Switch and Delta. Some of these investments with Outagamie, Revolve and Switch in particular, were in the construction stage and basically was going through construction in the past 12 months. And as such, we did not recognize any royalties because they weren't cash flow producing yet.

As provided in Peters update, certain of these investments that are made in 2022 are now coming online. And as such, we do expect that in upcoming quarters, we would see a proportion of royalty income relative to finance income began to ratchet up. So that's our expectation.

The other sort of interesting aspect is as well is based on IFRS rules, some of the royalties that we actually have makes us recognize the income on those fixed royalty payments, again, such as Outagamie and Delta as interest income rather than royalty income. So for us typically from a management perspective, we do sort of view the royalties and interest sort of a blend in terms of our cash flow. Thanks, Melanee.

Melanee Henderson

Thank you, Bernard. The fourth question is, RE refers to time limited royalties, 10 to 15 years? While, Altius Renewables Royalty, a similar business prefers perpetual royalties. Can the company please explain the difference?

Bernard Tan

Sure, I'll take that question, Melanee. So one of our -- like our closest competitors, Altius, focuses primarily on development stage projects, where they can take a much longer term view on project success, whereas we do prefer projects that are already in operation or near operation. Because we do feel that near term cash flow is paramount when we screen for potential opportunities.

Our time limited royalties are also tied to items like a power purchase agreement, or sometimes the asset life such as a battery. Part of the reason we have not acquired perpetual royalties is that there is an elevated level of uncertainty when it comes to say repowering an asset.

For example, there is no assurance that we can get from an owner of a Solar Park, who won't simply just move the solar panels outside of a fee established royalty boundary. And thus rendering those royalties worthless. Also, we have found that the price of these perpetual royalties that are being asked for an evergreen royalty was difficult to value, and we didn't really want to take on the risk of overpaying for it.

Melanee Henderson

Thank you, Bernard. Our fifth question is, RE has issued approximately C$40 million in Green Bonds. Given the actual trends, how does the company expect to pay back the debt with interest in only five years?

Bernard Tan

I'll take that question as well, Melanee. So for most of the investments that we make, especially the loan component in our structures, they tend to be much shorter in terms. So on average, there are about two years among our portfolio. When the Green Bonds are five years in duration, effectively, this allows us to recycle that Green Bond capital roughly about two to three times. So when the bonds are due to be repaid in five years’ time, we can utilize the proceeds from our maturing investments to repay back the bonds, while keeping the royalties that have been created.

However, realistically, what we would likely do is refinance the entire or partial portion at maturity. Even though we have approximately C$40 million in Green Bonds issued, we do have an additional capacity to issue approximately an additional C$50 million in new Green Bonds without raising any additional equity.

Melanee Henderson

Thank you, Bernard. And we have a question. We're going to unmute Sean. Go ahead, Sean.

Unidentified Analyst

Can you hear me? So, I was just wondering, Bernard, I wanted to ask you about what's happened with the lighting environment in the regional bank centers in the U.S. in the middle March? And have you seen a change in the pipeline or an uptick in projects looking for funding because of that, or has it been pretty steady state? You haven't been impacted by that. And then a derivative question from that is how the higher rates out there impacting you?

Bernard Tan

Yes. Thanks, Sean. Those are great question. In terms of the bank situations down there, in particular, with some of the regional banks and the issues, I think most of the folks on this call would have seen definitely the headlines. It hasn't really materially impacted us, most of the banking relationships, we deal with, our corporate bankers are CIBC. So we haven't seen it on sort of our own balance sheet side of things.

What we do have noticed, however, is that the constraints being caused by the banking system has created new opportunities for us. In particular, because there are less lenders, we have noticed, especially in the last few months, an uptick in additional deal flow coming from the United States. In particular, we're looking at about three or four opportunities currently that Peter referred to in our backlog that we are in active due diligence on. So, that I would say it's unfortunate to see, but, frankly, it has created an opportunity for our business on that front.

With respect to the second part of your question. Sean maybe you can just clarify again, just before I sort of answer that.

Unidentified Analyst

Well, I guess overall, just the higher rate environment. How has that been impacting your returns, capital costs, things like that?

Bernard Tan

Sure. In terms of the rate return, the increase in rates, definitely, as you can probably see on our Green Bonds, has escalated from about 6% on the Green Bond raise that we made in December of 2021, to roughly 9%. So there's been about 300 basis points increase. What we have actually done with our group of clients, because of the increase, we have been able to pass some of those costs along to them.

And part of the reason why they are actually able to absorb some of those increasing costs, it's mainly because our prices in particular the U.S. and we actually see this globally, has actually gone up. So they are our clients, in essence, have been making more money, they've been able to bear some of the costs that we passed to them. So I think on a net basis, even though the financing environment and the costs associated has gone up, but it hasn't really materially impacted our business, per se.

Unidentified Analyst

Thanks. My last question, Bernard is, are you seeing Inflation Reduction Act benefits in projects you're looking at today? So I'm just trying to understand the timing. I mean, we hear a lot of chatter about, obviously, people looking at projects to change the economics that this brings its material, it's very real. And are you seeing projects, leveraging the Inflation Reduction Act already? Or is that something that still is going to come down the pipeline with more projects coming your way?

Peter Leighton

Yes. So, Sean, I'll take that. It's Peter here. And absolutely, we're seeing the impact of the Inflation Reduction Act. And it's piling on the impact of the continuing decline in cost to produce energy using either solar wind or battery storage technology. So all of those technologies, we've had price reductions, we're seeing enhanced movement away from the fossil fuel productions.

And add to that the Inflation Reduction Act, and it is created a quite a gold rush in the U.S. And I would say for our Canadian investors, we're seeing the same thing happening in Canada is particularly in Alberta, where there's an open merchant market for power. And the Canadian government has said, well, we want to tag along. They haven't defined their investment tax credits yet. They've just said that we're going to keep up with the U.S. Inflation Reduction Act. And so we're seeing that same. I would say that definitely a bit of a fever of new projects on the horizon.

Unidentified Analyst

Great. Thank you.

Melanee Henderson

And that concludes our Q1 2023 conference call. I want to thank everyone for joining us today. And Bernard I am just wondering if you have any last remarks.

Bernard Tan

Sure. Again, just wanted to reiterate. Thank you, everyone, for taking the time. We really appreciate you taking time out of your day to attend the call. Should you have any questions, definitely please feel free to submit it as Melanee indicated, we have an inbox at info@reroyalties.

And I also want to note that our management team will be in Toronto on June the 8, presenting at the Canadian Climate Investor conference. For those of you that are based in Toronto or around the surrounding area, definitely come visit us and some of the other clean tech and renewable energy companies that are presenting the conference is free. And the registration to sign up is available on our website and also some of our recent news release. Thanks, Melanee.