Additional Royalty Acquisitions
Our Conclusion
We are resuming coverage of DRI Healthcare Trust following the closing of
the company’s C$104MM (US$77MM) equity raise (9.43MM units inclusive
of the 15% over-allotment at C$11.00/unit). This is DRI’s second equity raise
in two months, suggesting that management is confident enough in the
quality of the deals in its pipeline that it remains willing to issue equity—
despite the shares trading at ~$11/share, approximately a 39% discount to
our NAV estimate. With DRI announcing the acquisition of a second royalty
on Orserdu less than a month after its July equity raise, we expect that this
equity raise was also completed with a specific transaction nearing the final
stages of completion. The equity raise reduces leverage from 2.9x to 2.1x,
and we anticipate the next acquisition will be more comparable in size to the
equity raise than was the case with the Orserdu acquisition ($130MM
acquisition vs. $74MM equity raise) given a $77MM acquisition would
increase leverage back to nearly 3.0x, a level that appears to be the upper
end of management’s comfort level. We maintain our Outperformer rating,
but revise our price target from $20 to $18 after adjusting our net asset value
(NAV) for the cash received and share dilution.
Key Points
Expect A Near-term Acquisition: DRI announced the $130MM Orserdu
royalty acquisition on August 14, four weeks after it raised $74MM in a
similar bought deal. With that context, and management’s recent
commentary on the strength of its pipeline, we expect DRI to close on an
additional royalty acquisition in the coming weeks/months. On the Q2
earnings call, management indicated it had a near-term pipeline of $1.8B,
with deals ranging in size between $75MM–$150MM. Given leverage prior to
the equity raise of 2.9x, we believe that a deal associated with this raise
would be closer to the lower end of the range, as $150MM of spending would
increase leverage to 3.7x even after factoring in the proceeds of the raise.
Deployment Targets Likely To Be Updated: DRI’s most recent update to
its deployment target called for $850MM–$900MM in total post-IPO
acquisition spending by 2025. With DRI having spent $766MM to date
(excluding $76MM in potential milestone payments), the company is more
than on track to hit those targets, especially if the $77MM in newly raised
funds are deployed in short order. We expect management will increase its
deployment target with the announcement of its next royalty acquisition.
Orserdu Receives European Approval: This morning, the European
Commission approved the DRI portfolio drug Orserdu. We expect that the
approval will trigger a milestone payment on DRI’s first Orserdu royalty and
accelerate sales in Q4 and 2023. Prior to the approval, Orserdu was
expecting to generate $175MM in 2023 revenue, with sales accelerating
quickly after its U.S approval in early 2023. Milestone payments related to
the portfolio are upside to our current forecast.