Q1/25 - Results mixed; Announces internalization of the manager at ~4x trailing fees - positive news
TSX: DHT-U | CAD 12.40 | Outperform | Price Target CAD 17.00
Sentiment: Neutral
Our view - a mixed quarter, but the internalization announcement should be welcomed by investors: Overall, we view DRI's Q1/25 release as mixed with Q1/25 results below estimates, while the internalization of the external manger should be positive for unitholders over the longer term. Q1/25 total income of $44.0MM was ~4% below FactSet consensus ($46.0MM) and the adj. EBITDA of $51.7MM was ~6% below FactSet consensus ($55.1MM). Compared to RBCe, total income was ~5% ahead, while adj. EBITDA missed by ~9%. Cash receipts of $62.0MM in the quarter were ~10% above Visible Alpha consensus of $56.4MM but ~6% below RBCe ($65.6MM). As we have stated previously, we note that results can be lumpy from quarter to quarter. On a much more positive note, DRI will pay $49MM in cash (~4x trailing 12-month management fees) as part of the internalization of the external manager. Management estimates that the internalization will result in ~$200MM in cumulative savings over the next 10 years. We note that earlier this year, Royalty Pharma (RPRX, NC) internalized its management for ~$1.1B. Based on a 6.5% management fee tied to its 2024 portfolio receipts of ~$2.8B, we calculate a ~6x transaction multiple. As such, we view DRI's ~4x multiple as favorable for unitholders. On the earnings call tomorrow, we would expect focus to be on potential new expenses associated with the internalization, seek updates on the existing portfolio of royalties, especially the large royalty assets that are marketed by private companies (Orserdu and Omidria). Additionally, we expect the focus to be on the company's deal pipeline and the development stage of the drugs under consideration (Ph3, approved drugs) and management's return expectations for future royalty acquisitions. We note that peer company, LGND recently cited a strong pipeline of opportunities within the current macroeconomic and policy environment (here).
Internalization of the manager - a positive (and partially discounted) event, in our view. As part of this process, DRI will pay $49MM in cash to DRI Capital to terminate the existing management agreement. This payment will also extinguish all current and future management and performance fee obligations, while acquiring all relevant assets of DRI Capital. The payment amount represents approximately a 4x multiple of the trailing twelve months' management fees. Following the transaction, employees of the manager will transition to a subsidiary of the Trust. This transaction is expected to close before the beginning of Q4/25, pending the satisfaction of customary closing conditions. Management estimates that the internalization will result in ~$200MM in cumulative savings over the next 10 years. We note that in our valuation, we removed $74.6MM, or $1.32/sh, from our NAV to reflect the 6.5% fees associated with the external manager. With new corporate costs considered and internalized, we believe the $49MM purchase price appears reasonable upon initial reflection, in our view.
Total income (revenues) missed consensus while cash receipts were ahead of consensus. DRI reported total income of $44.0MM, ~4% below FactSet consensus ($46.0MM) but ~5% ahead of RBCe ($42.0MM). This royalty income should drive royalty receipts over the coming quarters once payment lags of one to three quarters under DRI’s royalty agreements are considered. DRI reported total cash royalty receipts of $62.0MM, ~10% above Visible Alpha consensus ($56.4MM) but ~6% below RBCe ($65.9MM).
Q1/25 adj. EBITDA of $51.7MM was below FactSet consensus ($55.1MM) and RBCe ($56.6MM). The adj. EBITDA margin of ~83.3% increased slightly q/q (~82.9% in Q4/24).
Balance sheet and dividend update. DRI ended Q1/25 with cash on hand of $55.7MM and had drawn $309.9MM under its credit facility as of Q1/25 (vs. $622.4MM in total available credit). The company paid its previously announced regular dividend of $0.10/ unit on 17-April to unitholders of record as of 31-March-2025. Today, it declared a cash dividend of $0.10/unit for Q2/25 payable on 18-July-2025 to unitholders of record on 30-June-2025.