Dri Healthcare Trust T.DHT.UN

RBC

[retiredcf]

Their current and upside scenario targets are $15 and $20. GLTA

November 9 2021

DRI Healthcare Trust

Q3/21: Mixed results, strong acquisition pipeline; next catalyst potential FDA approval of pacritinib

Our view: While Q3/21 royalty income was above RBC and consensus estimates, adj. EBITDA and cash royalty receipts were below these forecasts. DRI declared a cash dividend of $0.075/unit (2x vs. Q3/21) for Q4/21 to be paid on 20-Jan. Management noted that its near term pipeline has grown above US$1B and comprises 10 potential deals. We believe the next catalyst for the stock should be pacritinib's potential FDA approval (PDUFA date: 30-Nov).

Key points:

Royalties earned ahead of estimates while cash royalty receipts and adj. EBITDA came below estimates. DRI reported royalty income of $22.9MM in Q3/21, above our forecast of $21.1MM. Total revenue (including interest income of $548k) at $23.4MM was ahead of estimates (RBCe: $21.6MM; consensus: $22.0MM). Cash royalty receipts of $20.2MM (including Eylea receipts which were received after quarter end) were 7.5% below RBCe. Adj. EBITDA for Q3/21 was $17.1MM (including Eylea receipts), below RBCe ($18.7MM) and consensus ($18.0MM). Adj. EBITDA margin (including Eylea receipts) at 85.0% was essentially in line with RBCe 85.5%.

Dividend doubled for Q4/21 and a potential special cash dividend.

After quarter-end, the company paid its previously declared dividend of $0.0375/unit (~$1.5MM) for Q3/21 on 20-Oct, and today it declared a cash dividend of $0.075/unit (~$3.0MM) for Q4/21 to be paid on 20-Jan. As expected, DRI also intends to pay an additional special cash distribution which will be determined prior to year-end.

Updates on the deal pipeline. DRI management noted that its near term pipeline has grown above US$1B and has a total of 10 deals. Of the 10 deals, 5 are at a late stage and the associated drugs are actively marketed globally. Management reiterated their target of making $650-750MM of royalty acquisitions in its first five years. To date, DRI has made $100MM of acquisitions with another $60MM to be deployed post pacritinib's potential FDA approval (PDUFA date: 30-Nov-21, details here).

Estimate revisions; PT at C$15 (prior C$16). We update our estimated NAV for the Seed Asset portfolio as of Q3/21A (prev. Q2/21A). Using an unchanged 7% discount rate and updated RBC and/or consensus outlook for underlying drugs, we now estimate a gross NAV of $469MM (prev. $471MM) or $11.70/sh for future cash royalty receipts, and an operating NAV of $438MM (prev. $441MM) or $10.94/sh net of management fees of 6.5% of revenue. After incorporating estimated corporate overhead costs and DRI’s net cash position, we arrive at a NAV estimate of $9.61/ sh (prev. $9.79/sh) or C$11.96/sh (prev. C$12.16/sh). Applying a 1.25x multiple to our estimated operating NAV@7% of $10.94/sh and a 1.0x multiple to corporate items results in a $12.35/sh or C$15.00/sh valuation ($CDN strengthened). As such, we believe that the shares are significantly undervalued. Our P/NAV multiple for DRI (1.25x) reflects the optionality inherent in DRI’s business model. Our C$15 price target is equivalent to ~5.20x EV/EBITDA using our 2022 EBITDA estimate of ~$93MM ($2.32/sh).