Our view: Q1/23 revenue, cash receipts and adj. EBITDA were ahead of estimates. Total revenue of $28.2MM was above RBCe ($22.2MM) and consensus ($24.2MM). Cash royalty receipts (ex-interest receipts) of $23.4MM were ~22% ahead of our forecast ($19.1MM). Adj. EBITDA of $21.4MM was also ahead of RBCe ($16.9MM) and consensus ($19.3MM). DRI will pay a special cash dividend of $0.53/unit (C$0.72/unit) along with the regular quarterly dividend of $0.075/unit (C$0.10/unit) on 20-July. The near-term deal pipeline consists of 15 opportunities with potential deployment of ~$2B. The expected IRRs on these deals are 14% or more with favorable characteristics.
Key points:
Royalty revenues and adj. EBITDA ahead of estimates. DRI reported total revenue (including interest income) of $28.2MM, ahead of RBCe ($22.2MM) and cons. ($24.2MM). Cash royalty receipts (ex-interest receipts) of $23.4MM were +22% ahead of our estimate ($19.1MM). Total cash receipts including interest receipts were $25.0MM. Q1/23 adj. EBITDA of $21.4MM was stronger than RBCe ($16.9MM) and cons. ($19.3MM).
Balance sheet, dividend, and NCIB update. DRI ended Q1/23 with cash on hand of $10.5MM and had drawn $227.6MM under its credit facility. During Q1, DRI closed a private placement of preferred securities of ~$114.8MM resulting in gross proceeds to DRI of ~$95MM. The preferred securities are unsecured, subordinated debt securities of the Trust. On 02-May, DRI used the proceeds from the Tzield sale to make principal repayment of $146.3MM, bringing the outstanding credit balance to $85MM. DRI declared a cash dividend of $0.075/unit for Q1/23 payable on 20-Jul along with a special cash dividend of $0.53/unit associated with the Tzield sale. During Q1, DRI acquired 319,453 units for an aggregate purchase price of $1.7MM under its NCIB at a weighted price of C$7.44/unit.
Updates on the deal pipeline. The near-term deal pipeline consists of 15 opportunities with potential aggregate deployment of ~$2B. Of the 15 potential deals, two are in late stage diligence (under exclusivity or soon to be under exclusivity), seven are in the middle stage of diligence, while the remaining ~5 deals are at early stages. The deal size ranges between $20-200MM. Given the state of the biotech funding market, management noted that the deals under consideration have IRRs of 14% or more (vs. ~10–12% in 2022) and have more favorable structures for DRI. Management noted ~$250MM of available liquidity to fund acquisitions.
Revising estimates, maintaining C$17 price target. We update our estimated NAV for DRI’s royalty portfolio as of Q1/23A. Our C$17 price target is based on a 1.25x operating NAV at 9%, reflecting the optionality inherent in DRI’s business model and our expectation that cash flow will be redeployed into accretive acquisitions.