Dri Healthcare Trust T.DHT.UN

RBC Report

[retiredcf]

Their upside scenario target is now $20.00. GLTA

July 8, 2024

Outperform

TSX: DHT-U; CAD 11.17

Price Target CAD 16.00 ↓ 20.00

DRI Healthcare Trust

Units reflecting NT uncertainty following surprising CEO departure; PT lowered to C$16

Our view: While we were disturbed to see the executive changes at DRI and the associated reasons, we believe the price decline (~27%) has created an attractive longer-term entry point, with the units now trading at ~0.8x RBCe NAV. To reflect the uncertainty regarding DRI's ability to acquire new royalties in the near term, we have reduced our target P/ NAV multiple from 1.25x to 1.1x. We would expect the units to close the NAV discount and eventually trade at a premium once the matter is fully resolved, a permanent CEO is identified and the Trust demonstrates continued execution.

Key points:

Robust investment team - Management focused on continuity. Following the executive changes announced this morning (here), we spoke with senior management at DRI (Ali Hedayat, Gary Collins and Navin Jacob). While the previous CEO possessed material institutional knowledge having built the company, management noted that Mr. Khosrowshahi's role in the day-to-day operations had declined as the investment team expanded under the current CIO, Mr. Navin Jacob. Regarding the sourcing of new royalty transactions, management described how the CEO had transitioned to an oversight role while the investment team led by Navin Jacob has been involved in the day-to-day operations including deal sourcing over the last ~1.5 years. Management noted that the deal pipeline remains robust. The Trust is very focussed on continuity of the business and is working to address certain gaps following Mr. Khosrowshahi's departure. We will monitor performance acutely to determine if the news has damaged DHT's ability to close transactions at reasonable rates.

DRI Healthcare has committed to full restitution of funds. Management noted that the irregularities pertained to the CEO and entities related to him in his personal capacity (since 2021). The investigation was underway for the past 3 weeks and was on a strictly need-to-know basis with the previous CEO only being made aware of the investigation yesterday. DRI Healthcare, the external manager, has committed to full restitution of the $7.5MM in funds that may be owed to the Trust. As a result of the inflated expenses, cash flows to the Trust had been understated, which will be made whole by DRI Healthcare, although the benefit would be partially offset by investigation costs, in our view.

PT lowered to C$16. We reduce our target P/NAV multiple from 1.25x to 1.1x to reflect reduced trust in the business and uncertainty regarding DRI's ability to acquire new royalties in the near term. Importantly, we note our NAV is unchanged as existing royalty assets were not impacted by the previous CEO's actions in our view. Our P/NAV multiple of 1.1x reflects our belief that there remains a mid- to long-term opportunity as long as an appropriate successor is identified and the company successfully executes. We revise our PT from C$20 to C$16, reflecting the lower multiple.