Dri Healthcare Trust T.DHT.UN

RBC 2

[retiredcf]

Their upside scenario target is $21.00. GLTA

November 7, 2024

Outperform

TSX: DHT-U; CAD 13.25

Price Target CAD 17.00

DRI Healthcare Trust

Income & cash receipts ahead of estimates while adj. EBITDA missed due to one-time costs 

Our view: Q3/24 results were mixed with total income of $41.6MM, ~4%/2% above consensus/RBCe, cash royalty receipts of $38.9MM ~3%/ ~6% ahead of VA consensus/RBCe, while adj. EBITDA of $31.3MM was ~6%/~2% below consensus/RBCe, impacted by certain one-time expenses during the quarter (~$2.2MM). Management noted a robust deal pipeline of ~$3B. While the units have closed the majority of the discount to RBCe NAV following the abrupt CEO departure this summer, we would expect the units to eventually trade at a premium to NAV as the company demonstrates continued execution.

Key points:

Total income (revenues) and cash royalties ahead of consensus and RBCe.

DRI reported total income of $41.6MM, ~4% ahead of FactSet consensus ($39.9MM) and ~2% ahead of RBCe ($40.9MM). 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 $38.9MM, ~3% above Visible Alpha consensus of $37.7MM and ~6% above RBCe ($36.8MM).

Adj. EBITDA impacted by certain one-time costs related to the investigation. Adj. EBITDA of $31.3MM was ~6% below FactSet consensus ($33.2MM) and ~2% below RBCe ($31.9MM). Management noted a ~ $2.2MM (net impact) in one-time charges related to legal and investigation related costs. The adj. EBITDA margin of ~80% increased q/q (~77% in Q2/24).

$3B+ deal pipeline: DRI noted a robust deal pipeline of more than $3B in potential opportunities. While management noted signs of recovery in biotech as the market prices in expected cuts in interest rates, there remains an immense backlog of companies with significant financing needs.

Estimate revisions. We have updated our estimated NAV for DRI’s royalty portfolio as of Q3/24A and have made slight revisions to our outlook for Omidria and Oracea given weaker-than-expected royalty income generated by these assets offset by slightly stronger Orserdu outlook, which reported better than estimated royalty income and receipts (aided by strong ex- US performance per management). For Orserdu, we were previously forecasting a ~$10MM milestone income to DRI and also a ~$10MM payment to Radius in Q4, both of which we have removed. While on a net basis, these milestones did not impact our valuation and price target, our Q4/24 revenue and adj. EBITDA metrics reflected the ~$10MM in milestone income to DRI. Based on these revisions, our PT remains unchanged at C$17, which is based on an 1.1x 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.

Additional takeaways from the Q3/24 results

Incremental Oracea impairment (~$0.9MM) during the quarter. The company recorded a further impairment of ~$0.9MM related to the Oracea royalty asset in Q3 (~$6.1MM in 9MCY24). The net book value of the Oracea royalty asset as at September 30, 2024 was $15.4MM (~2.1% of net book value of royalty assets as of Q3/24). The Oracea royalty asset could potentially see further impairment given the "at-risk" launch by generic companies. Oracea represents <1% of RBCe gross NAV. On September 5, 2024, the Federal Circuit heard oral arguments in the Lupin appeal and DRI management expects a decision in the coming quarters.

Balance sheet, NCIB and dividend update. DRI ended Q3/24 with cash on hand of $89.4MM and had drawn $231.3MM under its credit facility as of Q3/24 (vs. $481.6MM in total available credit, which was increased to $631.6MM post-qtr). QTD in Q4, DRI has deployed $157MM in royalty acquisitions (Casgevy: $57MM, sebetralsta: $100MM) and $5MM in a private placement equity investment transaction. The company paid its previously announced regular dividend of $0.085/unit on 18-October to unitholders of record as of 30-September-2024. Today, it declared a cash dividend of $0.085/unit for Q4/24 payable on 20-January-2025 to unitholders of record on 31-December-2024. During the quarter, DRI repurchased 198,746 units at an average price of C$11.92 ($8.72), for a total consideration of ~$1.7MM.

Q3/24 cash royalties ahead of RBCe and consensus

DRI reported total cash royalty receipts of $38.9MM (+54% y/y), ~3% above Visible Alpha consensus of $37.7MM and ~6% above RBCe ($36.8MM). The +54% y/y increase in total cash royalty receipts was largely due to increased contributions from new royalty assets (Orserdu II and amendment of the Omidria royalty transaction vs. previously capped receipts on Omidria). The y/y performance was also aided by the increase in cash royalty receipts of Empaveli and Syfovre as cash royalty receipts returned to a two quarter lag vs. a three quarter lag in Q3/23; and an increase in Orserdu I royalties due to the drug’s launch into Europe and RoW markets partially offset by a) increased competition and genericization of Oracea; b) the expected step-down in royalty entitlement for Rydapt and c) the expected impact of increased competition on the sales of Spinraza.