Altius Renewable Royalties Corp. (ARR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Q4 2021 results. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Ms. Flora Wood. Please go ahead.

Thank you, Patricia. Good morning, everyone, and welcome to our Q4 year-end 2021 conference call. Our press release -- our press release and filings, including the AIF were released yesterday after the close and are available on our website and on SEDAR. This event is being webcast live and you'll be able to access a replay of the call along with the presentation slides on our website. Brian Dalton, CEO of ARR; and Frank Getman, CEO of Great Bay Renewables, will both be speakers on the call, and then the Q&A, there will be joined by Ben Lewis, CFO of ARR. The forward-looking statement on Slide 2 applies to everything we say in our formal remarks and during the Q&A. And with that, I'll turn it over to Brian.

Thank you, Flora. I'll keep my comments today fairly brief in general. I know it's -- Frank that you're almost keen to hear from in terms of our business development. What I will say is that 2021 was a very pivotal year in the history of this business. And I say that because I feel it was the year in which our royalty financing products really gained a toehold in the renewable energy sector. For several years leading up the major challenge we faced was in getting players within the sector to take the time to learn how royalty funding would fit in the capital structure. It involved a lot of cold calling, the perseverance of Frank and his team is now really paying off. Most of the renewable sector in the U.S. anyway now is awareness that our royalty funding is a new tool available to them in funding projects and all told, that it has a wide range of potential applications. In other words, we believe that our innovative often bespoke structures and solutions have reached a point of early adoption and acceptance. I cannot commend the entire Great Bay, New Hampshire team enough for this accomplishment. Personally speaking, it has been an incredibly fun and exciting thing to be part of. The past quarter may have seemed relatively quiet from the outside looking in, particularly as compared to the flurry of deal announcements -- announcements we made in Q3. Q4 was anything required internally level. In Q3, several deals closed that were the result of initiatives that were begun earlier in the year. With those closings, we essentially began a new cycle of deal originations, much of it, in fact, stimulated by the attention of those announcements through across the sector. Each of these new initiatives take time to properly advance. As in most cases, the challenge we are trying to help our potential counterparties address, requires specific tailoring were focused on forming long-term partnerships. Several opportunities are currently being advanced, and I would say the team is now busier than it's ever been to the point that new people are in the process of being added to lead particular files. While there is never an assurance that deal work will lead to closings, we are optimistic that '22 is shaping up in a great year. Finally, I continue to be amazed at how rapidly things are evolving within the broader sector and the pace at which our team is adapting to these changes with real-time solutions for our partners. And with that, I'll turn it over to Frank.

Thank you, Brian. What I'd like to cover today, I'd like to provide an update on our progress in 2021, an update on the current state of our growing royalty portfolio, and I'd like to provide a few comments on the state of the renewables market in the U.S. and how that's evolving, and then the implications and prospects for our business moving forward in 2022 and beyond. On the progress update, 2021 was a fantastic year on that front. Deployment and new investments, creation of new royalties from our developers and internal execution from the team, was just amazing to get this all accomplished. On the developer front, when we started, we were focused on providing early-stage development capital. The program proved quite fruitful in 2021. Our partner, TGE, sold 5 projects in 2021 and that's for a total of 8 projects sold with royalty since our initial investment. And we received 3 royalties from our deal with Apex. So we have 11 total developer royalties to date. On new projects, investing royalty capital on new projects. That was a new market that we added in 2021, investing in projects at NTP or COD as part of our target market. In that category, we did the Longroad deal, which was a $35 million investment in their 250-megawatt Prospero 2 solar project. And then on operating projects that our Northleaf deal was a good indication of that. It was an investment in 2 operating wind projects and 1 operating solar project for a total of $52.5 million. So between Longroad and Northleaf, we've deployed $87.5 million in operating projects. Those investments provide near-term cash flow unlike our development royalties. And opening up these new and operating projects target markets as potential investment opportunities is a big deal when you look at our addressable market. Now not only every development stage, preproduction project is an opportunity, but every existing operating project is now a potential target for Great Bay, as a reinvestment opportunity. As I'll discuss in a moment, we expect this segment of new and operating projects to be an important part of our business in 2022 and beyond. When we look at our diversified portfolio, when we set out to build this company, we had the vision and goal of creating a deep and diversified portfolio of renewable energy royalties. We felt then and continue to believe that the royalty model is simply a better way to invest in renewables. In 2021, we made great progress toward building that highly attractive diversified portfolio. We now have a royalty portfolio of 16 royalties, totaling over 3,500 megawatts, that's 72% wind, 28%, solar and about a little less than 1% hydroelectric. It's spread across 5 different states and 4 different power pools with 9 different sponsors, owners, who are ultimately -- they are ultimately our long-term counterparties on these royalties. So we're well on our way of building a highly attractive diversified portfolio and diversified across technology, regions and counterparties. I'd like to turn to the current state of the renewables market in the U.S. So there continues to be an insatiable demand for shovel-ready and renewables projects. Virtually everyone in every industry are seeking to reduce their carbon footprint. So the demand is -- remains very, very high. There's continued strong demand from commercial and industrial buyers for renewable energy, either through corporate PPAs or in some cases, direct investment in projects. That's the Amazon, Googles and Microsofts of the world. And then on the investor side, there's strong investor demand to invest in these projects. I'd like to address a couple of headwinds that the industry is facing -- started to face in 2021, and it's continued into 2022. I'd note that the interconnection backlog in several regions in the country, particularly PJM and SPP is probably the single biggest issue facing the industry and supply chain constraints. Solar panels out of China are a particular issue. And these headwinds are causing delays in projects coming online, but actually, is I guess, this would be a good place to note that we did get an update in Q4, which caused some of the projects that TGE is working on particularly in regions to be pushed out a bit in their expected COD date due to some of these issues. And that is in part why the revenue forecast for the year was adjusted. But I would note that, that in no way affects our ultimate return, because that just means that the always more royalties. And I guess as we're turning from a preproduction or a pre-revenue company into a revenue company, I guess, I'd caution about trying to put too fine a point on exact COD dates for these development projects. I guess I'd stress that investing in developers, the reason that we structured our deals the way we did, where -- it's not tied to certain dates, and we're covered if there's delays in that we don't give them credit for the royalties until they're 6 months post commercial operation. It's the things that are happening now in the industry that are causing delays as the exact reason why we structured the deal the way we did. So -- a couple of other things I'd note, face headwinds facing the industry, some headwinds or some tailwinds, I guess, depends what side of the ledger you're on. Rising inflation, rising interest rates, rising energy prices and for the first time in some time, we're seeing merchant power prices starting to move up and more and more players are wanting and seeking to have increased merchant exposure. And I guess this is a blessing or curse depending on where you sit, as Brian has talked in the royalties love inflation and higher prices. So while these things could create some delays in higher cost, the higher prices ultimately are beneficial to a royalty. I'd like to comment on the increased merchant exposure we're seeing in the market. And with rising prices, there's more desire from project sponsors for exposure to market prices rather than locking everything down to long-term PPAs at low prices. More and more sponsors are either leaving some of the output, subject to market prices from the beginning of operations. If you look at our Prospera 2 investment, that 30% of that project is merchant from day 1 or they're seeking to unwind hedges on existing projects in full or prior, particularly if their shape risk or minimum delivery requirements on those hedges. Overall, this movement towards more market price exposure for the offtake of these projects creates an opportunity for us. What's happening is these projects can't use as much leverage as they may have in the past, with the long-term PPAs due to the perceived risk. So they need sources of capital to fill the hole in the capital stack. The sponsors can write a larger equity check or use in our case royalty financing to help fill that gap. And also if an owner is seeking to unwind a head, so sometimes we'll need to come up with a cash payment to do that or they can use equity or they can use our capital. So the increased merchant exposure is creating an opportunity for us to invest directly in the capital stack at the projects, where historically, we invested in the capital stack of the developers. So the implications for these -- the current state of the market is what we're calling a barbell approach, where on the developer front, if you look at developers with larger pipelines, who previously needed capital to advance our pipeline, they're being pursued by larger strategics and institutional investors, who are willing to write big checks to basically buy their pipeline at an early stage. These institutional and strategic investors used to buy projects, now they're looking to buy more of the entire pipeline of projects. And this is a fairly recent change in the competitive landscape and it has made the developer pipeline deals, which is where we started, more difficult for us, because our capital that we're competing against folks are trying to buy the entire pipeline. Our response has been to seek earlier-stage partnerships with good developers, who don't yet have a large pipeline and partner with them to help build the pipeline of projects on which we receive royalties. It's similar to our concept with our TGE and Apex deals and that we're looking at preproduction projects. It's just a bit earlier. It's not too dissimilar to Brian's very successful project generation business. He's used with Altius and base metals to essentially create their own royalties. At the other end of the barbell, later-stage development or operating projects, where we're part of the capital stack of the project themselves, not the developers' capital structure, our long road and Northleaf deals. Interestingly, when we started this business, this is where we wanted to invest, but the market at the time was too competitive and the returns too low to invest in operating projects. That's why we initially started with our developer deals. But now with shorter-term PPAs, more market price exposure, these projects are perceived as higher risk by the banks, so the project sponsors can't use as much leverage and we have an opportunity to invest directly in operating stage projects. These are generally larger checks, larger investments, and they provide near-term or immediate cash flow as compared to our developer deals. So that's basically our barbell strategy given current market conditions. Earlier-stage partnerships with developers to help create a pipeline of projects and royalties and direct investments into later-stage development or operating projects. We've been hedged down in Q4 and thus far in Q1, refilling our pipeline of potential investments pickups. As Brian mentioned, we've got a number of active discussions underway, and we're confident we'll be able to continue to deploy capital throughout 2022 and beyond. The renewables market continues to evolve, but it's evolving in a manner that requires new and innovative sources of capital, such as our royalty financing. And I'd like to just make a couple of final comments about our overall structure in our partner like Capital in general and why I think we're having success in gaining adoption. Our royalty financing represents long-term flexible partner like Capital. In every one of our investments to date, the counterparty had something unique to them where we were able to structure or shape our royalty investment to address their specific needs and still achieve our investment objectives. We're looking to build long-term relationships where these counterparties look to Great Bay for their financing needs again and again. This isn't a short-term trade for us. We're offering permanent non-dilutive partner like Capital. I think this is a big part of what differentiates us in the market and it's part -- a big part of why we're having the success that we are in gaining growth and adoption. That's it for my update. I'll turn it back to you, Brian.

Thank you, Frank. We've got some time for questions. Operator, if you could maybe put some of those to us.

[Operator Instructions] Your first question comes from the line of David Quezada from Raymond James.

My first question here, just on the topic of rising merchant power prices and just thinking about your business, I guess, from a high level, strategically. I'm curious if there -- if you're exploring or if you see any other ways to potentially get more exposure to higher merchant power prices, be it providing funding to projects that may be coming off contract that are owned by an entity that needs capital, or even repowering type projects that are outside of assets you already have royalties on. Just curious how you can position yourself or if there is any way to try and take advantage of those higher prices.

Yes. That's a great question. 100%, we are talking to folks who -- projects that may be later in life and they only have a shorter time that's on their PPAs and traditional sources of capital, bank debt would want to see them go lock that up. Well, these owners are less willing to do that, as they see the tide is turning in their direction and that merchant tail, so to speak, that you referred to, could have real value. So whether it's repowering or maybe it's almost like we could provide capital almost like a cash out refi to invest in the future of the project. Those are real opportunities. And I think going forward, that's only going to become a bigger part of our business, but it makes sense that at this point, because in the renewables industry, there's only certain projects now that are hitting that period. Because remember, when we started in this business, everything was locked up under really long PPAs and the PPAs duration has gotten shorter with time. So the window for those projects to move through the, the time life or the life cycle of these projects is just starting to happen, and there's a huge backlog, I think, of opportunity for -- as time moves forward, for us to invest in those type of opportunities. So we have some going now and I expect us to have more of those conversations moving forward.

I'd just add, David, that it's happening naturally. I mean let's say that we are passive here. And I think our exposures will evolve with the market and the market is definitely going [indiscernible]. I mean sure, we can pick and choose between projects that have more or less merchant exposure. But overall, I think we're aiming for some balance probably in the same way that many of the project operators are, but just naturally sector as a whole, becoming more price exposed, which is -- which I think is a natural and a good thing, not dissimilar as I said many times before, to evolution we would have seen even in industries such as the gold market that had incredible impact in terms of making royalty financing become mainstream and establishment.

And it has a direct impact on the sources of capital available. I was on conference recently, and I heard a very large bank say that with merchant projects, they haircut the merchant curve by 20%, and they reduce their leverage ratio from 80% or 70% down to 50%, but that creates a hole that has somebody has to fill.

Absolutely. That's great color. And then maybe just digging into your comments around the barbell approach and specifically what you're doing to help developers build the pipeline. Just maybe add more color on exactly what kind of activities you're doing there and how that -- what kind of attention does that take? And who are you backing in terms of early-stage developers?

Yes. I can't provide specific needs at this point, but it's really finding -- this industry is really -- development is all about people. So when we find an earlier-stage team, and we've been in this a long time, and we think that they have the skill set to be successful or someone in some cases, when some of these larger developers are acquired, maybe some of the fruits of that purchase don't filter all the way through the organization, the way everyone would like and there's teams that want to spin out and pursue things on their own. There's lots of -- there's new developers getting into this business. We're not going to develop -- support someone who doesn't have any experience, so we don't feel confident, has a strong track record. But there are becoming more and more opportunities -- and it is a little different. We're having to look at that and say it's almost -- we're learning from Brian's experience and project generation, it will be -- the deal structure would be something that will provide you flexible capital, but we get a royalty on a certain number of gigawatts that come out of your pipeline and we'll get an equity kicker as part of that as well or something on those lines. Because it is a different stage investment, and I think that our investment return profile needs to reflect that.

Yes. And I'd add -- and main thing that's happening over the course of the year, I mean, we would have talked even at the time of the IPO about capital for developers being difficult and expensive to combine, probably a little too easy for construction and operating stage. We feel like that's reversed to some degree, and you're seeing some of the deals in the market with development portfolios are trading at enormous valuations right now, but it's become a little more difficult for operators, particularly those that want market exposure. But we've learned and evolved as well. I mean our focus on developer deals early on was heavily, heavily based upon getting our comforts from the scale of the portfolio that these groups held. But as time has gone on, we've continued to learn and I think we've probably evolved more to the point that it's a belief now that we're investing as much in the people that put projects together, as we are projects -- and projects, just things on paper until they're not, the people that turn them into real game. So just a little bit of evolution along the way and some -- certainly some evolution in the markets, and relative valuations. And we could be on here in 2 quarters and talking about that haven't completely reversed again. Whatever it is, but overall with it.

I guess that's just -- I'm excited that we're able to use our structure and have found different spots as the industry evolves, we've been able to evolve our structure to be able to participate where we see the best opportunity and the best value. That's what's most exciting to me.

And we have your next question coming from the line of Rupert Merer from National Bank.

Wondering if you can put some goal posts on the amount of investment that you could make this year. You have a fairly strong balance sheet. You've also issued a prospectus recently. How long could it take for you to deploy the amount of capital you could have available?

Well, I think we said when we -- at the time of the IPO that we were going to have everything deployed in 12 to 24 months. So I think we're well on track to meet or exceed that. We're in about 12 months in right now.

It's a hard question. There's lots of yield origination in the pipeline and if it all works out, we'll likely overshoot, but again, it's just not something we can -- or prepared to make promises around. Deals aren't done until they're done.

Right. Okay. Fair enough. And then on the pipeline, you talked about the barbell strategy and you really had a more, say, diversified. The types of projects in that pipeline, what does it look like today? How many opportunities are you finding in these, say, earlier-stage investments versus late stage?

I think it's going to -- I think it's reasonable to assume that the lion's share of the dollars deployed will likely be in the later-stage projects right now, because that seems to be -- the earlier stage ones they take longer, right? Because it's more of it's a partnership, there's a lot more making sure. When you're investing into an operating project, you can really get your arms around that project, how it's performing, what the market is in that area, and so forth. So I would expect that the lion's share of our investment will occur into the operating project side or the new project side. I don't want to -- I do love this idea of having this barbell approach and having some of these earlier-stage investments that will pay out over time. Because as we're seeing, there's a lag between -- when you invest in a developer to when they actually get a project across online or multiple projects, where you actually have a cash flow and royalty, there's a lag, and it's hard to predict. So -- but I do like having those -- that kind of built-in pipeline of royalties that are coming over time.

Great. And how do you consider the risk from merchant. You mentioned how the big banks might handicap the potential returns on the market price, for example. What's your own internal process? And how do you handicap those returns? What sort of returns do you think you can target in the future? Could they be better than what you targeted on your, say, developer pipeline historically?

Yes. I don't know that they'll be better. I think they'll continue to fall in that range. I think when we look at the -- there's basically 2 or 3 large forecasting agencies everyone looks to for their forward price curve and then people make their own assessment and judgment of those. My experience over time, and this is going back 20 years, has been that they always are slow to appreciate when things turn up, and they're slow in adjusting their curves, and then they stay too long on the other side after a period of higher prices when things start to go the other way. They're too slow in adjusting downwards. So there seems to be a lag. I feel like we're just at the beginning stage. So there's been some modest adjustments in their forward price curves, but I think all signs at least seem to me to be pointing to continued upward pressure on merchant prices.

And your next question is from the line of Nick Boychuk from Cormark.

First question on the barbell approach. One of the questions I was going to ask is if you participate in the equity upside the potential exit of those early-stage developers. Can you comment on what that return profile might look like? Obviously, if you're going for 8% to 10% on your prior developers, would that be magnitude higher?

Well, who knows, right? You that's -- it's a function why it's equity investment versus the royalty or something with a little more certain cash flow profile. I mean, who knows what the market is going to hold in the future. But the current valuation of these developers is very, very high. So my simple logic is that we can participate in that. But again, we're not running their businesses for them, but make certain investments and partnerships with top quality teams and get our royalties and then have a participation in that. It could be lucrative, but that's really hard to -- try to say what that return will be. It's going to -- I'm sure that if you had talked to Apex a few years ago, they wouldn't have expected the kind of price that -- the kind of prices we're seeing today, but who knows what that might be in the future. I just think it's smart for us to have some alignment there, so we have some participation and we're going to help create these pipelines and provide the capital to do that. I think we should participate not only on the royalty side, but have some exposure. We're in it for the royalties, but have some exposure to the equity side.