Earnings Call: H1 2023

Sep 25, 2023

Good afternoon, and welcome to the Octopus Renewables Infrastructure Trust PLC interim results investor presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged and can be submitted anytime by the Q&A tab situated in the right-hand corner of your screen. Just click Q&A, scroll to the bottom, type your question and press send. The company may not be in a position to answer every question received during the meeting itself, however, we review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Chris Gaydon, investment director. Good afternoon. Okay. Good afternoon, everyone, and thank you for joining us for this presentation of ORIT's 2023 interim results. For those of you who don't know us, my name is Chris Gaydon, and I'm joined by David Bird, and together we manage ORIT on a day-to-day basis. I'd just like to start by pulling out a few features of the ORIT platform. Firstly, we consider ORIT to be the only genuinely diversified investment trust of meaningful scale amongst the renewable trusts. Last year, we entered into the FTSE 250 Index, which brought liquidity in alongside that scale. We've also delivered on our mandate that we set out at IPO, and that was to build a highly diversified portfolio of renewable generating projects. We're now invested across eight different countries and across multiple different technologies. We believe the combination of our portfolio and our construction-focused mandate puts ORIT in the best position to grow as economies move towards net zero. Finally, with greater than 6% income yield, this opportunity for NAV growth, as well as the potential for share price rerating as NAVs are proven in the secondary market, we think our share price is an attractive entry point at current discounts. ORIT's portfolio is diverse. It's achieved scale and provides a solid base of operational assets from which to build. We've delivered a positive NAV return of 0.9% in the period, and that's very much despite falling power prices, rising discount rates, and unusually low wind speeds, in particular across Northern Europe. The combination of a diverse portfolio and a large proportion of fixed revenues allowed us to deliver yet another fully covered dividend. Finally, the team is actively pursuing a variety of asset sale options to free up liquidity, which would allow for further growth if some of the proceeds are recycled into new construction projects. I'd now like to just give you a bit of an overview of our portfolio before David presents the interim results. On this map, you can see the industry-leading diversification and scale that we've built into the portfolio. We currently have 668 megawatts of capacity, but that's set to increase to almost 900 megawatts with the completion of the first 200-megawatt phase of the Ballymacarney solar farm, which is just outside Dublin, in the coming weeks. I'll provide an update on that shortly. Other than that, the portfolio is close to being fully operational with just the Breach Solar Farm and Woburn Road battery remaining in construction. All of our commitments in the construction of those projects are all fully funded from existing sources of liquidity. Over time, we have aimed to maintain an even split between wind and solar, and you can see we are slightly long wind, so we will be looking to rebalance that through our capital recycling and asset sale program. I will now give you a bit of an update on our construction assets. I mentioned Ballymacarney solar farm there. It is currently being built by Statkraft, and I am pleased to say that project is now complete and fully exporting, and we are just going through the administrative steps ahead of us taking ownership, which we think will be completed in early November. I also touched on the Breach Solar Farm. That project is also approaching being fully complete, and we are currently waiting for a firm grid connection date to be provided to us from National Grid. On the Woburn Road battery, that came to investment committee just a couple of weeks ago, at which point we approved entering into those construction contracts, and I am hopeful that we will see construction underway on that project during the course of Q4 this year. Finally is the Spanish solar farm. We entered into that project on a forward purchase basis, which essentially means that originally we were obligated to buy that project once it reached a ready-to-build stage. Because of the delays in development, we have renegotiated with the vendor to turn that into an option. We are no longer committed to buy that project. It is now getting extremely close to reaching ready-to-build stage, and we will be making a decision on what to do with that project before the end of this year. Just finally from me at this point, I thought it would be helpful just to show you how our portfolio's generation has grown since IPO. On an annualized basis, 2023 production is set to be around 1.1 terawatt-hours, and that is a bit lower than what we had originally planned for because of those low wind speeds across Northern Europe in the first half of this year. But we believe that once the portfolio is fully operational that will increase to 1.8 terawatt-hours, and that is once all of our projects are fully constructed and taken over. Okay. With that, I will hand over to David, who will present the interim results. Thanks, Chris, and good afternoon, everybody. In the first half of 2023, ORIT delivered a positive NAV total return of 0.9%, with dividends of 2.89 pence per share, offset by a small fall in the net asset value of around 1.7 pence per share. We have seen share prices fall, which impacted total shareholder return over the period, which was -4.9%, and that reflects a wider fall in share prices across the entire renewables sector. However, we continue to see secondary market activity for the types of assets we have within ORIT's portfolio, which support our valuations. We do not believe that the current share price represents the true value of the company. The dividends declared during the period were in line with the 5.79 pence per share target, which the board set earlier on in the period, and that target itself represented a 10.5% increase on the 2022 dividends. That increase was in line with CPI inflation for 2022. The dividends declared in the first six months of the year were fully covered by operational cash flows arising in the period, net of all debt amortization, and they were 1.7 times covered if you exclude those scheduled debt principal repayments. The increase in the dividend going from 2022 into 2023 was the second consecutive period in which the target has been increased in line with inflation. That has been facilitated by the significant level of inflation-linked revenues that we have within the portfolio. Around 55% of the forecast revenues over the next 10 years are contractually inflation-linked. Dividend cover in the first half of the year was a little lower than expected as those low wind speeds and falling power prices reduced operational revenues. However, as we look forward to the full year picture, we do expect the dividend cover to improve, all else being equal, as we benefit from a full six months of generation at the Cumberhead wind farm in Scotland. We also have those Irish solar assets, which have been generating since earlier in the summer, coming into the portfolio shortly. Looking at the NAV, it fell by 1.7 pence per share in the period from 109.4 to 107.7 pence per share. The primary drivers of this fall were an increase in the discount rates we applied to the U.K. assets in our portfolio of 50 basis points, and that led to a fall in valuation of around 2.5 pence per share. As well as that, we saw a reduction in near-term power price forecasts, which led to a fall in value of 2.8 pence per share. These falls were offset by an increase in the forecast for the green certificates, which our assets generate. The assumptions for green certificate prices have not been updated for some time. Refreshing these led to an increase in value of 4.3 pence per share. You can see here some of the high levels of fixed pricing we have available within the portfolio. 76% of the revenues forecast over the two years to June 2025 are fixed in nature, and we have a high level of fixed revenues going right out into the early 2030s. We also have a high level of inflation linkage within our forecast revenues. 55% of these are explicitly contractually inflation-linked over the next 10 years without any form of cap. Most of the remainder are power price sales, which we would also expect to follow inflation to a degree. Looking at the operational portfolio and down into the performance at that level, you can see that we have had significant year-on-year growth in the amount of output from that portfolio and therefore also the financial results. That has been reflected in the number of acquisitions that we have made since the first half of last year, as well as us successfully bringing assets through construction into operations. You can see, however, that performance was below the levels that we expected when we set our forecast at the start of the year, and that is driven by two main factors. Firstly, the very low wind speeds compared with long-term averages, and secondly, the material falls in power prices that we saw between the end of 2022 and receiving those revenues over the first half of the year, and that was particularly true in Sweden and Finland. What you can also see here is the benefit of diversification, as the solar assets within the portfolio performed very well and mitigated the lower than expected output from the wind portfolio. Finally, on this slide, I would just like to highlight some of the impact KPIs relating to our portfolio. You can see that we have displaced fossil fuels from the grid such that we have avoided 193,000 tons of carbon dioxide emissions over the first half of this year. Beyond that, we carry out lots of additional social and environmental activities around our sites. For example, we have had 360 students benefit from these activities over the first half of the year. There is much more detail on our impact activities in the full copy of the interim report available on the website. With that, I will hand back over to Chris to give a little bit more detail on our priorities at the moment. Thanks, David. I mentioned earlier that we have embarked on a capital recycling program, which is largely in response to increasing debt costs and the closed equity market. This means we are in the process of selling a selection of assets, and we will use the proceeds to first pay down our short-term debt before potentially reinvesting into further growth opportunities, such as new construction projects, which in our opinion, will be more NAV accretive than share buybacks. Our selection criteria has been targeting projects that will help us rebalance the portfolio, but also where we can crystallize construction gains, which is a key feature of our mandate. I am unable to give more granularity on the individual sales processes at this time, other than to say that we expect them to complete over the course of the next 6 months. Once our capital recycling program has released liquidity, one option we will have will be to reinvest into new growth opportunities. That is because the tailwinds in the sector remain exceptionally strong. As a society, we still need to deal with the three social issues of climate change, affordability, or energy affordability, and energy security. Renewables are a key part of the solution to all of these. In fact, according to McKinsey, the amount of capital that needs to be invested in renewables in order to hit net zero targets is at least $1.7 trillion in our target markets. The route to decarbonizing economies is through renewable energy generation. That is electrify everything that can be electrified, such as light transport, home heating, that sort of thing, and to use renewably produced molecules such as hydrogen and ammonia to decarbonize everything else. The opportunity remains, the macro tailwinds are still there, and ORIT's mandate remains as relevant as ever as the need to construct more and more renewables becomes ever more important. Why construction? We invest in construction to provide the opportunity for NAV growth, as we de-risk those construction projects and also for additionality, which is what we get by displacing existing, more polluting forms of electricity generation. Since IPO, we have delivered NAV accretion of around GBP 15 million. That is purely from de-risking those construction projects and does not include any additional NAV uplift we have achieved from contracting out the electricity supply. We will be looking to crystallize some of these gains through our capital recycling program. Probably the other theme to touch on here is that anecdotally, we are starting to see construction premiums return to the market as money is essentially getting more expensive. That provides opportunity for ORIT to drive further NAV growth into the portfolio. Finally, in other news, a couple of weeks, we were very pleased to inaugurate our Cumberhead Wind Farm, where we were joined by members of the public, elected officials, and also the Kimberly-Clark team. Kimberly-Clark, of course, is the offtaker of the power from that project. Really, one of the highlights of that event was the awarding of grants to the first recipients of our community benefit scheme. That is providing funding to individuals and organizations who are helping with the just transition, with helping the elderly stay active, and also helping with things like men's mental health. It was really fantastic to see the wider benefits that our construction projects bring to our communities, in addition to the environmental benefits of that green generation. We also have an allocation of up to 5% of gross asset value towards developers and development pipelines. We back developers for a couple of reasons. One is because it provides the possibility of additional NAV growth as the projects we are developing reach a ready-to-build stage, but it also gives us optionality over future pipeline and the possibility of avoiding competitive processes when we acquire ready-to-build assets in the future. In past presentations, I have provided updates on Simply Blue, on Wind2, and Nordic Generation. I will not touch on those here today, but I will mention HYRO, which is a partnership that we formed with RES during the period. With that platform, we are targeting industrial hydrogen production, which will be backed by government CFDs. The government is currently in the process of tendering for those at the moment. We have made good progress on the nearer-term projects and also building up the portfolio of industrial relationships that we need for future projects. Also, post the period we made a small investment of around GBP 2 million into a U.K. solar developer and co-located battery developer called BLC Energy. With that, I will pass back to David for the outlook. Thanks, Chris. If you look in a bit more detail at how we see the renewables investment market at the moment, it would be easy to fall in the trap of being a little bit gloomy around the sector, given some of the recent headlines around government sentiment, around CFDs auctions, and also clearly looking at the fall in share prices in the listed sector over the course of the last 12 months. We think to be pessimistic would actually be a big mistake. We have clearly seen inflation feeding through into construction costs and into discount rates. ORIT's valuations have actually been supported by the significant level of inflation-linked revenues within our portfolio. We have seen an impact of power prices falling in the first half of the year, but power prices do remain high for the next few years compared with historic norms, and that does support the business case for new build projects facing some of that CapEx inflation, provided that governments are listening to industry and not imposing caps on auction prices which are just too low. If we look at the future for solar and batteries in particular, we are seeing a return to the world where overall construction costs are falling rather than rising. Getting access to electricity grids does remain a key bottleneck for the sector, but this is now really well understood by governments. We have seen in the U.K., for example, National Grid beginning to take action to try and remove some of the obstructions and some of the delays in getting new projects connected. Now, whilst some of the rhetoric in the U.K. at the moment is perhaps something of an outlier, albeit that is less to do with wind and solar generation and more areas that involve direct household spending. If you look across the entirety of ORIT's broader mandate, and that broad mandate we view as very important, we see government sentiment as enormously positive behind getting more green generation built more quickly. There is a real drive from governments across our target geographies to stimulate new investment in renewables. All of that supports our belief that there remains a very significant opportunity within the sector for those who have the right skills and a sufficiently broad mandate to be able to capture that opportunity. That then leads to our concluding slide before we go to Q&A. We see diversification as being crucially important within the renewables sector, both when mitigating risks, but also to insulate from any one government's shift in policy when looking to capture future opportunities. We see ORIT's portfolio as being the most genuinely diversified within the FTSE 250 renewables trusts. If you look at dividends, ORIT's dividend has continued to grow in line with inflation and been supported by the high levels of fixed and inflation-linked revenues within the portfolio. We have new assets such as the Irish solar portfolio coming into the company to boost revenues further in the second half of the year. Right now, the level of dividend and the current share prices represents a more than 6% yield, and that is as well as the additional growth opportunities which come with investment into ORIT. We haven't focused on it a huge deal in this presentation, but ESG and impact considerations continue to remain at the heart of everything that we do, our entire investment and asset management process. ORIT is an SFDR Article 9 product for those for whom that's relevant. We've spoken quite a lot about the opportunity within the sector, particularly for those who are seeking an element of capital growth alongside their income returns, and we see ORIT as being very well placed to capture some of that growth through our focus on construction and development. But to do that does require capital, and so we're actively pursuing a number of potential asset sales, primarily focused on crystallizing some of the construction gains that we've already delivered through our NAV, and then potentially reinvesting some portion of those proceeds to deliver future growth. With that, I think we can hand back over for Q&A. Fantastic, David. Thank you very much indeed. Chris, David, thank you very much indeed for your presentation. Ladies and gentlemen, do please continue to submit your question, just using the Q&A tab situated in the top right-hand corner of your screen. Just click Q&A, scroll to the bottom, type your question, and press send. While the team take a few moments to review those questions submitted today, I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. Chris, as you can see, we've had a number of questions that have been submitted throughout today's presentation. I can just hand over to you just to either read them out or David read them out, and we'll pick up from you at the end. Yep. Sure. Thank you. Thanks, Paul. So first question that we have here is from Marshall. Is the plan to keep with a progressive dividend policy or would you consider alternative capital allocation policies such as buybacks or increasing portfolio investment? I might throw that one to David. Yeah, sure. A few things to say here. It correctly highlights that ORIT has a progressive dividend policy. Now, for the last two years, we have increased the dividend in line with inflation. The board is not obliged to do that, but it has, in making that decision for the last two years, recognized the importance of that inflation protection to investors, and I think understands how highly investors have valued that real income. That's clearly going to be an important consideration. However, the board will always have the flexibility to choose different level of increase, but we do expect to continue a progressive dividend policy. The question will come more in how capital is allocated to other things as well as dividend growth, be that new investment, paying down debt, or potentially other things such as mentioned in that question, like buybacks. But from our perspective as a management team, we think there's more accretion, more attractive opportunities available through continuing to invest for growth than there would be in buybacks at the current share price. Okay. We have a question here from Robert. Given the rising cost of wind energy developments with developers like Ørsted, Equinor, and Avangrid canceling or trying to renegotiate U.S. power contracts and U.K. government failure to attract developer bids for offshore wind projects at the recent auction. How do you see the future for this energy source and its expansion within ORIT's portfolio? I might just perhaps begin a response to that question by saying that we are absolutely convinced that if we are going to be decarbonizing economies around the world, then offshore wind will be an inevitable and a core part of that process. That's largely because of the amount of wind that you can access by developing offshore is of the scale that you need to be able to fully decarbonize economies. Having said that, the facts remain that costs have increased in the sector, and frankly, government policy has perhaps not caught up with that fact. But we do see that governments will continue to be supporting that technology across all of the markets with a coastline that we're developing in, and we think it still has a bright future. In terms of its role in ORIT's portfolio, we've made two investments with exposure to offshore wind to date. One of those was in the operational Lincs offshore wind farm, and that is a useful sort of source of yield, which underpins our dividends, in the portfolio. We've also backed a developer called Simply Blue Energy, who are developing the next generation of floating offshore wind projects, rather than the sort of fixed foundation generation that we have today. We remain very excited about the opportunity within that platform and the amounts of, I suppose, additional ocean space that the floating foundation technology opens up. I will move to the next question here from Samuel. What are you seeing in the pricing of assets you are selling? Is there a large amount of assets generally for sale due to interest rates and asset economies, sorry, asset economics for more geared operators? I might pass that one to David. Yeah. The headline on asset pricing is that we still see strong demand for assets. We continue to think that the NAV that we publish represents a good sense of fair market value. What you have seen, perhaps if you look across the wider listed alternatives space with real estate and some of the other alternative sectors, is deep discounts in share prices to net asset value, and then maybe some market activity that shows that there was a lag in net asset values coming down to where they should be, and that a fair value is perhaps somewhere between the share price and the NAV. In the renewables sector, I simply do not think that is the case. We cannot give precise detail on where we expect pricing to come out on the live processes we have right now. There will be news on that in the coming weeks and months. We are not sat here worried that our portfolio is overvalued. We think there is plenty of demand for these assets and that we would expect to meet or indeed beat NAV in selling those processes. Yes, there are assets out there on the market, but there is also a lot of money that is perhaps outside the listed sector that is keen to buy those assets and willing to pay attractive valuations. Okay. Thanks, David. Question here from Andrew: How do you view the utility scale battery investment opportunity beyond Woburn? I think just at a high level, we are confident that utility scale batteries have an important role to play in both stabilizing the grid and time-shifting energy. There is a threat that there may be a saturation of batteries which are coming to market. What we are also seeing is an increasing focus on the longer duration batteries as some of the shorter duration revenue streams are becoming well-served. From our perspective, we have already invested into the Woburn Road battery. We have an embedded opportunity to build a co-located battery alongside the Breach Solar Farm. I think our general approach to future utility scale batteries will be dependent on whether we feel that there's some portfolio benefits to be achieved by having them in the same portfolio as wind and solar generating projects. The reason why we think there might be some portfolio benefits is because, in essence, as renewables continue to be built out, they are zero marginal cost generation. They can lead to lower power prices, and increased volatility, and batteries benefit in that sort of environment. So it provides a bit of a natural hedge. Also, if the renewable rollout is slower than what we currently expect, then there might be less volatility for batteries to take advantage of, but higher power prices as a result for the wind and solar farms to benefit from. So that, in essence, is our view on batteries. One thing I might just add on that is, so when we're thinking about the investment opportunity in battery storage, we're thinking about it in just the same way we do with our renewable generation investments, in that every deal has to represent attractive value. In both sub-sectors, we see a lot of opportunities that we don't feel represent the best value. In the renewables sector, a lot of processes are run with a third-party M&A advisor running a very highly competitive process. We've never bought a large volume of assets from those kind of processes. We've bought our renewable generation assets mostly in bilateral processes or processes where a developer has gone to a handful of investors and hasn't appointed an M&A advisor. We've seen exactly that same dynamic in the battery storage sector, where a lot of the assets that have come to market and a lot of the prices that have been paid have perhaps been more expensive than we'd see value at. When we're looking at new opportunities, we'll have that same mindset. Where do we see value? It's unlikely to be in widely competed processes. It'll be in those bilateral opportunities that we're able to find. Okay. One last question here from Xander. What's our view on the U.S. market and attitude to entering it? David, do you want to have a first crack at that? Yeah. First thing to note is that at the moment, the U.S. is not within the mandate for ORIT. Our wider team does manage some other money that can invest in the U.S. Clearly, the U.S. is a huge market. So one where there is lots of opportunity. It is one where we have a team on the ground and have the experience to be able to originate and transact on assets there. It is one where the government measures through the Inflation Reduction Act have created real momentum behind the transition in creating jobs, not only in generation, but also in areas like storage and hydrogen. So there is plenty of opportunity there, and it could be a really interesting expansion to the mandate in due course if the board wanted to consider that. That said, we do not see it as something that ORIT needs to do in the very near term because there is more than enough opportunity in our existing mandate and within our existing target geographies of U.K., Europe and Australia. Thank you very much. I think that covers off all the questions that we have received. Of course, any further questions that do come through, the team will be able to review those. We will publish responses where appropriate to do so on the Investor Meet Company platform. Chris, David, thank you very much indeed for updating investors today. Could I please ask investors not to close the session, as you will be automatically redirected to provide your feedback in order that the team can better understand your views and expectations. This may take a few moments to complete and is greatly valued by the company. On behalf of the management team of Octopus Renewables Infrastructure Trust PLC, I would like to thank you for attending today's presentation and good afternoon to you all.