Welcome everyone to the RE Royalties third quarter 2023 conference call. Joining us today are Bernard Tan, CEO, and Peter Leighton, COO. All company executives will participate in the Q&A session after management's formal remarks. As usual, before we get into opening remarks by management, I would like to remind our listeners that our comments and our answers to our questions will contain forward-looking information. This information, by nature, is subject to risks and uncertainty that may cause stated outcome to be to different materially from actual outcomes. For further information on risks and uncertainties, I'd encourage you to read the cautionary notes that accompany our third quarter MD&A, and the related news release, as well as the risk factors particular to our company. I would also like to point out that we will use various non-GAAP measures during the call.
You can find explanations and reconciliation regarding these measures in related news releases. Following the open remarks, we will address some previously submitted investor questions, as well as those that come through Teams. If you would like to submit a question, please use the Q&A function in time, in Teams. If we do not get to your question today, please email info@reroyalties.com, and we will be happy to follow up with your answer. Now, we'd like to turn the call over to the CEO, Bernard Tan. Please go ahead.
Thanks, Melanee. Good afternoon, ladies and gentlemen. Thank you for joining us today, and welcome to the RE Royalties 2023 third quarter results conference call. Joining me today is our Co-founder and Chief Operating Officer, Peter Leighton. Our Chief Financial Officer, Luqman Khan, is currently traveling and unfortunately will not be able to join us today. Peter will start by highlighting some of the key investments that we made during the quarter and also provide an update on our investments and backlog. I will then provide a summary of our financial results for the quarter, and we will wrap it up with questions from the audience. Over to you, Peter.
Thank you, Bernard, and thanks to everyone for joining us today. During the third quarter, we announced two new investments: one with a new client and a second investment with an existing client. The first investment we made in Q3 was with Clean Light, a high-growth clean technology company and manufacturer of mobile solar battery systems, including solar lighting towers and solar hybrid battery generators. CleanLight was founded in 2019 in response to customer needs in the mining sector for off-grid lighting and communications towers, without the costs, emissions, and maintenance challenges of diesel-powered options. CleanLight solar towers are priced competitively to diesel options, passing significant fuel and maintenance cost savings on to their customers, in addition to environmental benefits. The U.S. dollar $3 million loan and royalty acquisition will allow CleanLight to further expand and grow their customer base in Latin America.
The CleanLight loan has a two-year term and bears interest at 12% per annum. The company also acquired a gross revenue royalty of 5% for a period of 10 years for U.S. $200,000, and the royalty rate will reduce to 3% after certain revenue milestones are met. The second investment we announced in Q3 was with an existing client, ReVolve Renewable Power Corp. ReVolve is a North American renewable energy developer with 2.8 GW of wind, solar, and battery projects under development in the USA and Mexico. We provided a loan of CAD 4 million for ReVolve to acquire a minority ownership, 21%, in two operational run-of-river hydro projects in British Columbia, and a majority ownership, 51%, in an operational wind project in Alberta.
The combined gross capacity of these three projects is 23 MW. The hydro projects receive revenue from power purchase agreements with BC Hydro, Hydro, with remaining terms ranging from 32-35 years, and the wind project receives revenue under a contract with the city of Medicine Hat, with a remaining term of 11 years. The company will receive a gross revenue royalty of 0.5% on the projects during the term of the loan, growing to a gross revenue royalty of 1% upon repayment of the loan. This royalty will run over the remaining life of the contracted revenue. The loan will have a term of 3 years and bear interest at the rate of 12% per annum, compounded monthly and payable semi-annually.
At the end of September, we have 113 royalties under contract, covering projects that generate solar and wind energy, projects that convert waste to energy, storage projects, and energy efficiency projects. Cumulatively, these represent approximately 400 MW of clean energy capacity, generate approximately 1 million MWh of clean energy. This is enough clean energy to power approximately 133,000 homes, offsetting approximately 420,000 tons of CO2 emissions annually. We continue to make progress converting our project pipeline and backlog into royalties under contract. The following opportunities are potential investments where we are in detailed due diligence, including site visits with the client. First one is a construction financing for a solar project currently under development in Alberta. Second one is an equipment financing, investment for a network of electric vehicle chargers in the Midwestern United States.
The third opportunity is equipment financing for a landfill gas capture project in Missouri, United States. And the fourth opportunity is the construction financing for a portfolio of solar projects in South Asia. These opportunities are under evaluation and are still subject to completion of due diligence, definitive documents, conditions precedent for each transaction, and ultimately, approval of the company's board of directors. There is no assurance that any of the opportunities under evaluation will result in a completed transaction. I will now pass it back to Bernard to discuss the financial results for the third quarter.
Thanks, Peter. For the third quarter of 2023, we continued growing the company's revenue and income. Revenue and income for the three-month period ended September 30th, 2023, was CAD 1.9 million, compared to CAD 1.3 million for the same period last year, for an increase of 47%. On a year-to-date, nine-month basis, revenue and income, including the income from OCEP, was CAD 7.2 million, compared to CAD 3.1 million in the past year, for an increase of approximately 128% year- over- year. This increase in revenue in 2023 was due to additional investments that we have made over the course of the year, such as those with CleanLight, Ticos, ReVolve, Delta, and Alberta Wind earlier this year.
Expenses for the quarter was CAD 694,000 , which also includes CAD 113,000 for non-cash, share-based payments recognized due to option issuances earlier this year. This number, CAD 694,000 , compares with CAD 490,000 for Q3 in the prior year. Compared to the prior year, the increase in expenses were due to, one, additional marketing costs for attending investor conferences during the quarter, two, additional staff, and three, higher audit fees. Net loss before income tax for the quarter was CAD 2.6 million, compared to net income before income tax of CAD 492,000 in the prior year. On a year-to-date basis, net loss before income tax was CAD 884,000 , compared to net income before income tax of CAD 168,000 for the prior year.
Net income was negatively affected for the quarter and year to date by a CAD 3 million loan loss provision we recorded on our investment in FuseForward. During the quarter, the company served a notice of default to FuseForward for continued delinquency of outstanding payments and delays in FuseForward's efforts to recapitalize its business. Due to a deterioration in overall capital market conditions, various recapitalization initiatives by FuseForward did not and may not materialize in the foreseeable future. As such, the company began legal proceedings to enforce its claim as a senior secured creditor to recover the amounts owed. The company has recorded a full loan loss provision, as there is uncertainty surrounding FuseForward's ability to continue as a going concern, and also ability to repay the amounts owing to the company.
FuseForward investment represents approximately 5% of the company's overall assets, and while the results on FuseForward are disappointing, the rest of our diversified portfolio remains resilient to the volatility and uncertainty currently in the capital markets and economy. As at the end of the quarter, the company had CAD 15.2 million in cash available on our balance sheet. We expect to invest the remaining cash on our balance sheet in the coming weeks and months on opportunities such as the previously announced transaction with ReVolve and the backlog of potential opportunities mentioned by Peter earlier. The additional investments will help grow our revenue, and we expect higher revenue and income, along with cash flows, in the upcoming quarter. So with that, I would like to thank everyone for the time they took to join us on the call today.
This concludes the formal part of the conference call, and we will now turn it over to Melanee for submitted questions. Melanee, over to you.
Yes. Yes, thank you, Bernard. Our first question for today is, what went wrong with the FuseForward facility?
In terms of the FuseForward, when we originally provided the facility, it was for FuseForward to grow a certain segment of their business. They had acquired a new business, which required substantial amounts of capital. When that new acquisition created a lot of cash flow pressures on the overall business, and over the course of the last two quarters, FuseForward was in the process of selling one of their cash-flowing subsidiaries. FuseForward was actually able to secure a buyer in the preceding quarters, which gave us confidence that they would able to complete the sale, and the proceeds from that sale would be used to repay our loan.
However, due to current market conditions, that transaction was unfortunately unable to complete with the identified buyer, and as such, we had issued a default letter to FuseForward. We are currently working with FuseForward along with our legal counsel in looking at various options on realizing on that security.
Thank you, Bernard. The next question is: How does FuseForward facility loss affect the company's growth?
... While the results are disappointing, it really does not have a material impact on our growth. As previously mentioned on the formal part of the call, we currently have CAD 15 million in cash. We have a lot more opportunities than that. Once we are able to deploy that cash, on an annualized basis, that would add an additional roughly CAD 2 million to our top line and also bottom line. So once we are able to deploy that, you know, we do expect our results to improve in the upcoming quarters ahead.
For the third question. Bernard, we're just waiting for the third question here. Just hold one second.
Sure.
Okay, Shane, can you go ahead?
Sorry, can you hear me now?
Yes.
Great. Thanks. Bernard, I was wondering how the pipeline has been looking with the higher interest rate environment. Have you seen a lot of projects fall off in terms of, you know, the higher hurdle rates and higher cost of money? Have you seen the field narrow a bit in what you're looking at?
Yeah
... in terms of projects?
Yeah, no, that, that's a great question, Shane, and I'm actually gonna pass it over to Peter, who is, I guess, drinking from a fire hose in terms of opportunities. And he can talk a little bit about the impact of higher interest rates and what we're seeing and the opportunities coming at us.
Yeah. So, Shane, I think it's fair to say that the high interest rate environment is definitely changing investors' attitudes. So we are seeing, yeah, tremendous turn to cash in the investment market, which has an interesting impact, in that it's actually driving more business our way because it's more difficult for some of the developers who are out there, who are maybe planning to do an IPO or planning to do an equity raise. They're having trouble in the equity markets. Funds are all having trouble getting cash. So, so I think the opportunities are actually expanding quite a bit. We have over CAD 200 million in our pipeline of projects we could proceed with. And the challenge now is for us to find that capital. But...
That higher interest rate environment is actually driving more business our way.
Has it led to higher return potential? What I'm, what I'm talking about is the arbitrage between, let's say, the rates on green bonds, for example, and then the required hurdle rates that are out in the marketplace. Simple cost of money, right? Are you seeing that there's more opportunities to drive even higher ROIs in this environment with, you know, the spread, let's say, increasing between those, those two forms of financing?
And the answer to that is yes. Yeah, so-
Good. Good
... which is a, you know, it's a great position to be in, where, you know, there's lots of good things happening in the renewable sector that's driving, demand for renewable projects. And so, yes, we are able to extract a little more value than... and, and commensurate with the increase in capital costs.
Yeah. But that being said, Shane, you know, we are very cognizant on our own capital costs, just given, you know, where equity prices are. So there is also a sensitivity side on our side to ensure that we are able to capture that spread and hopefully also expand on it on behalf of our shareholders. But yeah, it in terms of the outlook, you know, I think part of our business is a bit contrarian in that, and we are finding that there is a tremendous you know, set of opportunities, you know, I would say, that we haven't really seen in the last two to three years.
Great. My last question is, you guys are pretty diverse in the types of projects that you engage on, but is there anything out there in the pipeline in particular that you see as being an area that you're looking at a lot more projects, you know, be it charging or utility scale? Just some framework on what you see out there for some of the, let's call them, the hotter sectors with better opportunities and projects.
Yeah. So I think, again, you know, we continue to see a tremendous interest in battery storage, distributed generation behind the fence, prospects-
Mm-hmm
... which are where the end customer is asking for it, instead of a utility. So the good news with that is it speeds up the sales cycle tremendously. If you've got a developer who's selling to Amazon, they move a lot faster than, say, BC Hydro or Ontario Hydro or the large utilities in the U.S. So I think that section of the market has... And we're seeing that internationally as well, that direct sales to end customers is speeding up the development process.
Yeah. We are also seeing a lot of solar, especially in the last few months. Requirements for things, you know, like interconnection deposits, which we have done several times with groups like Belltown and Ticos historically. So we are seeing, you know, I would say, fairly across the board. But, you know, as Peter indicated, battery, solar, distributed generation has really sort of been the key technologies. And also, I would also say from a geographical standpoint, a lot of the opportunities that have sort of approached us are on our radar are primarily in the United States.
Great. Thank you.
Thanks, Bernard and Peter. That concludes all our questions submitted.
All right. Again, I want to take the opportunity to thank everyone who are able to attend our call again today. As Melanee indicated, if you do have any follow-up questions, please feel free to email them to Melanee or at info@reroyalties.com. Thank you, everyone, and we look forward to the next quarter.