On today’s Breakouts report, there are 15 stocks on the positive breakouts list (with positive price momentum), and 38 securities are on the negative breakouts list (with negative price momentum). Discussed today is a security that is on the positive breakouts list– DRI Healthcare Trust (DHT-UN-T
The unit price has been quite volatile since the Trust began trading on the Toronto Stock Exchange in early 2021. Consequently, this security is best suited for consideration by investors with a high risk tolerance within a well-diversified portfolio.
A brief outline on DRI is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Toronto-based DRI holds a diversified portfolio of 23 royalties, generating income from 20 pharmaceutical products as of March 31, 2023.
Units of DRI trade on the Toronto Stock Exchange in Canadian dollars under this ticker DHT-UN and in U.S. dollars under the ticker DHT-U.
- Recession resistant. Generates royalty streams from sales of pharmaceutical products.
- Diversified portfolio. Products that treat a variety of medical conditions.
- Products are marketed by well-known companies, including Johnson & Johnson, Novartis, AstraZeneca, Biogen, Regeneron and Roche.
- Growth through the purchase of pharmaceutical royalties. Management targets deploying between $850-million and $900-million in royalty deals by 2026 funded from cash, royalty income generated and its credit facility. This is up from its previous target of between $650-million and $750-million.
- Steady quarterly distribution with an attractive yield. Management targets paying out between 30 per cent and 35 per cent, at a minimum, of its free cash flow to its unitholders.
- Special distributions frequently declared. Since 2021, management has announced three special distributions.
- Potential risks to consider: 1) patent expirations; 2) regulatory risks; 3) ability to complete new royalty transactions; and 4) expiration of royalty entitlements.
After the market closed on May 11, DRI reported its first-quarter financial results.
Total income was US$28.2-million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was US$21.4-million, surpassing the Street’s forecast of US$18.8-million. Adjusted cash earnings per unit came in at 49 US cents.
The following day, the unit price declined 1 per cent.
On the earnings call, chief executive officer Behzad Khosrowshahi provided colour on its pipeline of potential deals, “Our pipeline is very robust, more substantial than DRI has seen in decades with an estimated $2 billion in near-term opportunities. The deals we are looking are all high-quality and meet or exceed our investment criteria, both financially and qualitatively. Our focus will remain on acquiring royalties on medically necessary products that have the potential to change and improve health and quality of life for patients. We will also require for these therapies to be marketed by industry leading life science companies that can successfully launch and grow the treatments in their target markets. And we intend to acquire those therapies that benefit from solid and long-lasting intellectual property protection. This aligns with our target of a weighted average portfolio duration of over 10 years.” He added, “The deals in our pipeline cover a wide range of therapeutic areas, everything from oncology to pain management and anything in between. Size of the deals are sort of between $20-million on the small end and about $200-million on the high end…We have three deals that are in late-stage diligence, meaning that they’re either under exclusivity or will soon be under exclusivity. We have seven deals that are in the middle of our process and then five deals that are earlier stage.”
Returning capital to its unitholders
DRI pays its unitholders a quarterly dividend of 7.5 US cents per unit or 40 US cents per unit yearly, equating to a current annualized yield of 3.9 per cent –excluding special distributions.
The Trust will pay its unitholders a special distribution of 53 US cents per trust unit payable on July 20 to unitholders of record as at June 30. Funds used to pay this special distribution stemmed from the announced sale of its TZIELD royalty interest to Sanofi.
In a news release issued on April 27, chief executive officer Behzad Khosrowshahi remarked, “The Trust originally purchased the TZIELD royalty on March 8, 2023 for U.S. $100-million upfront and a commitment to make certain milestone payments. We have sold the royalty for U.S. $210-million upfront and assigned our obligations to make any milestone payments to Sanofi. The proceeds generated by this transaction provide significant value for unitholders and allow us to compound that value by allocating capital to transactions in our pipeline of royalty opportunities.” Management added, “DRI Healthcare intends to use U.S. $20-million of the proceeds from this transaction to pay an additional special cash distribution to unitholders of record as of June 30, 2023. A further portion of the proceeds will be used to pay down the entire debt outstanding under DRI Healthcare’s revolving acquisition credit facility, leaving significant cash and credit available to invest in its pipeline of innovative opportunities.”
During the first quarter, the Trust repurchased 319,453 units at a weighted average price per unit of $7.44 as part of its share buyback program.
The stock has a unanimous buy recommendation from nine analysts.
The firms providing research coverage on the Trust are: Canaccord Genuity, CIBC Capital Markets, iA Capital Markets, National Bank Financial, Raymond James, RBC Dominion Securities, Stifel Canada, Truist Securities and UBS.
In May, three analysts revised their target prices.
- Canaccord’s Tania Armstrong-Whitworth to $17.50 from $18.75.
- Raymond James’ Rahul Sarugaser to $16 from $13.50.
- Truist Securities’ Gregory Fraser to US$14 from US$13.
The consensus EBITDA estimates are US$92-million for 2023 and US$95-million for 2024.
The consensus EBITDA estimates have come down in recent months. For instance, at the beginning of the year, the consensus EBITDA estimates were US$95-million for 2023 and US$106-million for 2024.
Analysts commonly value the stock using a discounted cash flow (DCF) analysis.
According to Bloomberg, the average one-year target price is $16.89, implying the unit price may appreciate 64 per cent over the next 12 months.
Insider transaction activity
Year-to-date, there has not been any trading activity in the public market reported by insiders.
Trading history is brief since the Trust just began trading on the Toronto Stock Exchange on Feb. 11, 2021. As a result, technical analysis is limited.
Immediately after the unit price started trading, the unit price came under pressure, making lower highs and lower lows. In early 2022, the unit price bottomed, closing at $5.83 on Jan. 25.
The unit price has since recovered and is now trading slightly above its initial offering price of US$10.
Year-to-date, the unit price is up nearly 30 per cent, making it the fifth best performing stock in the S&P/TSX SmallCap HealthCare Sector. These gains were achieved in recent months. Quarter-to-date, DRI’s unit price is up 35 per cent.
Looking a key technical resistance and support levels, the unit price is approaching an initial ceiling of resistance around $11. After that, there is major overhead resistance around $12.50, near its record closing high of $12.45 set on Feb. 11, 2021. Looking at the downside, units of DRI have initial support around $9, close to its 50-day moving average (at $8.82). Failing that, there is technical support around $8, near its 200-day moving average (at $7.89).
This small-cap security with a market capitalization of approximately $410-million can be thinly traded, which can increase price volatility. The three-month historical daily average trading volume is approximately 75,000 units.
ESG Risk Rating
Looking at three risk rating providers, Sustainalytics, MSCI and Bloomberg, the Trust currently does not have an ESG risk score.