Duke Capital (LSE:DUKE) — Investor Presentation

0:02 Good afternoon, ladies and gentlemen, and welcome to the DUKE Royalty Plc Investor Presentation. Throughout this presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Just simply type in your questions in the box below and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, company review all questions submitted today and publish responses where it is appropriate to do so. These will be available via your Investor Meet company dashboard.

0:33 I'd also like to remind you that this presentation is being recorded. Before we begin, we would like to submit the following poll, and we'll be grateful for your attention in that regard. I'd now like to hand over to Hugo Evans, CFO and Neil Johnson, CEO of DUKE Royalty. Good afternoon to you both. Good afternoon. Good afternoon. Thank you so much for everyone's attendance here. I'm Neil Johnson. Why don't we slip to left side number three and, just give you, us, Hugo Evans, as we said, the the finance director and myself, the director and founder and CEO of the company. This is the first time doing an investor meet company, we're really excited to have this opportunity to to to interact with you directly, take your questions.

1:24 And we will try to run through the slides and give you a sense of of what we do at DUKE Royalties. Hopefully, some of you are shareholders, so we'll we'll get to the questions as soon as we can. We wanted to put this slide up just to just to give you a sense of who we are. Our directors, you know, FTSE two fifty ex FTSE two fifty directors with with management, fund management experience and and also, you know, our management with our chief investment officer, Jim Webster, you know, really a pioneer of of this industry over twenty five years doing drug royalty and and he was the first ever CEO of a public drug royalty company. So we're excited to have Jim and the rest of our team here and we will we will make these people available for you at a later time.

2:26 Our investor highlights, one of the one of the things I I want to begin with was just what we do. You know, in a sentence, we provide minimally dilutive capital that provides no refinancing risk for private and owner managed companies. And so you'll hear that coming through. We want companies with strong cash flow. It's been around for a long time, lived through crisis crises more than just the latest one that we've lived through this year. And and that's what we do. We've been around for a number of years. We have an established portfolio. We're really here in in The UK and Europe having a first mover advantage because this royalty sector, has been around for decades, and it's lived through, many, economic downturns, and good times, and, and it's a very investable sector as as I will present.

3:31 What you should take away from this presentation and really about what DUKE royalty is all about is is is an income producing company and and stock public company, but also has operational leverage. And as we grow, that operational kicks in so that there is capital growth as well. And what we do is is play as really an alternative finance company, the non bank finance for small to medium sized businesses. It is a very, very large industry, it's growing and we feel post COVID and we'll talk about our favorite virus. Post COVID, this is going to be a bigger opportunity than we had pre pre pre COVID. So we're, you know, there is a silver lining for for DUKE in in that we we now are first mover in this in this growing industry.

4:34 I talked about royalty financing being around a long time, won't dwell on this side. Royalties, you you have multiple sectors now representing a £50,000,000,000 industry for forty years, so it has been proven to withstand market cycles. You can see some of the the latest ones in the London Stock Exchange. So we're excited to have more and more royalty funds and more more royalty companies with us in the in The UK market. But I wanna dwell on the fact that we have corporate royalties, which are a little bit different than just a a fixed percentage of like a song or or a drug.

5:21 And so you have to think about this really as a long term participating loan, which is engineered to have similar characteristics as traditional royalties. What DUKE does is really put a lump sum capital to a company, so these are companies that are looking for capital and we put a term of twenty five to forty years. Why? It's it's like the life of a mine or life of a of a patent, for example, and and it's a long term because what we do is there is no bullet repayment at the end of the at the end of the term. So therefore, there is no refinancing risk for the for the business owner, and that is key because we're a long term partner of these companies, and that's a that's a characteristic that that that you will find as we go through.

6:17 Our initial yield, now that is a one payment and that is adjusted once per year as you can see, but that is the total obligation of the company and there is no additional amortization payments because the amortization is included technically in that in that yield. So what does that mean? Means that our the total obligation to DUKE and and by extension our

6:48 our return and the return for our shareholders is really that one monthly payment that the company makes to us. So that can be serviced out of the current cash flow and we do not need an exit event. We are here to provide a very long term annuity like revenue stream for our shareholders and that takes the pressure off of off of the business owner to get off the kind of refinancing treadmill. Everyone wants their money back, know, whether it's private equity or or a bank loan, and they have to refinance that that principle. We take that away and and that as you'll see, it's something that that business owners like in turn in times of of short term uncertainty that we're working from here, we have a long term view.

7:39 But just like your house, it's like a corporate mortgage. This is what we tell our our our business owners, you know, it's it's like you're taking a mortgage out on your on your company and you don't have to live in your you know, live in your house when you take a mortgage out on your house, you don't have to live there for the end of the mortgage, you can buy it out and and we have that buyback feature as well. So the no one has a thirty year business plan that we found and and saying in 2050, this is what I want. Everyone's looking at the the first five years and we're no different and our royalty partners are no different, but they have the ability to pay it back, but it's at their option.

8:26 So the real key is that the control is in that owner's owner's hands, the control of the buyback, the control of the refinancing event, the timing, and and of course, he keeps he or she keeps the the equity in their hands and the control of the operations. So with that, I wanted to just make sure that that everyone was was absolutely crystal clear on on how we make money and and what it means for for our royalty partners or our investee companies.

9:05 So you might say, why why not just the bank loan, private equity? This appeals to owners who have a need for capital but want to retain control. And so we're a little bit like debt and a little bit like equity, and but it it appeals to to company to to business owners who don't wanna sell their company. That is the key. If you want to sell your company, you're going to go to private equity. And by the way, I don't want to invest in something that you want to get out of as a business owner. So we're looking for people who want to keep that control, but have a need for capital here. And so I've highlighted the boxes, you know, we're really we really compete. These are the three things that business owners care about.

9:52 It's it's it's do I lose control through a refinancing risk event? Do I lose control of of of selling my business and giving the control to private equity? Don't like that. And and I'm only concerned about the first five years, but this is my likelihood. I need school fees and holidays paid from the dividends that I make. I I I can't impact my free cash flow that significantly with all these amortization payments that the debt that that comes with these days. So those are the three things and and we and we take care of those for the for the business owner. A lot of people ask about how we look for deals, how we evaluate deals and how we are experts in all the industries. We'll get to the breadth of our portfolio.

10:51 I think that's a big strength when we talk about the established portfolio that we have, we'll talk about how we navigated COVID. It's really important to know that we have a we evaluated a large number of companies. And and those are three relationships, you know, we it's a we're a first mover, so we are educating the market here in in The UK. And but these private owner operated companies have trusted advisers in their in their accountants and their lawyers and those are the people that we deal with in order to to give them an option from just going to the high street bank and getting out another loan because the funding gap after the last credit crisis, and I'll tell you, after this credit crisis, we're also gonna have a funding gap, but the regulations changed in the banks. So they they are disincentivized to to give these type of loans to to small business, it gets tougher and tougher.

11:56 Of course, is a the high street bank is our main competitor, but British Growth Fund, for example, has grown up and come out of the last crisis and and tried to fill that gap. And and we're looking at a lot of opportunities, but we're not all things to all people. We only need to do, you know, four to six deals per year to keep growing and keep that operational leverage as we talked about, that capital growth and income for DUKE royalty shareholders. So if there's never going to be a time that we have a 100 companies that we're that we're giving out checks to, we do significant due diligence, we look for the right opportunities, and we'll get to one of my favorite my favorite examples of of what we do.

12:46 But we boil those down. We have an independent investment committee. We have we have executives from Oliver Wyman, which is a part of a Fortune 500 company. He sits on our investment committee, Andrew Carrigar runs a $1,500,000,000 private equity fund that he founded twenty years ago. He sits on our investment committee. We have royalty experts on our investment committee. We we we have that layer of filter And of course, as you might as you might, if you squint, see that we have global consulting partners, Oliver Wyman and McKinsey and Company, that help us evaluate as the commercial due diligence partner. We have we have a tremendous partnership with those companies that we do not do not ever have to have write them a large check for a deal that we never did. It's a it's a it's really a percentage annuity of of theirs with us and so they're we're all in alignment together to get the best companies that fit our criteria and and can withstand economic shocks and then that goes to the board for approval on the board as I showed you at the first slide. So that's the due diligence process, it takes about three months, it's very in-depth, those due diligence reports that go to the investment committee and the board are are typically a 100 pages going through all aspects of of a due

14:17 diligence that you would think. So, you know, with Jim Webster and and in our experience doing these types of deals, you know, we're we're really proud of our process and we're proud of our ability to to evaluate these different companies.

14:38 Hugo, why don't you why don't you take over?

14:42 I got a little frog in my throat, so we'll we'll give you slide nine. Thanks, Neil. Yeah. I just wanted to touch on really sort of COVID and and how it's affected our portfolio and our, royalty partners and what the response to that was. You know, as as Neil said, we are long term participating lenders. It's in our interest to work with our royalty partners, to ensure their long term growth, so that, ultimately, our cash flows can grow with them. So, you know, COVID has been had a pretty profound impact on on many of us, both personally and and from a business perspective. And and that's certainly true for our some of our royalty partners who, you know, saw their revenue disappear from a 100 to zero almost overnight.

15:29 So, what that meant for for DUKE to preserve the long term value was to work very closely with some of our royalty partners, and and we structured forbearance agreements with five of them, which gave them a short term alleviation from their from their interest payments, which allowed them to sort of remove that cash flow strain that that they've had over the last six months. What that meant for DUKE was a short term drop in in our cash revenue. Q one this year, actually, as we sort of pre pre COVID, we saw a record revenue quarter for us of 2,800,000. And but q two, that dropped to to circa two million. So a 30% short term drop in our cash revenue.

16:15 But as we near the end of of of this calendar year, q four, we've recently announced the market that we should be expecting, cash back up to 2.5 for the quarter. So we're now only sort of 10% off where we were, pre COVID levels. But that interest that has structured through the full forbearance agreements isn't lost. So what have we done with that? Well, we've we've worked with our royalty partners. And in some cases, we simply deferred that, and we fully expect the missed payments to be caught up over the next twelve months. And in three cases, we've actually equitized those interest missed interest payments. So rather than say, well, yes, we have a a short term cash impact, really, what we've done is we've acquired future value.

17:03 And as these businesses trade through the COVID time and sort of get back to a normal trading environment, we're now in a position to support these businesses, and we have a 30% equity stake in them for the future. So it it sort of goes back down to the the last point of a of a long term approach, and and DUKE sees itself as a as a long term support partner to these businesses. Ultimately, we want them to grow because as they grow, we grow with them. Just touching on slide 10, which is really sort of an overview of our current royalty partners. We diverse selection across different sort of business sectors and geographies. We often joke internally that for us, boring is good.

17:51 You know, we want to we we don't go near oil and gas. We don't go near mining, no biotech, and really no startups. We we we want businesses that have a a long, long standing history of of EBITDA and and sort of unlikely to to be too jazzy and glitzy. So the we have twelve eleven partners currently. You'll see the bottom right, Tombstone Extreme Push. We had our first successful exit back in September at a at a at a fairly healthy IRR of 22%. And and, Hugo, it's it's just thank you. And and it's very good to also note that we that what what business situation there was and then management buyouts and acquisition capital as is a theme that you will see as a good very good use case for our our capital. That's it. We're not all things to all people. There's some companies that are too small,

18:51 and startups, and, so we don't do those those type of companies without a a track record of EBITDA. And, but there's a sweet spot for us. If they're too large and they don't care about the refinancing risk or they're or they believe that, you know, in in in five years, they're, it's a very high growth sector, which should actually extreme push, became very good COVID. They were in the eye of the eye of the hurricane in in COVID. And and so buyouts are a are a a big tenant of of what we do. There is a life cycle. There is, we want the companies to grow, and that will reduce our, risk.

19:37 And, but at one at one time, if they if they do feel that they can get a a lower cost of capital and they're willing to take on that risk because, you know, they've grown to a size, we understand that that that there are lower lower cost capital out there. Part of what we do, we get our capital back, and I should should mention, we get our when when there is a buyout, we get our capital back, plus we get a prepayment penalty or a redemption premium as we call it. And that that allows us to to reinvest the exact same amount of capital as we started with, plus it gives us a boost to our IRR. So it's a it is a disincentive because we don't want this to be churning in terms of, you know, using us like a bridge loan to something else. So we really are looking for long term partners, but but we understand, for example, the extreme push, we got our principal back, we got a pot, you know, a positive IRR kicker on that and and they're happy. They've got they've got a larger facility with a bank and going into The United States for their for their growth.

20:51 And so that's that's where That's on the positive side, I'll tell you, you know, when we talk about COVID and and Hugo talked about the forbearance agreements, you know, we talked and we had trading updates all throughout the 2020. It was important for us to to on regular basis talk about our portfolio and we talked about the consumer facing companies and we had most of our shareholders will know one of the the first deal that we ever did was Riverboat Cruise Company and and we had such a it was we were we had the first mortgages over the the ships that were value of asset coverage of more than one times of of our of our, capital investment.

21:44 And these boats were two for fully booked for two years out, very good visibility on this. But when you when you when you think of a pandemic and you think that, you know, boy, we're we have cruise ships and they're going through Central Europe and full of 80 year olds, you know, it wasn't it was just a a real unfortunate confluence of events. The entire industry halted production halted cruising through to most of the summer. They are they are back. But what we had to do is and this is one of the one of the things, we have senior security. We are a loan that has senior security, and we have the first rights to to to the assets. So we can we can work with these companies to produce an outcome. And in this case, we we now took possession of the boat boats in our own in our own name, and we are working with the management to to try and get the boats on the water the next year.

22:47 If that is impossible with the with the existing boat owners or the previous boat owners, there are bigger companies and and better counterparties that we that we can. So that is that's one aspect, you know, on the downside. But what I wanna point out is that our fair value through the BDO process

23:13 of our of our audit. In the summer of two thousand and twenty, our fair value went from £13,000,000 to to 10.5. So it didn't go to zero, but you know the fair value and I won't steal Hugo's thunder about our numbers that we released yesterday, but just to show you the downside, are protected in that. We are restructuring different companies like Pearl and Dean, but we have we have a group. If you if you know our companies, the LIMITED equity is a mini conglomerate. Pearl and Dean is one subsidiary of our of our royalty partners called STEP Investments, and they have a mini conglomerate.

24:02 So we are protected on the downside and we have security over all of those different subsidiaries. So our our portfolio did get affected in the negative in a negative way, especially as as those two companies. But on the positive side, that is why you need a portfolio and a and a and a different variety of of industries. We have different variety of of of jurisdictions that we're in and and and, of course, the sectors. The Myriad, for example, is The UK's largest RV and caravan parts distributor, and the staycation market has really come as

24:49 a boost to their to their business. They're doing, you know, £3,500,000 of EBITDA and and they owe us a million and change a year. So that was been very good for the business owners of of Myriad. Welltel was the other one. We put two act two acquisitions together for them during COVID and during 2020 because their their work from home is is one of their it's a boost to their business. So we've we've had we've had some positives, we've had the negatives, but the most important thing I want people in to take away from from what we do is that that is why royalties have been around for four years. We have downside protection and now we can talk about, you know, this crisis that our portfolio has been has lived through instead of, you know, in o eight, what happens when and then in different jurisdiction because, you know, we're we're the only ones in The UK doing this. So, you know, we if you go and get

25:53 to the numbers, but I wanted to give you a flavor of of some of the positives and negatives of of 2020. I'm really proud of our team that helped these business owners, you know, through a very difficult situation through no fault of their own and we've been able to support those businesses. One of the, I won't dwell on the slide, but, you know, just to give you a flavor of of what we of what we do, we had Mark Harrison, were introduced to Mark Harrison as a as a referral from one of our other royalty partners, and he was facing the redemption premiums for his British Growth Fund. And at the same time, he had an opportunity to buy buy a company. And so, you know, British Growth Fund didn't want to give him more money, they wanted their capital back. He was facing a refinancing event. He came to us and had not heard of heard of what we did before, but we showed him, and I think the bottom right really speaks to what he was facing. It was I can the first two years, I can get cheaper financing, you know, on a cash flow, but there's no way that I can I can have years three, four, and five be able to

27:16 to service those payments out of my cash flow? So I'm gonna have to be, in two years, refinancing this again. And what if I wanted and I wanna keep continue to build through acquisitions. It's interesting to note that 2020 in this slide that we've had for a couple of years, 2020 would have been the time that he would have faced these refinancing events, and that is the exact time that he would not have been able to. Because because this was one of the ones that that for for, you know, six months, we reduced his payments, cash payments, and we helped him through the short term because we took the long term view and that's what Hugo said about us taking the long term view of of helping companies because we are his long term partner and he's very appreciative of that. There's a video of him on the website at dukeroyalty.com.

28:09 You go to the partners page, we got four different videos that we just we we interviewed some of our royalty partners and and their experience with us. So go to our website for further due diligence on that.

28:23 Okay. We're pleased about doing this right as we have our half year release fresh off the press from yesterday. So if you go, we'll turn over to you. Thank you, Neil. Yes. The numbers part.

28:42 I'll focus on two sort of areas in terms of financials of the business, the cash flow side, the cash flow generation of the business and then the sort of the balance sheet aggregate NAV side. First and foremost, we we are a cash generative business that pays out

29:01 quarterly dividends to our shareholders. So so generating that cash is very important to us. The slides the numbers really show you sort of two sides. It shows you the FY twenty numbers, which were just pre COVID, and it showed where the business was as we went into the the pandemic. And then, obviously, the the the interim '21 numbers, which we've just released, which really have have been us trading right through the pain of of COVID. And what you see is cash revenue of of 4,400,000, which is down circa 15% from the comparative period last year. But actually, net cash flow operating cash flow held up well at 3,600,000, only only just down on the 3.9 from the comparative period. So our cash flow has held up. There's there's no hiding from the fact that, you know, we, as I alluded to earlier, we we structure forbearance agreements, and and we we've have foregone some of that cash in the last six months. But for the most part, the the cash flows have held up very well.

30:04 And even, you know, the cash flow generation currently are is producing enough cash flow that we're on a on a current dividend of naught 0.5 p a quarter annualized to 2 p. It's still showing a seven percent dividend yield at the current share price. So I think that sort of shows, you know, where there's room to grow for this business given that we've just waiting the six months, which I I hope we won't see again for a while. And yet the the the dividend yield is still holding. I think it's important to note that as our revenues grow, you know, we're a very

30:39 leveraged operationally. We have a very stable fixed cost base. So as you see that top line cash revenue number going up, core operating expenses should remain relatively stable. I think with all growth comes a small additional cost, but I think as we grow, that operational leverage will only increase.

31:09 And then moving on to the balance sheet side of things now. Neil touched on the fair values of the investments, which underpin our net asset value. I won't bore you with the intricacies of IFRS nine accounting and how I spend months with BDO valuing all of these investments. But suffice to say That would take the other the other half hour, and we gotta get to questions. It's simply great questions. Send people to sleep. But suffice it. You know, the the bulk of the audit work took place June, July when we were right in the eye of the storm, and, you know, gone through three months of lockdown. Our the the models are really driven by the growth rates of our businesses. And as I'm sure you can understand, growth rates fell off a cliff for for the next twelve months. And what happened meant that, our plus six adjustment factor for for the next twelve months turned into a minus six adjustment factor for a lot of these businesses who saw their revenues literally disappear.

32:09 So we incurred significant write downs in in FY twenty in our annual report, 15,500,000. But our balance sheet has started to recover. So the NAV was 74,000,000 at March 31. We've recovered, you know, a small amount, 77,000,000. And and I and I'll touch upon that sort of in the upside blue circle, you'll see the gradual rerating the fair value portfolio. And somebody has actually asked a question, which I might just touch on now actually, asks where the interim results are unaudited. What extent were the asset carrying fair values reviewed at half year, and will they be revisited going forward? So, the fair values are looked at at half year. I I do a a thorough review of them. Given that we only released our annual report 2.5 ago, I hope you wouldn't expect to see a significant change in that. And the way the fair values work is is, yes, we took 15 and a half million write down.

33:05 You won't see a V shaped recovery on those. But what you should see is a gradual re rating of that fair value portfolio. So and actually, the back end of the question also said, are the fair value assets ever revalued above their original cost or capped? Yes, they are. The fair value can go above cost, because if the business starts to show more and more growth, the discounted cash flows only increase that fair value. So we're currently the portfolio is sitting about £6,000,000 below cost. And I would expect over the next eighteen months for that value to be clawed back. Other upsides on the balance sheet, should be aware of. Neil alluded to that. All of our royalty investments have redemption premiums attached to them, which on the current portfolio is around sort of just over £15,000,000 of premiums. Now those aren't really baked into the fair value because we the models are really a thirty year discount to cash flow. So that sort of 2,000,000 kicker or 3,000,000 kicker on refinance effectively sits in the model at a thirty year discount.

34:11 So there's significant premiums there. Then lastly, I'll just touch on the equity stakes. As I mentioned, we took three equity stakes in the businesses through the foreborne interest. We also hold four stakes in other businesses, which were prudently valued at under 200,000 at year end. Again, through the audit, this was you know, we were audited back in in July. Value is really based on a on a forecast EBITDA and then a a a multiple added to that. And as the EBITDA clearly reduced significantly for this financial year that had a sort of fairly significant knock on effect on the equity stakes. Now just touching on the equity stakes, you know, three or four questions have asked us about how we think we can monetize those equity stakes. It's we can't lie. These are all equity stakes held in private businesses.

35:06 So those will be monetized really through one of two ways, really, a a trade sale of the business, or we will be refinanced out. Generally, if we're gonna get refinanced out, we will look to negotiate and exit on those equity premiums as well. So it is reliant on on there being a a sale of the business or all that refinancing. But all of our investments hold a three year non core, and now we're sort of coming to the end of of of certainly of the early ones. And and I think as we start to to go through what we see as the sweet spot of refinancing, generally about four to six years, I hope that we can expect to see some both refinancing of our royalties. But also, some of these business you know, they're they're they're MBOs, and and a lot of the the management team don't want to be in it for twenty, thirty years. You know, they they've they bought out the incumbent management, they want to grow the business, and they want to monetize that as well.

36:06 So so there's definitely room for these businesses to be sold. And, Hugo, that's that's a good point because, you know, again, you know, acquisition capital, you know, the buy and build, we provide additional tranches of capital to the same royalty partners, which is great for us because it's the same return and a lower risk, you know, as we build these companies. But, you know, the life cycle is part of the part of the model, as you say, which then unlocks those kind of upsides of redemption premiums and those things that are not in the fair value. So, yeah, good good point. Talking about, you know, upside upside surprises that aren't in, aren't in aren't in the fair value, I really think that, you know, the benefits for investors I see that most of you are investors. So thank you so much for, for for your time, and and we won't dwell on on this. We'll get to questions here in the next couple minutes.

37:04 But, for those of you who aren't, really a compounding and annuity like revenue streams is what, what you can expect. The compounding opportunity because of that rerating and that royalty aspect, we provide we are participants in the growth of these companies. And then, you know, on the downside, we take we take some we're capped at 6% and dollar figures lower than we were the year before. So there was a cap on the collar of of our compounding opportunity, but that gets reset once per year on the upside and the downside. And so, you know, for LIMITED equity, we had two two years of plus sixes as they grew and now we're a minus six, which you go explain the, you know, the the fair value adjustments as we go through. But, you know, at the end of the day, we look at the cash flow generation of this company and that ability to pay the dividends, which is a commitment to of our company to pay our shareholders dividends.

38:11 You know, I am a very large shareholder myself as is Charlie Brooks that that we started the company, we've participated in every round along alongside our our institutional shareholders. So we love dividends as much as our shareholders, that's one of the things that we, that you can count on us for. But as we grow and as we get more capital through debt or equity, you know, the yield compression as we reduce the risk happens, diversification through additional revenue streams and additional partners, as well as the liquidity of shares And so that's what we're committed to. That's a bigger company is is less risky, and we're still building and growing our our company.

39:03 And just alongside all of you who are shareholders, we these are our declared over 3% shareholders. We're really excited that that we have a big and stable group of of shareholders, institutions have been with us since 2017 and participate in every round, as well as as well as the liquidity that has been built through, you know, doing things like this quite frankly, and, you know, I probably have seen some view at the Mellow conferences and the shares conference that we that we put on. So, hopefully, we'll we'll meet again in person sometime soon. But that has built the liquidity of the company and the knowledge base of our company that we're committed to, and we're in the co the top quartile of AIM value traded stocks, you know, so far this year in 2020.

40:03 And I and I touched on this, we're gonna get to questions. Just pipeline is probably one of your questions, which, you know, we we now think that coming out of COVID, the banks are gonna look terrible again just like they did in two thousand and eight, nine. No one's gonna forget the fact that, you know, the banks even with an 80% government backing in these civil loans, they were very hard to come by in the time of need for small businesses, the high street banks have just too many regulations on them, the bank managers, you know, have a box that if it need to fit in this box, you know, we are are part of this alternative financing industry that has really blossomed in the last ten years and I believe will continue. And for us, our little company, we don't need to be the biggest and the best, you know, we're looking at over £65,000,000 worth of opportunities right now. We think 2021 is going to be really the year that that people have looking forward and and refinancing some of these these companies.

41:10 We're not looking at any companies that are that are in trouble. We wanna help companies grow and take advantage of the opportunities that they have. And and so that's what we're looking forward to. We do have 20,000,000 of spare capacity, liquidity through the cash on our balance sheet and the and the and the deadline that we currently have. And so we'll get to questions. Really, our the summary here is that we have the established product, we have an established portfolio, we resumed our cash dividends through the COVID period, but what we have done for the for the six months that that we had to had to help our companies and we had to reduce our cash inflow and therefore the cash to you, what did we do? What did we do for our shareholders?

42:08 We have now long term embedded value in these companies. One of the questions is about the the psychology of of taking equity, I'll get to that, but we not only have the fair value long term upside, but we have the embedded cash flow upside as the full reinstatement of cash flow resumes to our existing portfolio and, you know, the buyouts and the new the new the companies that we're that we're evaluating. We're under an exclusive period right now with a with a new royalty partner. In the new year, we'll we'll be talking about that, I sure hope. And the future in the global macro picture is also very bright.

42:55 So thank you for your attention. I'll turn it back and we'll go to questions. Thank you very much indeed to both Hugo and to Neil. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. But just while the company take a few moments to review the investor questions that have been submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q and A, can be accessed via your Investor Meet company dashboard. You'll receive an e mail notification when that's ready for you to access. I'd also like to remind you that your feedback is important to the company. And immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order that the company can better understand your views and expectations and would very highly recommend doing that if you could spare the time. Hugo, Neil, investors did have the ability to submit questions. We had four. You've answered one in the presentation.

43:47 Perhaps I could start off with with you, Neil. The first question reads, how do you intend to fund both future potential capital payments to royalty partners and cash dividends? Yeah. It's it's a good question. I mean, the the point of this model, and and and we are replicating a proven model in in North America, is that we continue to fund through the equity issuances. We've done four equity issuances so far, and that really builds the, you know, the the the opportunity and the and the and the the the yeah. Now now I'm now I'm I'm screwing that one up. That was, you know, that was that was submitted before this too.

44:37 The operational leverage. Thank you. So that's the vagrancy of live presentations. The the operational leverage comes through us deploying more and more capital, and so it benefits all shareholders. And so that's, that again has been proven through, what we do. You know, the the the real tenant of of our of our company is the the cash flow to the shareholders, the dividends. We're a cash flow vehicle, and and we believe that the company is it has that discipline of returning cash flow. You know, it it goes to what we're what we're compensated on. You know, we have a we have a salary and we're not a fund, so that's a fixed cost base. The only way we are aligned in our in our compensation to grow the cash flow per share of the company. So that that that means that the per share aspect has to grow and and that's why we both believe that dividends are important and and and grow through equity and debt as we've layered on debt, that's part of the model as well.

45:51 But both of those things are important. Thanks ever so much indeed, Neil. And perhaps Hugo, I could address this question to you. 4,200,000 of the group's loan investments mature within a year. What is the interest rates on those loans? And is it the group's intention to redeem them? Or are they more likely to be rolled? Thank you, Mark. An actual fact, that number has changed as of yesterday and is now sitting at 5,200,000. So I save three just on a three and a half of that relates to to MARCA, which Neil referred to earlier, our our river cruising business. And that loan is will actually as we have seized the assets there, that loan will be rolled into the fair value that we've assigned to the boats.

46:38 The remainder, of relates to 1,300,000 loan, which is actually in the process of being rolled up into a royalty financing instrument. And and and the third loan really, is a small £700,000 loan, which is actually on a quarterly revolving basis. And we we we kind of expect that to be refinanced the next sort of twelve to eighteen months. That's brilliant. Thank you. And finally, the last question that we received, and I know you've probably touched on parts of this, but if a partner entered into an insolvency process and was restructured, for example, by a prepack, would your contractual obligations survive that process and attach to the hived up business, or would they cease for potential capital and income loss? Yeah.

47:24 That is, that goes to the heart of of our downside protection, which is we have senior security of these loans. So the prepack process, we will be in control of an insolvency. And so for for example, to market, you know, we we we work with the with the owners. They have a seasonal business, and so we were able to control the process with them. And so the prepack would be our prepack, And then we would we would be able to restructure the company in any way. I I think that what what we what we have proven in in COVID is the first thing we we do, because these are fundamentally profitable companies, is that we work with the company on a short term basis to try and ease the the cash flow, keep cash inside the business to to to restructure in in some way and keep them an operating company.

48:28 If we if we went to a an insolvency process and tried to tried to do a fire sale of assets, Most of the most of the companies are not like to market that we have one times asset backing, more cash flow loans. And so so we so we wouldn't put them through a through a prepack. But but ultimately, the royalties we have inter creditor agreements for any other bank that we have. So we are protected and we are top of the tree. So that's that's the answer to the question, you know, when we are in control of the process. That's brilliant. Thank you ever so much indeed. Neil, Hugo, perhaps I could just ask you to click on the Q and A tab.

49:16 You can see there's a considerable number of questions that have come in today. If I could ask you to perhaps read out who the question is from along with the questions you said earlier, this is a live event, so there's plenty of you can see plenty of investors here. We've got about ten minutes or so, but feel free whatever time you need. And then hand back to me, and then I'll redirect investors to give feedback. Thank you. Sure. There's there's one there's one theme that that that I think a lot of people are are asking about, the the equity stakes that we've picked up. I think there's I think the first the first statement to say is that while we don't look there are some there are some situations that, like, for growth capital and whatnot that we do not get or or anticipate getting any equity.

50:12 But for an MBO situation, you know, some equity when there's when when we are crafting, recrafting all equity stakes, there are an opportunity for us to get, you know, some some sweeteners in equity, and they're minority stakes. And and so that's why it's minimally dilutive dilutive. It's, it's we usually don't and they're part of the the return that we need, but when when available, we on the shareholders on behalf of the shareholders, we're going to pick up, some embedded value and equity stakes. The other part of that question are the new equity stakes that we've that we've taken through this process and and is that incongruent with, you know, our model.

51:02 You know, there are there are some and then Interhealth is one that is in that is a deferment of the payments that they are anticipating a refinancing of a hospital loan. So that is that is not equity stakes. That's just a deferment of of our cash flow. But the ones that we were that we have, like United Glass, we did as is in conjunction with the with the with the the agreement of the equity partners and the owners. And so that is that is the best thing that that they did. There are different ways that we can do, and we can preserve the value. There's also capitalization.

51:49 So we could, say, well, missed £500,000 of payment. You owe us 7,000,000 now and make it 7.5, and you're gonna pay the royalty payment on 7.5 instead of seven. And and so it just we go into you know, we have a range of different options that we can do, but it's what's best for the for the different companies. So but we are not in we are not in direct conflict with the with the business owners and and that's a that's that's really what we're what we're looking for, alignment with the business owners. If you go if you picked out one that Yeah. No. Absolutely. I'll I'll just back and forth, shall we? Yeah. Think that's the way to do it. I'll just respond to Douglas k who's asked, does DUKE take any currency risk in their loans?

52:43 Douglas, we I try very hard to ensure that we don't take currency risk. We you know, it's well known that we we have a number of royalty investments in Ireland. So theoretically, it could be exposed to the euro and also our our our riverboats. Currently, we do have a little bit of exposure, certainly to to to the euro in terms of the ownership of our riverboats. But wherever possible, I ensure that we we structure the loan in Sterling. And while our royalty partners may receive euros, when they pay us back upon refinancing, they will pay us back, the sum in in sterling. And all of our royalty payments, bar our smallest royalty partner, are paid in sterling.

53:30 There's a good question about ESG, and we do have a an informal ESG policy. We are formalizing one in and that kind of got interrupted with the with the COVID situation. But but the first thing to remember is we are going into kind of Western Europe and North America. That's where we're looking for for for for our royalty partners. So, you know, we want we want a robust rule of law, corporate governance is important to us. And for the for the for the royalty partners, what we found, you know, when we looked at, you know, what what we what we really need to focus on is is is good financial reporting.

54:19 We get monthly statements from every one of our of our companies, and we need the finance function to have a to to be robust. On the on the environmental side, you know, we are we are conscious of of what industries we we are in and and that they are they're doing their best in in whatever industry they're in and they have in their industry best practices. And socially, you know, again, you know, we're conscious of those things and we take a look at them. Formalizing that process in our investment book is something for the near future and you'll see more on us from that.

55:11 There's a question here from James C. Please, can you clarify where you currently stand on any LTV covenants and related headroom? Given the strong pipeline, is there sufficient LTV headroom on balance sheet to pursue deals without further equity raises? James, good question. Yes, we do, have an internal LTV covenants, which we we have the ability to breach, but we like to stay within. What what that means really is that we currently have we're in a net debt position of just under 15,000,000. We have a debt facility currently, which can take us up to 30,000,000, but that also has an accordion facility for an extra 20. So the the the debt facility on an aggregate level gives us 50,000,000, of sort of aggregate firepower.

55:57 But currently, I would say we've got about 20,000,000, of sort of spare cash and available firepower to invest over the next three to six months before we even think about going out for an equity raise. Right. You know, what's we're just trying to to have something in the last four minutes that we There's a there's a quick one here, Neil. I can answer fairly quickly. From Richard G, thank you. Have you generated any useful tax losses as a result of the recent write downs? And if so, how does that position look currently? Yeah, spot on, Richard. Absolutely. We posted a £10,000,000 PBT loss last last financial year.

56:46 With the way the group's structured, we do have a a holding company in in Guernsey, which is outside of sort of The UK tax, obviously. But we we generated 4 to 4 to 5,000,000 of of UK tax losses last year. So, yes, those will be utilized. And and pleasing to say, I I would imagine all of those losses will be utilized this current financial year. There's there's one here about about when when you have significant equity stakes in finance companies. Thank you, Douglas Kay. Do you seek board positions? And and, yes, that is one of the downside protections that we that we have. You know, when everything is going great, you know, they're paying us. They they keep more than half of the revenue sorry, the the cash flows, and they're happy. We're happy. There's no covenant breaches. As as as in what happened, one of the things that that we that we that we have as a as a protection is to take board seats. So as companies go into these forbearance, you know, we have a board seat on UGG and Trimite.

57:57 And so so those are those are some of the things that we that we do. So I think that's you will you will see that. And and again, those don't have to be permanent, but, you know, we are incentivized to keep the company growing and and to help the company. So unlike just your bank manager who's always looking for his downside and trying to get his money back when the term loan comes up or sell you another product. You know, we're helping the the the the management kind of grow the business and and we're aligned in that way. So so, you know, they they welcome us on the board. And and I would there's one last one here.

58:45 I'll have to get to that, you know, through the dividend. There's one about, I think we'll we'll end with the, the the pipeline and and the future. You know, we I I can't name name names, but I I think one of the central tenants of our of our business is to know companies that have been around and been through multiple cycles. There's a there's a company that's over twenty years old that is the one that we have under exclusivity terms. It is an MBO. The the the existing the existing vendors are are leaving leaving it to their employees, two of which have been there for over thirty years. The continent Continuity is beautiful.

59:36 The CFO really knows the numbers. The company is in is in a growth sector, including including electric electric vehicle charging stations. There's there's there's some that's their that's their future, but their bread and butter is in is in more infrastructure type things. And so we're really excited about what that means in the future and more and more opportunities like that. So thank you so much. That's brilliant. Thank you very much indeed to both Hugo and Nilan. And just to investors who have submitted questions, perhaps those that might come in after we as we wrap up, obviously, we'll make these available to the company as well. So thank you once again for submitting and taking the time to submit those questions. Neil, perhaps I could just ask you just for a few closing remarks, and then I know investor feedback is incredibly important, and we'll redirect investors to to provide that to you.

1:00:35 I I would just say thank you. I I do wanna point out that on LinkedIn, we are we are taking more proactive approach. Please follow us on LinkedIn. We're doing things, posting about alternative financing and really trying to be in the in the community, and we can take questions there, and that'll keep keep keep us having a dialogue. And we don't do Twitter, but but but, you know, we're a small team. So but I regularly look at what is is we're doing on LinkedIn and what people are saying. So please follow us on that. And and hope to see you again either virtually like this or or in person in one of our conferences. That's perfect. Thank you very much indeed. And thank you for updating investors so soon after your results. So thank you once again. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide feedback?

1:01:31 If you access this meeting from our website, the feedback page will appear. And if you access this via the link sent to you by email, you'll simply be asked to log in, just to submit your feedback, but it is incredibly valued to the company that they understand your views and expectations. So on behalf of the management team of DUKE Royalties, I'd like to thank you for attending today's presentation. That now concludes today's session, and good afternoon to you all. Thanks once again.