Altius Renewable Royalties Corp

TSX:ARR

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the ARR Q1 2021 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Flora Wood, Corporate Securities. Please go ahead.

[Flora Wood]

Thank you, Mariana, and I'm Corporate Secretary, probably knew we wouldn't have a security officer. But I wanted to thank you to everybody who's joined us. This is the first results call since our IPO closed in March, and we've got a short slide presentation, which is on our website and showing on the webcast. The main purpose of this call is to provide a quarterly forum where we'll have Brian, Ben and Frank available for questions. And for those of you who are on the webcast, I'll point out that if you have questions, you've got to dial in to the conference call. With me today are Brian Dalton, CEO of ARR; Ben Lewis, CFO of ARR; and Frank Getman, CEO of Great Bay Renewables. Brian is going to speak first, and we'll then hand over to Frank. And in the Q&A, you can address questions to any of us. We're using forward-looking statements and have the disclaimer on Slide 2. That applies to both the comments we make and any discussion during the question-and-answer session. And with that, I'll hand over to Brian.

[Brian Francis Dalton, Chief Executive Officer]

Thank you, Flora, and thank you, everybody, for joining us. So yes, it's exciting to do our first ever quarterly results and progress update. Obviously, given the stage of most of our royalty projects, free cash flow, there's not a ton to say about our financial results just yet. So obviously, in this -- for this report, we'll be talking more about the status of our existing investments as well as touching on opportunities that we're working on for further deployment. I mean if there are any questions regarding the actual financial results that we published last night, we'd certainly be happy to address those over the Q&A session. So there's actually a really busy quarter on the ground. Most up here know that the IPO was a pretty intense process, but thankfully, that's completed and we began trading. We raised just over CAD 107 million through that. This is now available for deployment. But I guess the real progress over the quarter was in terms of existing investments with both TGE and Apex, the developers that we've provided royalty financing to. They completed sales of 4 projects over the quarter, totaling about 945 megawatts that are all subject to our royalty structure. These have been pretty well described, I hope, in press releases over the last couple of weeks, and we've added some more on the time line slide in the presentation today. I know there are some questions that are going to pop off regarding the most recent sale, which was out of TGE regarding the Appaloosa Run project. There, we had no disclosure of the buyer. And really, that was just out of respect of the buyer's own disclosure policies, and we do expect that in relatively short order that name will be known, and we'll fill in that gap. And you'll understand who the owners are at that point. I'm going to turn it over to Frank from here, and then maybe I'll come back with some high-level comments on what we're expecting, looking forward beyond that to the extent that Frank doesn't fully cover them. So over to you, Frank.

[Frank Winsor Getman]

Great. Thanks, Brian. It's great to speak with everyone again. Where it's our first call, I thought we'd first share some perspective on what we as management look at and how we're measuring our progress. And we thought we'd share that with shareholders so some key metrics that they may -- we think they're important to them and they should be following as well. And it's really -- the first is continued sell-through on TGE and Apex projects. And seeing those projects getting sold on and going into construction, that's a critical factor. And then the second key metric that we follow at this point in our development is our ability to make new investments and deploy additional capital. So those are really the 2 key metrics that we're following as management, and we think that it's important for shareholders to follow as well. On the sell-through side, we really made -- have made terrific progress since the IPO. As Brian mentioned, we have 4 new project sales. Apex with Jayhawk Wind, 190-megawatt wind project in Kansas, sold to WEC Energy and Invenergy. It's already in construction. With Tri Global, they sold 3 projects, Hoosier Line wind and Honey Creek solar, those are 180-megawatt wind project and a 400-megawatt solar project in Indiana, those are on adjacent land, and those results are Leeward. And then as Brian mentioned, the Appaloosa Run project, 175-megawatt project in West Texas to an undisclosed buyer. And I guess one thing I'd like to highlight is that if you look at the buyers, these are top-tier buyers who will ultimately be our counterparties, our long-term counterparties. So I think it's a testament to the quality of the projects and the job that Apex and TGE are doing. And that it shows that we've teamed up with the very best in the business when you look at the quality of the buyers that they're selling to. I would also say that there's continued great progress and momentum. We talk regularly with TGE and Apex, and they're still seeing very strong interest and demand in their projects. A quick comment on Appaloosa. Folks may have noted that, that was a 1.5% royalty that we received instead of our normal 3% royalty on a wind project. And that was because it was a special situation that the project was running up against some time line deadlines in development process and a buyer came along with strong interest in the project and was going to move quickly. And they sought certain accommodations, including a reduction in the royalty to 1.5%. TGE came to us seeking our consent, and we agreed. It made sense for us to support TGE with the sale, and the bottom line, it doesn't affect our returns. We'll just count that royalty at half the value in determining how many more royalties we are owed from TGE. So I really think that our structure is working really well that -- in the end, it doesn't really have any impact on us at all. And I wouldn't expect that -- I do think it was a special situation, and I wouldn't expect it to be -- other projects to be similarly affected. As far as new investments, we don't have anything new to announce today. But we continue to see strong activity in our pipeline and have a number of discussions underway and term sheets under negotiation, and we remain comfortable with the 12 to 24 month guidance we provided at the IPO on the deployment time line, and we are very, very busy in those discussions. A few comments I wanted to make on recent events and the general market conditions for renewables in the United States. There is incredibly strong demand. It's even accelerating, it seems, not only for new projects, but also it's being driven -- it's an economic issue now, and it's coming. It's a demand-driven momentum, where it's the Googles and Facebooks and Amazons of the world demanding that they want to buy renewable energy. It's the commercial and industrial buyers. And therefore, the demand for new projects is really insatiable at this point as everyone is trying to achieve their own ESG goals and mandates. The second point I'd make is that there's been floated the Biden infrastructure plan, which includes strong incentives for green tech and renewables that should only help accelerate the need for new and innovative forms of capital, such as royalty financing. I think this provides only further tailwinds to our business and the opportunity. The details are still very much in flux. There's a lot of back and forth between all the parties and the folks involved. What we're hearing is it's going to be late summer or September time frame before that bill comes up for a vote. So I think that's the time line that we're looking at there. And I guess lastly, just wanted to comment on the ERCOT situation in Texas with the deep freeze event back in February. This was an unprecedented weather event, almost 2 weeks of freezing temperatures. The entire system, the whole grid system froze up for many -- for large parts of Texas. It was -- I'd note that it was the entire system, including fossil fuel plants, renewables, processing plants, pipelines. And so it really -- I know both sides are pointing at each other and saying it was renewables' fault, some fossil fuel -- and renewables saying it was fossil fuels'. It was really a system where the entire system was not winterized to be able to withstand this kind of unprecedented weather event. And I think you're going to see a lot of investment in their infrastructure going forward. But what happened is a number of renewables projects suffered significant losses due to what are called shaped hedges. And that's a situation where they had financial contracts put in place in order to provide price certainty for the offtake and with those came minimum delivery requirements. Now when they put these in place, they set those at a level that they thought were very conservative and would never create the potential for losses that they experienced. Well, this tail event showed them otherwise, and they incurred large losses because they went on for much longer than anyone could have expected, almost 2 weeks, and the price of power went to as high as $9,000 a megawatt hour. So the -- a number of projects incurred large losses that are owed to the hedge providers. The impacts on ARR in Great Bay and the opportunity for us is that there's a need for additional capital to recapitalize some of these projects, fresh capital coming in to help pay off some of these obligations owed to the hedge providers. That's created a new investment opportunity. We have a number of discussions underway with those type of counterparties. When we set out to put the royalty product in place, we never said, "Oh, boy, this would be a perfect product for if there was a terrible weather event in Texas, and they needed new capital to recapitalize on these projects." But it turns out that our structure, and the passive nature, and that it's non-dilutive and its permanent partner like capital, it really does make it ideal, in many cases, an ideal product. So we're continuing to pursue those opportunities. And then there's also, as a result of this event, a movement to unwind the hedges that are in place. And this is going to create more merchant exposure in the market, both for our existing projects and also new projects going forward. And I think that only creates a greater opportunity for us because we are very comfortable with merchant exposure. We feel that we're taking such a long-term perspective that we're well suited to take that risk. And not every investor in the market feels that way. So I think it's only going to create more opportunities for us as the market moves to a more market-based and merchant exposure. I guess those are the points I wanted to highlight. And I guess with that, Brian, I'd turn it back to you.

[Brian Francis Dalton, Chief Executive Officer]

Okay. Thanks, Frank. I think you've pretty well covered everything. I mean, I just maybe make a few more comments on this trend towards more market exposure in the renewables industry generally. We actually talked a fair bit about, based on our IPO roadshow, which was just before the Texas events, and we were noting that PPA durations were getting shorter. And so naturally, the whole sector was basically taking on more market-type exposure and then, lo and behold, within days, this event happened, and I feel like, if anything, that whole trend is now even further accelerated, not just shorter-duration PPAs, but see more synthetic contract structures that are being unwound. Again, it's not just the people that got hit. It's still that got away with it as well that are looking at hedge structure now. We're hearing it on the ground from sponsors that if only there were some capital out there that was more permanent in nature that wasn't forcing us into these pretty ridiculous structures, either way below market PPAs or these difficult and obviously, risky hedges that, that would be really refreshing. So again, I think it speaks well about what Frank just said about how the opportunity sets up for us. Just think about where most of the capital has come from to date for the most recent surge in renewable development. It's capital, it's pension-type money, it's money that doesn't want any of that risk. They want to try to turn natural resource projects into bonds. Well, it's all falling apart. And so a lot of that money, I believe, is becoming alienated or marginalized from the sector or it's going to have to accept that there's a different risk/reward profile that they've got ahead of themselves or got ahead. Well, what we do is perfect for -- or is a perfect solution. And the other shift here is that, again, we touched on this on the IPO roadshow as well, that as that happened, an opportunity was going to open up for us that a few years ago, we really had to abandon, and that was to provide project finance to more advanced-stage projects or even after operating-stage projects just because the competitive returns relative to other sources of capital weren't there. But as this is unfolding, I think we're all starting to believe that the opportunity is back on for us. So it's not just these funding developers, which is fantastic and will be a very core part of what we do going forward. But we now believe that we have the opportunity to be very competitive on a more advanced-stage projects, and that could ultimately lead to, obviously, earlier cash flows and larger ticket sizes. So anyway, nothing firm to point to there, just a general comment on things happening faster perhaps than we even imagined a month or 2 ago. I thought when I got into the utilities renewable space that was getting into a relatively boring, steady business. Well, boy, was I ever wrong. It's -- in some ways, it makes the mining industry look kind of slow and steady. But anyway, I think that's enough from me. So any questions, please, for Frank or I?

[Operator]

[Operator Instructions] Your first question comes from Rupert Merer with National Bank.

[Rupert M. Merer, Managing Director and Research Analyst]

Congratulations on the IPO and your first quarterly conference call. I'd like to just circle back to the Texas opportunity, if we could. Can you talk about the size of this opportunity, maybe in terms of megawatts or the number of projects you could see or, I guess, ideally, the scale of the investment opportunity?

[Frank Winsor Getman]

I can take that one, Brian. I would say that there's anywhere, 25-plus projects that have some have incurred losses as a result of this, that not all of them are looking for capital. Some are saying we're just going to fix this ourselves. Others are saying we'd like to bring in some fresh capital to help us to pay off the amounts we owe to the hedge desk. And the ticket sizes, it depends on the situation, but they can be $25 million, $50 million, could be $100 million or larger ticket sizes. And that the -- there is a window of time, but this isn't an ongoing opportunity. This is more of an opportunistic situation where our capital is well suited. And I think this will play out over the next several months here.

[Rupert M. Merer, Managing Director and Research Analyst]

Can you talk about what your investment might look like? Could it be, in your view, ideally a royalty? And if so, are you looking at something at a similar kind of size, say 2.5%, 3%? And also, who do you actually have to work with to negotiate that? I imagine you're focused on a project at the subsidiary level, but you're negotiating with the equity holders and the lenders to get that done?

[Frank Winsor Getman]

Yes. No, it's interesting. I think your instincts are spot on. It's a complicated negotiation because you have the sponsors, the owners. You have the lenders, you have tax equity, and then you have the hedge providers who ultimately are the ones who wrote the money that are causing the issue to come to a head, saying, "Hey, I'm out money, I'd like to be paid." So it's a complicated solution. But I do think that the situation has created more flexibility, where everyone is focused on trying to come up with a solution for this. So as to what our capital would look like, it would be a royalty, where the dollar size is larger and it's into a specific project. We would probably have a larger royalty percentage in the early years, and then there would probably be some -- based upon certain hurdles and things, that would step down over time. And maybe end up in the same size as TGE out in the future. But in the earlier years, we'd probably have larger percentages because we need to -- where we're investing more money, we need to have those cash flows through to make sure that we hit or earn a satisfactory return. If that makes sense.

[Rupert M. Merer, Managing Director and Research Analyst]

Yes. I suppose the lenders are also incentivized to get this capital in, so we'll be willing to negotiate.

[Frank Winsor Getman]

Nobody wants to -- nobody wants to put these things into default or bankruptcy because a tax equity has the consent to allow that to happen. And they are unwilling, in most cases, to provide that consent because they just want the projects to run because they're really looking for the tax credits, which only get generated if the projects actually run. So it's an interesting dynamic.

[Operator]

Your next question comes from the line of David Quezada with Raymond James.

[David Quezada, Research Analyst]

My first one is just related to -- I mean, in your conversations with renewable power originators and developers, I'm curious what their activities -- or what your view is on their activities in terms of acquiring land and staking out new projects? I mean, it certainly seems that there's no shortage of demand on the corporate side, very supportive political backdrop. So I'm just curious what the early stage developers, what they're saying, I guess, related to what constraints would be on finding new projects and how they are going about, I guess, securing land for new projects?

[Frank Winsor Getman]

Well, there is a bit of a land rush. And I think that our conversations, at least with TGE and Apex and our ongoing conversations with potential new partners is, we want to seize this opportunity while it's here and can -- we need capital to do that. So it's creating an opportunity for us, whether it be providing additional capital to existing partners or bringing in new partners. There is a sense that it is a bit of a land rush going on. So there are -- these land men and units are out all over trying to grab leases for these projects. The bottleneck in getting them to the market where they're actually operational, in many cases, is the interconnection process, that there are so many new renewable projects being brought to market that the system operators are a bit overwhelmed and they weren't set up -- they weren't staffed and set up to be able to handle this kind of demand for new projects being connected to the system. So I would say that's the biggest bottleneck in the entire industry right now. And interestingly, the Biden infrastructure plan has a fair amount of focus on new transmission and infrastructure, and I think they realize and acknowledge that this is an issue and it's someplace where the Biden infrastructure plan could really help accelerate the -- getting all the way through to where these plants are actually operational.

[Brian Francis Dalton, Chief Executive Officer]

Yes. I guess it's not just the fact that the people and the organizations aren't -- weren't prepared for this rush. The system isn't either. Like the transmission system cannot accommodate the objectives of the sector and of the administration for that matter. So there has to be some serious investments put in the transmission to clear some of these interconnection bottlenecks, which makes the speculation on land all that more interesting because now you start to think about where that infrastructure and transmission starts to get placed.

[David Quezada, Research Analyst]

Absolutely. That's great color. And then maybe just one other one for me. I'm curious, obviously, consistent with some of the comments you just made, offshore wind is a big source of growth. There's a lot of excitement there in the U.S., and I realize that there's a tax credit there now. But I'm curious if you've had any early stage discussions with offshore wind developers? And if you see any opportunity for the royalty structure in that end market?

[Frank Winsor Getman]

Yes, that's a great question. I do. We've had some introductions. I think it's interesting. Those are much larger projects. And they don't -- it's not like a -- there's a -- companies have a portfolio of offshore wind projects similar to on land like TGE and Apex do. So it makes our structure at the early stages, it doesn't really fit well and you're taking more single project risk. And I will tell you that the offshore wind development in the U.S. is not a technology issue. It is a regulatory issue. It is figuring out the interplay between states rights and federal rights and getting the process to bring the power to shore and when it comes ashore, whose jurisdiction is that and what approvals are needed, and it's really a regulatory issue. But I would say the opportunity for the royalty investment would be similar -- it would be, I think, as part of the capital stack going forward, but it's probably not going to be -- the structure wouldn't be like where we would give an offshore wind developer capital at the development stage and just take the risk that they get one of these across the bowline because there is still a lot of risk associated with this. So I guess that's how we're thinking about it.

[Brian Francis Dalton, Chief Executive Officer]

Yes. So it goes more to that point around more advanced-stage project investment and our capital becoming more competitive there, more permanent-type capital, so would be part of an actual approved project finance structure. And I agree with Frank...

[Frank Winsor Getman]

The ticket size are big dollars, too. The other thing I'd note is these are large, very large expensive projects.

[Brian Francis Dalton, Chief Executive Officer]

Yes, there's way more traditional project finance work with royalties as part of an overall capital structure, tranche investment, that sort of thing. But I guess, it's probably fair to say, Frank, there's nothing like that, immediately, is there?

[Frank Winsor Getman]

No.

[Brian Francis Dalton, Chief Executive Officer]

In our list of targets, but we're certainly ready to do it. But the market isn't ready for it yet.

[Operator]

Your next question comes from the line of John Mould with TD Securities.

[John Mould, Research Analyst]

I'd just like to circle back to the Texas discussion and consideration on operating royalties just more broadly from a returns perspective. Just wondering how you see those returns on potential operating or late-stage development investments, either as a result of the Texas event or just more generally, how do you see those returns stacking up against either the Apex or TGE agreements you've already got in place or other development agreements that you're looking at, and how you're weighing the potential to accelerate your cash flow ramp up through royalties on operating projects versus maybe lower returns.

[Brian Francis Dalton, Chief Executive Officer]

I can start there, Frank. John, the first thing I'll say on that is it's an active negotiations underway with multiple partners. So we're not going to be throwing at return expectations here. And Frank might want to add more color. But we still believe it's very competitive risk-adjusted capital and not deeply out of line with the return expectations that we would have talked about for developer-type deals, just the structures will be a little bit different. But we definitely don't want to get into throwing actual return numbers out at this point. Too many things in the hopper at the moment.

[Frank Winsor Getman]

I would just comment on the -- I personally think it's quite attractive to be able to bring the cash flow forward to get one of these done on operating projects. So that would be, I think, a great benefit to our company. So it's something we're spending a lot of time and energy on.

[John Mould, Research Analyst]

Okay. Great. No, that's helpful color. And then just on the merchant exposure commentary from earlier in the call, is there an upper bound on the share of merchant exposure you would ideally want to have in your overall royalty portfolio?

[Frank Winsor Getman]

I think it's going to be set by the participants, right? The market is not ready for a 100% merchant in most cases. So there's still going to be some level of PPAs while they are getting shorter. There's still some price earning. It may be that you do it in shorter increments. So you can have like a rolling 3-year or 5-year PPAs or something. But I don't think that we have much -- we're not in the driver's seat making those decisions, right? So that's not really -- we're a little bit price takers from that perspective. I don't know if Brian wants to add anything.

[Brian Francis Dalton, Chief Executive Officer]

Yes. No, I think that's fair to say like there's an interesting dynamic, hedges are being unwound. Those sort of saw more synthetic-type contract pricing structures. But in contrast, there is actually -- we're getting a sense that there's a pickup in demand for PPAs. But so again, the shorter duration though is akin to more market exposure because even if you do have, say, 5 years or 7 years of PPA, you're going to have to reset those PPAs much sooner than before, and that's going to base off presumably of where market prices are. So that's gone today, for the most part of being able to look at a project as an investment that has 15 years of locked-in pricing ahead of it. It might be 5 with bills and more merchant that way. So it's just naturally happening, as Frank said. And our -- I guess our mix really, in the end, is going to probably look a lot like what the overall market mix looks like. The reality is that if you're a renewables investor right now at any level, merchant pricing is a reality. Like that is what is happening in the market, and it's bigger than any participant. So I don't care who you are, you've got merchant pricing coming and you got it coming fast.

[Frank Winsor Getman]

This conversation is happening across all the big pension funds and everyone who's invested in renewables saying, how do we handle this. This was what -- this wasn't what we initially thought we were signing up for, how do we want to handle this. So it's a very dynamic situation.

[Brian Francis Dalton, Chief Executive Officer]

It's funny, actually, in some ways because some of the traditional hedge providers are trying to figure out ways to create more synthetic structures to offset. Every time this develops, they come up with another creative way to try to offset it and take -- and keep what was going and it just gets -- the more they try to manage that risk, I think the more risk is starting to be introduced at this point. So we don't look at it as merchant risk. We look at it as an opportunity, and that's the only way I think we can do it.

[John Mould, Research Analyst]

Okay. That's great. I appreciate all that context. And maybe just one last one on the Apex agreement. You're expecting in the range of 1.4 to 1.9 gigawatts of potential capacity under royalties from Apex. And Brian, I think you said on the last Altius minerals call that Apex was targeting about 2 gigawatts of project sales for the year. So is your hope or expectation that your entire Apex loyalty pipeline under the existing $35 million agreement could get created this year through party sales?

[Brian Francis Dalton, Chief Executive Officer]

Well, that's the number that they said they targeted for the year. And if that happens, we'll be filled out. I guess the other thing to point out between Apex and TGE, obviously, TGE has been knocking it out of the park over the last couple of months here selling projects. Apex has great pipeline of deals in the works as well. But you got to remember that their business models are different. TGE is an earlier seller. So from the point that they sell a project to when it will reach construction and operations is going to have a lag. Apex takes things much further, often right to the point of having interconnection completed PPAs locked down and sign, and that's the point that they sell. And I think it's interesting to note, the one project that -- in this quarter that was sold from the Apex portfolio went into construction within days, right? Whereas the TGE sales, there's still work to be done before that point gets reached. So important to understand the differences between the 2 companies and their business models.

[Frank Winsor Getman]

And then just as a reminder to everybody, but we -- neither Apex or TGE get credit for it vis-à-vis our deal until the project is post operational. So even though TGE may sell them sooner, they're still not -- if for some reason, a project doesn't make it across the goal line and end up going to construction, will they just have to pay out some more royalties, [ pay out ] more projects.

[Operator]

Your next question comes from the line of Mac Whale with Cormark Securities.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

I just wanted to drill down a little bit on that change in the royalty rate and why you think that's not a trend. If -- the way I understand the way this works is the buyer shouldn't really care about the royalty because he's after a yield himself. So he would just offer less. So if you had to reduce the rate, wouldn't that pressure be coming from the developer? I'm just wondering what might be different in this -- like what is the -- what makes this one a special case so that you don't think that dampen you?

[Frank Winsor Getman]

It was -- I mean, they want as much of it as they can, these sponsors, right? So I think that -- and this was a situation where there were some deadlines on interconnection deposits and things. There's a clap on certain items in development and a buyer came along. And it came from the buyer. Because if you think about it, TGE actually is incentivized to go the other way. And we've had those conversations. If they find a particularly juicy project where they think the margins can support it, they're incentivized to put a higher royalty on it. So this was -- I actually think, Mac, it was the other way, that TGE and Apex are incentivized to maintain or even increase the royalty percentage so they pay us off sooner. Otherwise, the capital continues to accrue.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Okay. So -- and how does that vary? How does that pressure vary in terms of jurisdiction? Is it really project by project? Or are there regions in which -- because, again, the other thing here is status on interconnection, right? Like that's, as you rightly pointed out, I think you alluded to this, right? Like the dynamic here is to get your projects -- there's a real cost about delays associated with not getting your interconnect at the point you think that you're ready to get it, right? Like you want space available and you want to be ready to build. And so is that dynamic linked at all? Or are those 2 things completely separate issues?

[Frank Winsor Getman]

I think they're separate. Well, they're linked in that, if there is issues and delays, they don't get credit for it until it's operational. So we're protected from that delay whereas the developer is very much incentivized to fight through those issues and get them resolved as quickly as possible. And in fact, they could -- there was -- I think that this was just a one-off situation with a particular project. This one, I wouldn't say it came out of the blue, but it was a little bit a special situation that came that had a short time line on it. The buyer was willing to move quickly. And TGE said, well, we'd obviously rather maintain it at 3%, but let's -- if you guys are willing to do this. And for us, it's -- we're really -- it doesn't affect us to near the degree it does TGE.

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Yes. That's for sure. I think that's the beauty of the model, right? That for you, the portfolio protects that, right? It might take more projects or it might take a little bit longer, but it's not like a fatal flaw or anything. It's simply...

[Frank Winsor Getman]

No. I am with you. This was like an extra one kind of in a way, Mac. It was almost a...

[Brian Francis Dalton, Chief Executive Officer]

When we set those royalty rates, there was a real sort of discovery process. We didn't know, Apex didn't know, TGE, didn't know to what extent this underlying royalty was going to affect the saleability of projects. And really, there's been no pushback on the rate when it's a more competitive process, saying here it is, it's embedded, here's what you got and will make their bids based on the price or on the up line royalty rate and it hasn't been a challenge. And in fact, as Frank mentioned, it's as likely as not that you'll see a royalty come out of one piece that will have a higher royalty rate somewhere just because pushback was so -- no never mind that the developers felt that they could bump up the rate a little bit. And therefore, get past -- or put more megawatts in our account and get themselves closer to releasing next tranches, those sorts of things. So the discovery process really does still continue. But I mean, I think at the average rates or the rates that we put into the base structures, there's been really very little pushback. [indiscernible]

[MacMurray Davidson Whale, Analyst of Institutional Equity Research]

Yes. And I would imagine over time, right, you'll get better and better at that because you will have more -- you will have gone through these processes. So I'm sure you'll be able to identify over time where these types of issues will arise in the process. So it's a bit of a -- it's like you're refining that closing model or whatever you want to call it, that process.

[Frank Winsor Getman]

Yes. And it could be counterparty by counterparty, too. I'd note that -- I mean TGE's wind royalty is 3%, Apex' is 2.5%. And that was simply just Apex saying, let's start at 2.5% and see how it goes. We can scooch it up, we will, but they didn't want to have a requirement -- so it wasn't any -- there wasn't any -- it's just this learning process that we're discussing here.

[Operator]

Your next question comes from the line of Justin Strong with Scotiabank.

[Justin Strong, Associate Analyst]

So just a quick one here. Also on Texas and the interconnection. So do you think that the agreement was kind of close to expiring. Do you think that's -- is there kind of underlying one-off situation, either from COVID or lasting effects administratively from February events with TGE? Or do you think TGE was just kind of -- got a little bit ahead of themselves? And has this interconnection when they didn't want to expire because they take a while to line up? So just wondering what the -- from the developer side what the learning -- what the driving force for the situation and what the learnings are from it?

[Brian Francis Dalton, Chief Executive Officer]

This is just normal development. This is just different projects in different stages in different regions, in different countries and different issues, the different -- it could behave. We have trouble getting the land we need in this one could be this -- I don't -- and it wasn't related to COVID at all, I don't believe.

[Operator]

Your next question comes from the line of Rupert Merer with National Bank.

[Rupert M. Merer, Managing Director and Research Analyst]

So you talked about Texas. Wondering if you can give color on what the rest of your pipeline looks like for future capital deployments. Are you deployed with 2 developers right now? Maybe you can give us some color on how many developers you're in discussion with? And how many you'd ideally like to work with in the future? Is there sort of sweet spot for you? And maybe limits on how much capital you might want to put to work with 1 developer to diversify. Maybe you don't want to put too little because of some of the structural costs. Can you just maybe give us some color on what that pipeline looks like? And where we're headed?

[Frank Winsor Getman]

Sure. I guess the best color I can give you is that a developer needs to be -- for this development -- developer-stage product that we have for it to work, they have to have a pipeline of sufficient size and scale that we can feel comfortable that not every project has to work for us to earn our return. And we need to have them show us that we need to see a track record of success or a team that has had success. So we feel comfortable that -- because there's a reason that good developers are serially successful, right? If there's a lot of -- some folks are really, really good at the social licensing side. Some people are very tone deaf on that front. So it's making sure that they have a big enough pipeline. So like a -- there may be some really great single one-off projects with a small 2-person team developer, but that doesn't really fit our model for would -- that's too much of a binary risk that if that project works, we might do well. If it doesn't work, we don't. That's really just an equity investment. From a royalty perspective, we want to invest in companies that have a broader pipeline. So we are talking to a handful of, I would say, again, blue-chip developers who have broader pipelines. And as far as location, it's all over the country. Apex and Tri Global by very definition of their pipeline, we're going to get a very diversified technology and location, geography, regionally diversified suite of royalties just because that's where they're working all over the country. Certain areas of the country heat up and are more active right now, PJM, Pennsylvania, New Jersey, Maryland, is very, very active. ERCOT is still very active. California, a little less active, you would think. But it's actually -- I think folks are finding it tough to do business there, and there seems to be less activity there on the early-stage development front. So it's -- the Northeast is starting to heat up. So it's really -- again, we're going to go where the market opportunity is. But it's happening everywhere, I guess, is another point to remember here. Within the U.S., this is -- these mandates, these pressures, these government, local and state governments saying we want to be carbon neutral by 2035, it's happening everywhere. So...

[Rupert M. Merer, Managing Director and Research Analyst]

So you mentioned you'd be in discussion with a handful. What would the pipeline look like in terms of the number of developers who seem to be in your sweet spot?

[Frank Winsor Getman]

I don't think there's a limit on us right now. I think -- I don't -- at least, in my mind, I don't see a limit. I mean, there's a limit of how many there are. But I don't see a limit as to us -- we're talking to all the folks that we think have interesting pipelines and good teams. And I don't see us bumping up against a limit at this point. If anything, the market opportunity seems to be getting bigger.

[Brian Francis Dalton, Chief Executive Officer]

Don't forget it's like in terms of investment size. There's a big difference between the size of the portfolio that Apex brought to the deal versus TGE, in the way we adjusted for that is we tranched the investment such that [Technical Difficulty] on milestone, that milestone, it's really kind of proportionate to portfolio size and scale. So there is a bit of a range of developer sizes and types that we can work with by adjusting that regard. But as Frank said, it doesn't include one-off project developers. So yes, it's pretty broad. And again, the question you asked, though, what's the minimum size to make it worth our while. Look, when you factor in that tranching and that element. The work in these deals is upfront, right. You put them together and you put the deals together, and then there's a little bit of monitoring after. It's not like you're adding burden operations by doing a small deal relative to a big deal. I think about that a little different for us than I would say if you're asking that question to sponsor about what scale of a project there is worth their time. It's a little different for us. We're one-off and done essentially.

[Operator]

[Operator Instructions] Your next question comes from the line of Harry [indiscernible] with [indiscernible] 101.

[Unknown Analyst]

This question is more for Brian. My question is regarding the use of royalty revenue down the road. Based on my calculations, I'm thinking that you will start generating significant royalty revenue from 2023 and onwards. Is the plan to pay a dividend as soon as possible or to reinvest that revenue and focus on growth and capital gains for ARR shareholders? Did you get any feedback from shareholders during the IPO process or after the IPO process? What are the investors looking for? Are they looking for dividends and income? Or are they looking for capital gains at this stage?

[Brian Francis Dalton, Chief Executive Officer]

I'd say the feedback, maybe it's because we led horses to water, was that the main objective for the business for the foreseeable future should be to scale up the portfolio and to really build up the business and kind of in addition to that is, as we build up our business, it means that adoption of the royalty financing model for the sector is growing. So that without question is objective number one. As far as capital allocation goes, further out, yes, once we get to that point that current investments and any new ones that we're working on today that we happen to be successful with convert to cash flow, I mean we will start to have that conversation more deeply about should there be some component of dividend. And I guess another part, once that cash flow base is built in, you also start to look at sources of capital and whether or not leverage comes into the picture. So I guess, we're thinking about it, but it's really a later decision point. We'll take lots of feedback from shareholders, I'm sure, as the time comes. Without question, objective number one now is growth and scale of this business.

[Unknown Analyst]

Yes. That makes sense. And I understand that it's a decision for more down the road. I appreciate the answer and could potentially be a mix of both, but we'll see. Time will tell.

[Brian Francis Dalton, Chief Executive Officer]

Shareholders will tell.

[Unknown Analyst]

Oh, yes. That's true.

[Brian Francis Dalton, Chief Executive Officer]

The owners of the business will tell.

[Operator]

There are no further questions at this time. I will now turn the call back to Flora Wood for closing remarks.

[Flora Wood]

Thank you, Mariana, and I really want to thank everybody for dialing in and for a great Q&A session, really covered a lot of ground. If anybody has feedback, given this was our first call, happy to talk afterwards. And I look forward to speaking with you all at Q2.

[Brian Francis Dalton, Chief Executive Officer]

Yes, Thanks. I'll repeat, just to add to Flora's comment. Thank you very much for the great questions. It makes me think we shouldn't even have a preamble in the future. We just go to a Q&A right out of the gate, but no, it's really useful, these thoughts that you're bringing and these questions, they help sharpen our thinking. And it's a real benefit. So I really appreciate the time to join us today and the thought you put into helping us work through this very not boring industry. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.