Financial Year 2024 Interim Results

Duke Royalty Limited (AIM: DUKE), a provider of alternative capital solutions to a diversified range of profitable and long-established businesses in Europe and abroad, is pleased to announce its interim results for the six-months ended 30 September 2023 ("Interim 2024").

Financial Highlights

• Total cash revenue up 35% from the prior period to £14.1 million (Interim 2023: £10.4 million)
• Recurring cash revenue* totalled £12.2 million, up 17% from Interim 2023 (£10.4 million)
• Free cash flow** up 23% to £7.9 million (Interim 2023: £6.5 million)
• Adjusted earnings up 23% to 1.95 pence per share (Interim 2023: 1.58 pence per share)
• Cash dividends of 1.40 pence per share paid to shareholders (Interim 2023: 1.40 pence per share)

Operational Highlights

• Deployed over £18 million of capital into new and existing Royalty Partners
• One new royalty partner added to the portfolio, taking total to 15
• One investment buyback with Instor delivering a triple digit IRR
• Over £40 million of available liquidity for future deployments

* Recurring cash revenue excludes buyback premiums, cash gains from the sale of equity investments and one-off fee income

** Free cashflow is defined as operating cashflow, plus cash gains from the sale of equity investments, less investment costs less interest payable of Duke's debt facility

Nigel Birrell, Chairman of Duke Royalty, said:

"During the interim period Duke was able to post its twelfth consecutive quarter of increasing recurring cash revenue which was a fantastic achievement for the Company. In line with this strong financial performance, the Company also maintained its quarterly dividend of 0.70p per share. Investors can be reassured that the dividend payout remains well covered by operating cashflow with the attractive yield representing a pillar of Duke's ongoing business model and its overall financial discipline.

"Looking forward, I am pleased to say that Duke remains well-positioned for growth. We believe that we have an attractive offering through our private credit and private equity hybrid product, as well as a philosophy that resonates with SME business owners due to our ability to offer a long-term, partnership-based solution which keeps owners in control of their company."

Chairman's Report

Dear Shareholder,

I am pleased to report that Duke Royalty's results for Interim 2024 have once again highlighted the robust nature of the Company's business model in the face of significant ongoing global economic and political challenges. In particular, I am delighted to say that Duke was able to post its twelfth consecutive quarter of increasing recurring cash revenue during the Interim period.

Duke's simple investment philosophy of providing long dated, senior secured debt capital into long established, profitable SME owner-operated businesses has largely protected the Company from the high levels of volatility that have been witnessed in the public equity markets during the period. The predictable nature of Duke's monthly cashflows alongside its own tight internal cost controls has allowed Duke to report a strong financial performance for Interim 2024. In line with this strong financial performance, the Company also maintained its quarterly dividend of 0.7p per share. Investors can be reassured that the dividend payout remains well covered by operating cashflow with the attractive yield representing a pillar of Duke's ongoing business model and its overall financial discipline.

This strong set of results has been achieved despite the challenging business environment we are operating in. In the last two years, the UK experienced a record-breaking 14 consecutive interest rate increases, a trend that has largely been mirrored in both the EU and North America. Central banks have taken a pause from additional near-term interest hikes with inflation rates now trending back towards their longer-term norms. However, we believe the current elevated level of interest rates are set to remain for some time and we are not expecting to see any cuts until well into the Company's FY25 period. For Duke, the higher cost of borrowing has had a few core effects.

First, it has increased Duke's own debt servicing costs which have put a squeeze on free cashflow margins and second, it has resulted in a general reduction in consumer discretionary spend. Furthermore, there is no question that businesses have become increasingly burdened by wage inflation and a period of stubbornly high power costs. This backdrop has had an inevitable effect on both revenue and profit expectations for some of Duke's partners but, as long term, supportive investors, our investment team is working diligently to ensure they are given whatever help is required.

However, overall I am pleased to be able to report that the Duke portfolio remains well insulated and in a healthy position, protected by its increasing level of diversification. A positive effect that has resulted from the elevated level of interest rates has been the material increase in the cost of all other competing forms of debt. As I have mentioned before, Duke's permanent equity capital base and its long-term lending approach throughout economic cycles have enabled it to refrain from significantly increasing the cost of its offering in the short-term. The deliberate decision to not significantly raise the initial cost allows Duke to evaluate more opportunities through the lens of that company's ability to weather continued economic headwinds.

Unsurprisingly, Duke was cautious on making new deployments in Interim 2024 given the high level of uncertainty in the markets as well as a general declining trend in valuations that we are seeing across the board. The Company did welcome Glasshouse Products LLC as a new partner by entering into an US$11.5 million financing agreement. Founded in 2002 in Texas, Glasshouse is a long-established provider of custom glass solutions including the design, fabrication, sale and installation of glass architectural products and I hope that Glasshouse will become a long-standing core holding in the Duke portfolio as it executes its buy and build strategy. During the period, Duke also announced the successful exit of its investment in Instor Solutions, Inc., a California-based product reseller and service provider for work related to the build-out and migration of data centres. The exit represented the sixth and most profitable exit for Duke to date, delivering a triple digit IRR.

Outlook

Duke remains well-positioned for growth, having created a large and diversified portfolio of royalty investments alongside an exciting pipeline of new deal opportunities. The Company's liquidity position remains robust and the current macroeconomic climate means that demand for Duke's low amortising, patient capital remains strong. Our approach to monitoring our existing investments is collaborative and thorough. We evaluate monthly management accounts and look for signs of stress and aim to be proactive in working with a partner to address any issues. Having good visibility into our portfolio allows us to be cautiously optimistic for the rest of the year.

Looking more broadly, we constantly review the trends in the financing industry and we are pleased to report that Duke's core product is unique in the market due to its long duration and low amortisation qualities. The Private Credit market is a large and growing segment of the financing sector, and part of its growth has been from Private Equity players expanding into credit. What used to be the domain of the high street banks is increasingly supplemented by alternative financing providers, of which Duke is one. Our growing pipeline underpins our belief that we have a philosophy that resonates with SME business owners due to our ability to offer a long-term, partnership-based solution which keeps owners in control of their company.

Our product is essentially a hybrid between Private Credit and Private Equity, and as the Private Credit explosion has become mainstream in SME lending, we aim to ensure our 'best of both worlds' approach is articulated to business owners in a way they can compare. Therefore, we have embarked on a review of how best to show business owners the advantages of Duke when they are looking for capital. This review is ongoing and we will share the exciting changes with our shareholders in the period to come when they have been finalised. Our product remains the same to new business owners, but how we will engage with them will open up more opportunities for Duke and the goal is to broaden our appeal. We believe we are at the forefront of a large opportunity as Private Credit solutions become more accepted in SME lending.

As always, I am appreciative of the ongoing support of our shareholders and, on the back of a period of continued resilience and growth, I look forward to reporting on the Group's ongoing progress and development in future periods.

Nigel Birrell

Chairman

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

The notes form an integral part of these Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

All income is attributable to the holders of the Ordinary Shares of the Company.

The notes form an integral part of these Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The notes form an integral part of these Condensed Consolidated Financial Statements.

General Information

Duke Royalty Limited ("Duke Royalty" or the "Company") is a company limited by shares, incorporated in Guernsey under the Companies (Guernsey) Law, 2008. Its shares are traded on the AIM market of the London Stock Exchange.

The "Group" comprised Duke Royalty Limited and its wholly owned subsidiaries; Duke Royalty UK Limited, Capital Step Holdings Limited, Capital Step Investments Limited, Capital Step Funding Limited, Capital Step Funding 2 Limited and Duke Royalty Employee Benefit Trust. During the period, Capital Step Holdings Limited, Capital Step Investments Limited, Capital Step Funding Limited, Capital Step Funding 2 Limited were dissolved via voluntarily strike offs. Also during the period, the Group incorporated Duke Royalty US Holdings, Inc., a company registered in Delaware, USA.

The Group's investing policy is to invest in a diversified portfolio of royalty finance and related opportunities.

Significant accounting policies

2.1 Basis of preparation

The interim Condensed Consolidated Financial Statements of the Group have been prepared in accordance with UK adopted international accounting standards, and applicable Guernsey law, and reflect the following policies, which have been adopted and applied consistently.

On 31 December 2020, IFRS as adopted by the European Union at that date was brought into the UK law and became UK-adopted international accounting standards, with future changes being subject to endorsement by the UK Endorsement Board. The group transitioned to UK-adopted international accounting standards in its consolidated financial statements on 1 April 2021. There was no impact or changes in accounting from the transition.

The accounting policies adopted in the preparation of the interim Condensed Consolidated Financial Statements are consistent with those followed in the preparation of the Consolidated Financial Statements of the Group for the year ended 31 March 2023.

The Financial Statements have been prepared on a historical cost basis, except for the following:

• Royalty investments - measured at fair value through profit or loss
• Equity investments - measured at fair value through profit or loss
• Royalty participation liabilities - measured at fair value through profit or loss

The Directors consider that the Group has adequate financial resources to enable it to continue operations for a period of no less than 12 months from the date of approval of the financial statements. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

2.2 New and amended standards adopted by the Group

There were no new standards adopted by the Group during the reporting period.

2.3 New standards and interpretations not yet adopted

At the date of authorisation of these interim Condensed Consolidated Financial Statements, certain standards and interpretations were in issue but not yet effective and have not been applied in these interim Condensed Consolidated Financial Statements. The Directors do not expect that the adoption of these standards and interpretations will have a material impact on the interim Condensed Consolidated Financial Statements of the Group in future periods.

2.4 Going concern

In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. After making enquiries and bearing in mind the nature of the Company's business and assets, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future.

The cash flow needs of the Group have been assessed taking account the need for further funding for any of the existing royalty partners and the ongoing working capital needs of the business against the current cash and liquidity of the Group.

Furthermore, there is adequate headroom in terms of the uncalled loan facility in place should it be required.

Finance Costs

Income tax

The Company has been granted exemption from Guernsey taxation. The Company's subsidiary in the UK is subject to taxation in accordance with relevant tax legislation.

Basic earnings per share is calculated by dividing total comprehensive income for the period by the weighted average number of shares in issue throughout the period, excluding treasury shares (see Note 14). Diluted earnings per share represents the basic earnings per share adjusted for the effect of dilutive potential shares issuable on exercise of share options under the Company's share-based payment schemes, weighted for the relevant period.

Adjusted earnings per share

Adjusted earnings represent the Group's underlying performance from core activities. Adjusted earnings is the total comprehensive income adjusted for unrealised and non-core fair value movements, non-cash items and transaction-related costs, including due diligence fees, together with the tax effects thereon. Given the sensitivity of the inputs used to determine the fair value of its investments, the Group believes that adjusted earnings is a better reflection of its ongoing financial performance.

​

Royalty investments

Royalty investments are financial assets held at FVTPL that relate to the provision of royalty capital to a diversified portfolio of companies.

Royalty investment net income on the face of the consolidated statement of comprehensive income comprises:

All financial assets held at FVTPL are mandatorily measured as such.

The Group's royalty investment assets comprise royalty financing agreements with 15 (30 September 2022: 13, 31 March 2023: 15) investees. Under the terms of these agreements the Group advances funds in exchange for annualised royalty distributions. The distributions are adjusted based on the change in the investees' revenues, subject to a floor and a cap. The financing is secured by way of fixed and floating charges over certain of the investees' assets. The investees are provided with buyback options, exercisable at certain stages of the agreements.

Loan investments

Loan investments are financial assets held at amortised cost which the exception of the £2.2 million loan issued at 0% interest. The impact of discounting is immaterial to the financial statements. The below table shows both the loans at amortised cost and fair value.

The Group's loan investments comprise secured loans advanced to two entities (30 September 2022: two, 31 March 2023: two) in connection with the Group's royalty investments.

The loans comprise fixed rate loans of £4,652,000 (30 September 2022: £4,872,000, 31 March 2023: £4,652,000) which bear interest at rates of between 0% and 15%.

The loans mature as follows:

Loan investment net income on the face of the consolidated statement of comprehensive income comprises:

ECL Analysis

• liquidity and cash flows of the underlying businesses
• security strength
• covenant cover
• balance sheet strength

The disclosure below presents the gross and net carrying value of the Group' loan investments by stage:

The credit risk profile of the investments has not increased materially and they remain Stage 1 assets. No ECLs have been charged in the period on these assets as they are not deemed material.

The following table analyses Group's provision for ECL's by stage for the period ended 30 September 2023:

Equity investments

Equity investments are financial assets held at FVTPL.

The Group's equity investments comprise unlisted shares in 12 of its royalty investment companies (30 September 2022: 10, 31 March 2023: 11).

The Group also still holds two (30 September 2022: two, 31 March 2023: two) unlisted investments in mining entities from its previous investment objectives. The Board does not consider there to be any future cash flows from the remaining investments and they are fully written down to nil value.

Equity investment net income on the face of the consolidated statement of comprehensive income comprises:

Royalty debt liabilities

Royalty debt liabilities are financial liabilities held at FVTPL.

The other receivable balance consists of funds due on the sale of Duke Royalty Switzerland Gmbh, incorporated to hold the riverboat assets. On 31 March 2021, Duke sold its Swiss subsidiary to Starling Fleet AG for €11,600,000. The deal was structured so that €5,000,000 was payable on or before 30 September 2021 and €4,000,000 was due on or before 30 September 2022. Of the remaining €2,600,000, €867,000 was paid in September 2023, with the remainder due on or before 30 September 2024. The outstanding balance is accruing interest at 10% er annum.

Using the same methodology as laid out in note 7 for the loan investments, the deferred consideration has been subject to ECL impairment. The financial strength of the counterparty has been reviewed in conjunction with current and future outlook for river cruising, while also considering the charges that the Group owns over the riverboats. No impairment was recognised in the period to 30 September 2023.

Trade and other payables

In January 2023, the Group entered into a new credit facility agreement with Fairfax Financial Holdings Limited and certain of its subsidiaries ("Fairfax") and issued Fairfax 41,615,134 warrants. Refer to Note 15 for details. The facility term is up to £100m to replace Duke's existing £55m million term and revolving facilities. The credit facility has a five-year term, expiring in January 2028 with a bullet repayment on expiry and no amortisation payments during the five-year term. Furthermore, the interest rate is equal to SONIA plus 5.00% per annum.

The Group has adopted Interest Rate Benchmark Reform - IBOR 'phase 2' (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and 16). Applying the practical expedient introduced by the amendments, when the benchmarks affecting the Group's loans are replaced, the adjustments to the contractual cash flows will be reflected as an adjustment to the effective interest rate. Therefore, the replacement of the loans' benchmark interest rate will not result in an immediate gain or loss recorded in profit or loss, which may have been required if the practical expedient was not available or adopted.

At 30 September 2023, £37,000,000 was undrawn on the facility (30 September 2022: £20,250,000, 31 March 2023: £42,000,000).

Costs and fees of £1,439,000 were capitalised against the new credit facility. At 30 September 2023, £1,247,000 of unamortised fees were outstanding (30 September 2022: £387,000, 31 March 2023: £1,391,000).

The table below sets out an analysis of net debt and the movements in net debt for the period ended 30 September 2023, the prior period and the year ended 31 March 2023.

There is a single class of shares. There are no restrictions on the distribution of dividends and the repayment of capital with respect to externally held shares. The shares held by the Duke Royalty Employee Benefit Trust are treated as treasury shares. The rights to dividends and voting rights have been waived in respect of these shares.

Equity-settled share-based payments

Warrant reserve

There were no movements in the warrant reserve during the period:

Warrants

In January 2023, Duke issued 41,615,134 warrants to Fairfax. The warrants expire in January 2028 and have an exercise price of 45 pence. As per IFRS 2, the warrants have been valued using the Black Scholes model. A total expense of £2,771,000 has been capitalised and will be amortised over the life of the warrants. In the period to 30 September 2023, an expense of £277,000 (30 September 2022: £nil, 31 March 2023: £92,000) was recognised through finance costs in relation to the warrants.

At 30 September 2023, 41,615,000 (30 September 2022: 4,375,000, 31 March 2023 43,990,000) warrants were outstanding and exercisable at a weighted average exercise price of 45 pence (30 September 2022: 46 pence, 31 March 2023: 45 pence). The weighted average remaining contractual life of the warrants outstanding was 4.26 years (30 September 2022: 0.50 years, 31 March 2023: 4.56 years).

Share-based payment reserve

The following table shows the movements in the share-based payment reserve during the period:

Share option scheme

Under the Scheme, the Board of the Company will award, at its sole discretion, options to subscribe for Ordinary Shares of the Company on terms and at exercise prices and with vesting and exercise periods to be determined at the time. However, the Board of the Company has agreed not to grant options such that the total number of unexercised options represents more than four per cent of the Company's Ordinary Shares in issue from time to time. Options vest immediately and lapse five years from the date of grant.

No share options were granted during the period to 30 September 2023.

At 30 September 2023, 200,000 options (30 September 2022: 200,000, 31 March 2023: 200,000) were outstanding and exercisable at a weighted average exercise price of 50 pence (30 September 2022: 50 pence, 31 March 2023: 50 pence). The weighted average remaining contractual life of the options outstanding at the period end was 0.10 year (30 September 2022: 1.00 year, 31 March 2023: 1.50 years).

Long Term Incentive Plan

The fair value of the LTIP awards consists of (a) the fair value of the TSR portion; and (b) the fair value of the TCAD per share portion. Since no consideration is paid for the awards, the fair value of the awards is based on the share price at the date of grant, as adjusted for the probability of the vesting of the performance conditions. Since the performance condition in respect of the TSR portion is a market condition, the probability of vesting is not revisited following the date of grant. The probability of vesting of the TCAD per share portion, containing a non-market condition, is reassessed at each reporting date. The resulting fair values are recorded on a straight-line basis over the vesting period of the awards.

3,663,000 performance share awards (PSAs) were granted during the period to 30 September 2023 (30 September 2022: nil, 31 March 2023: 3,955,000).

At 30 September 2023, 9,726,000 (30 September 2022: 12,298,000, 31 March 2023: 13,727,000) PSAs were outstanding. The weighted average remaining vesting period of these awards outstanding was 1.49 years (30 September 2022: 1.44 years, 31 March 2023: 1.20 years).

Distributable reserves

Under Guernsey law, the Company can pay dividends provided it satisfies the solvency test prescribed by the Companies (Guernsey) Law, 2008. The solvency test considers whether the Company is able to pay its debts when they fall due, and whether the value of the Company's assets is greater than its liabilities. The Company satisfied the solvency test in respect of the dividends declared in the period.

Dividends

The following interim dividends have been recorded in the period to 30 September 2023, 31 March 2023 and 30 September 2022:

On 29 September 2023 the Company approved a further quarterly cash dividend of 0.70 pence per share, totalling £2,908,000, which was paid on 12 October 2023.

Deferred tax

Total

£000s

A deferred tax asset has been recognised as it is expected that future available taxable profits will be available against which the Group can use against the tax losses.

Related parties

Directors' fees

The following fees were payable to the Directors during the period:

Other related party transactions

The following amounts were paid to related parties during the period in respect of support services fees:

Support Service Agreements with Abingdon Capital Corporation ("Abingdon"), a company of which Neil Johnson is a director, and Arlington Group Asset Management Limited ("Arlington"), a company of which Charles Cannon Brookes is a director, were signed on 16 June 2015. Fees paid to these companies relate to the recharge of office rental costs. Abingdon fees also includes fees relating to remuneration of staff residing in North America.

Dividends

The following dividends were paid to related parties:

1 Includes dividends paid to Abinvest Corporation, a wholly owned subsidiary of Abingdon Capital Corporation, and to Arlington Group Asset Management

Fair value measurements

Fair value hierarchy

Level 3: Inputs that are not based on observable market date (unobservable inputs).

The Group has classified its financial instruments into the three levels prescribed as follows:

The following table presents the changes in level 3 items for the periods ended 30 September 2023, 31 March 2023 and 30 September 2022:

Valuation techniques used to determine fair values

The fair value of the Group's financial instruments is determined using discounted cash flow analysis and all the resulting fair value estimates are included in level 3.

Valuation processes

The main level 3 inputs used by the Group are derived and evaluated as follows:

Annual adjustment factors for royalty investments and royalty participation liabilities

These factors are estimated based upon the underlying past and projected performance of the royalty investee companies together with general market conditions.

Discount rates for financial assets and liabilities

These are initially estimated based upon the projected internal rate of return of the royalty investment and subsequently adjusted to reflect changes in credit risk determined by the Group's Investment Committee.

Valuation inputs and relationships to fair value

Royalty investments

The unobservable inputs are the annual adjustment factor and the discount rate. The range of annual adjustment factors used is -6.0% to 6.0% and the range of risk-adjusted discount rates is 14.7% to 17.4%.

Equity investments

The unobservable inputs are the EBITDA multiples and forward-looking EBITDA. The range of EBITDA multiples used is 5.3x to 10.0x (5.0x to 7.8x).

Royalty participation instruments

The unobservable inputs are the annual adjustment factor and the discount rate. The range of annual adjustment factors used is -6.0% to 6.0% and the range of risk-adjusted discount rates is 16.3% to 17.4%.

Events after the financial reporting date

Dividends

On 12 October 2023, the Company paid a quarterly dividend of 0.70 pence per share.