Q3 2020 Alaris Equity Partners Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the 11 equity partners income Trust third quarter 2020, <unk> earnings Conference call. At this time no. That's all lines are in illicit only boat, but following the presentation. We will conduct a question and answer session.
Any time during the call you'll be quiet needed assistance. Please press star zero for an operator also note that the call is being recorded on Friday November six 2020, and I would like to turn the conference over to Mr. Curtis Cook. Please go ahead Sir.
Thank you Sylvia good morning, ladies and gentlemen, and welcome to <unk>.
Equity partners conference call and webcast to discuss the financial results for three and nine months ended September Thirtyth 2000.
As well as corporate <unk>.
Curtis Congrats vice President of investments Investor Relations and I'm trying to.
Yes, Steve King President and Chief Executive Officer, as well as during fiscal Chief Financial Officer.
After a short presentation from Steven and there will be a question and answer session. The lines will be placed on mute until then.
Before we begin I'd like to remind our listeners that.
Amounts are given a Canadian dollars unless otherwise noted.
Caution that comments made today may contain forward looking information. This forward looking information is based on a number of important factors and assumptions and as a result.
Actual results could differ materially.
Information concerning the underlying factors assumptions and risks is available in last night's press release at RMD and pay for that period.
Forward looking statements and risk factors.
Which are available on SEDAR as.
Well, let's say non <unk> for.
Chris data is also presented in may differ from the way other companies presents such data.
Forward looking statements. Please refer to last night's press release under him do you need for the period from more clarification.
I'll now pass the call over to Dr. SKO [noise].
Thanks, Chris and thanks, everyone for joining us certainly happy to be reporting a solid Q3 in the midst of it all kind of like that supports the required services that the majority of our portfolio provide.
Moreover, our company is reporting year to date increases in revenue and profitability, then art and the overall weighted average earnings coverage ratio for the portfolio has increased from historically right around one and a half to 1.7, a significant move in one quarter.
This is a significant status, we do cap or you see ours at two times two boys skewing. The numbers for example, federal resources as any share away or two but that wouldn't play there were a number if we use the actual you see our.
And more importantly today, we have 12 to 17 partners, whether they see our over one and a half times just over 18 months ago that was six or 16.
Our businesses continue to perform in a very challenging environment.
We should it operational update a few weeks ago that suggested 23 and a half billion revenue in the quarter produced just that except.
Except for a small FX induced barrier to land at 23.4 million, a 16% increase on a per unit basis over our previous quarter.
Also in the quarter, we achieved normalized EBITDA of $20.1 million compared to 17.3 million in the previous quarter and 19% increase on a per unit basis.
Revenue and EBITDA results, primarily a result of two of our partner.
She sees recovery, where it's been it's been much faster and better than expected.
After being required to close all of its clinics for two months in Q2.
Regular distributions restarted and were paid in full for Q3, and there's a plan to pay the 2.2 million of unpaid distributions from Q2 in the coming months and nothing has been accrued in our books. So those will be increases to future revenue totals.
Chemical were seeing significant tailwinds from the additional cleaning requirements, but the pandemic is required.
There are no distributions for the first six months of 2020, they paid just under a million U.S.D. in Q3 with a 1.1 million U.S. do you expect in Q4 and now we'd expected annualized run rate of 4.4 million U.S. and the prospect of war of the way of distributions that lower roll or pardon me loan repayments in the coming quarters.
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I don't know if this quarter was a conversion into an income trust and the name change to Alaris equity partners on September 1st.
Which resulted in a number of accounting impacts that EBITDA diehard accounts will be hard pressed to get excited about.
Bottom line is the trust is a different kind of a company that attracts different accounting rules stasis.
Specifically alaris case, they didn't actually accounting for RSU and P.S. Yoo commitments to management directors.
As well as the method for presenting the convertible debentures.
No 13 in our financial statements. That's helped the various headlight impacts will be happy to answer any questions on the call or.
Follow up after the fact.
The income statement impact was a $10.6 million increased earnings in the quarter due to the change in accounting for the convertible debentures, but that impact was fully backed out when we presented our normalized EBITDA result.
The trust conversion allows us to retain more capital internally by reducing admit expenses related to operating subsidiaries overseas and most importantly, reducing our effective tax rate on U.S. revenue returning us to an overall rate comparable where we were pre 2019 and lowering our payout ratio.
A couple of improvements to our disclosure worth mentioning we have condensed the partner fair value table in note for the show the base currency to take some of the FX noise out and then a significant change to our partner section that maybe they are we now summarize key points in a single table and then provide commentary on those partners where additional explanation is warranted, we hope basketball's on both of those.
These changes are useful.
Our Q3 did see a handful of fair value increases, obviously, most significantly kimco up $7.5 billion U.S. to $20 million you asked on the hills of materially improved results over the past several months as well as our expectations for the months ahead.
Yeah, if I I was up 5.7 million U.S. based on continued success in 2020.
This U.S.T. consulting business has grown organically and through new opportunities in the current business environment and through the quarter. It became apparent that IMAX reset.
It would be happening for 2021 similar.
Similar to fleet up just under a million U.S. based on their 2020 financial results that will ensure a maximum reset in 2021.
No no decreases at all in fair value of any of our partners this quarter.
Other businesses like LMS and federal resources for example continue to perform well ahead of expectations, but no fair value adjustments recommended at this time.
Last quarter, we mentioned an opportunity to spark federal resources on a P.E. contract with U.S. government.
The supply chain as it was brought up didn't materialize and instead a fr has recently secured a supply chain that will deliver the PB, but over a much longer timeframe, which allows that far to use their own balance sheet to finance the project.
Ah So alaris had previously paid 11, a half billion dollar U.S.
Deposit, which is all since been repaid so no financial impact will there is other than the benefit of having a high performing partner like federal sources.
Earlier in the year fair to say, we are expecting our first weighted average negative resets in over 10 years and as he has played out our expectations have certainly improved and are now for a flat reset based on the following I.
That increase of greater than 10% for LMS as they continue to perform a top of the call resets for federal resources unify and fleet.
C C, which we thought would be down after two months of closure, we now expect that to be flat depending on their Q4.
I bought another call resets as expected from planet fitness GW and heritage in number.
And DMT, which show will be down 6%. This year, but was up 6% last year earlier. This year, we flattened the payment on the 2020 reset so that the current distribution will be maintained through the end of 2021. So you won't see a change to the DMT revenue amount until 2022.
And overall flat reset during an economic fallout from coordinated team displays the benefits of a diverse group of partners and industries and speaks to the high quality of our businesses and more importantly, the management teams that are running them.
Other items worth mentioning our bank covenants continued easily Matt and just recently, we extended the facility. Another two years to November 2023.
Similar terms that we'd certainly like to thank our bank syndicate for the significant show of support during these truly unique times.
Our income statement GE and I was a little higher than normal in the current quarter with that approximately 0.9 million spent on that at the end of the trust conversion.
Non cash unit based formerly called stock based comp expenses artificially decreased and the current quarter based on the new accounting rules for the trust, but you'll see the normalized EBITDA reconciliation mdna that we have allowed further half failure, so to normalized expense for the period.
The ongoing legal issues with sandbox will take time to work through and Alaris will not be giving any updates on this topic unless required in relation to a material change in the suit.
Resolution of matters or a final judgment as stated previously Alaris will vigorously vigorously defend the claims made as a company against the company and today, obviously, no accounting or financial impact to the financial statements.
The longstanding dispute with the CRT continues but a second favorable tax ruling with a similar pattern to ours was to set the site and the taxpayers favour during the quarter, giving us further confidence in our position.
And in fact, the theory has reached out in this trade is interested in a settlement discussion. We're currently putting together a proposal for their consideration.
And with more visibility on our performance.
We have returned to providing detailed guidance in the outlook section of the press release on the M&A.
Expecting revenue of 26 million for Q4, which I should that does not include any recovery or the BCC and paid revenues or anything extra that may come from kimco.
It also does not include any distributions from planet fitness and with all of its clubs elephant for three months, we do expect some level of distributions to commence in early 2021, and we will provide guidance as soon as terms are finalized with planned fitness a senior lender.
So, it's 120 million of dry powder, and a payout ratio below 75%, which is our lowest in in many years that.
That only gets lower with the restart of planet fitness distributions.
Our well positioned had heading into 2021.
So with that I'll turn it over to Steve fed before going acuity.
Thanks Aaron.
Obviously, there had done has done a great job of outlining the strength of our partner. So I don't have too much to add to that from a financial perspective, but.
Obviously, we have been very much awarded for our philosophy of partnering with well run required service businesses.
They tend to be more resilient than in times of distress like we're in right now is where we're very happy with with everything in our portfolio.
Reporting an all time high number of companies with more than a 50% cash flow buffer at an all time high aggregate number of 70% cash flow buffer all while we're going through a pandemic proves that our model is working extremely well.
And it certainly gives us and should give investors confidence that regardless of how long the pandemic persist that our fundamentals are strong and that we'll be able to keep providing our investors with a with a steady yield at the very least.
An update on planet fitness, Darren mentioned that the all other clubs have been open and so.
We do have now several months of actual numbers and trends to look at some.
So they are not paying us monthly distribution right now their cash flow numbers are strong.
Membership numbers of stabilize and interestingly enough actual Jim usage.
At our locations have moved up over 80% compared to peak pre covance levels. So while we get paid whether members use the gyms are not the usage number is actually very telling as it relates to the risk of future membership declines or perhaps growth.
Having a payout ratio below 75% with an identifiable event in the near future with it which is planet fitness restarting that will bring it down into the low 60% payout ratio range should give investors a very strong sense of not just stability, but also potential dividend growth.
Combined the restarting of planet fitness with any material amount of capital deployment and our payout ratio would actually be in the fifties well below our stated objective of 65% to 70%.
On the deployment front, we've had a great deal of success said during this period in sourcing potential new partners.
They are obviously attracted to our capital because of the ability to retain control retained the upside and also do a transaction that doesn't involve lenders who is shown to be very difficult to deal with for many companies during the pandemic.
We expect to be quite active and new partnerships and follow on deals over the next four months based on transactions that are in process today.
We have begun to traveling again to the us as we have been deemed as essential workers. So we expect that we will be able to move forward to transactions that are in progress now.
Now that we are able to be a face to face with with our potential partners again.
I'd also like to take this chance to thank not just our employees, but also the management teams and the debt.
Tens of thousands of employees that are 17 partners. This.
This has been a really difficult time for everybody obviously.
Managing working remotely and working well trying to protect the health of your families that.
It's obviously been a tough time for everybody.
And we do expect this environment to last for some time, but we feel that we're very well positioned to prosper regardless of how long. It takes so sylvia I'll throw it back to you and open it up to ask the question.
Certainly sir ladies and gentlemen, if you do have a question at this time. Please press star followed by one on your Touchtone phone you want to hear eight suites from acknowledging you request.
You decide you would like to withdraw your question. Please press star followed by two.
Ladies and the speaker phone, we do ask that you. Please lift the handset before pressing any Keith please.
Please standby for your first question.
Which will be from Scott Robertson at RBC capital markets. Please go ahead.
Thanks, Good morning.
Okay.
So you guys have been deferring distributions from planet fitness now for a couple of quarters, but it sounds like you guys are closer to a solution that will get distributions restarted.
My question is what would have to happen to the distributions in terms of.
Your level of initial restarts or timing of restart to trigger a meaningful revaluation of the investment.
From an auditor perspective, I'm, just thinking as we're heading into the Q, we're auditing process.
Yes, Scott we right now are in our fair value modeling.
Fairly consistently for planet fitness, we did that back in Q1, which resulted in that fairly.
Fairly significant write down of planet fitness and so we would have to be well below our I think we've got probably somewhere between 50 and 75% of distributions collecting in 2021 right now so so worst than that would result in a in a decline and we certainly don't expect that so we expect better than that we expect some.
Level of distributions, we expect some level of recovery of of unpaid distributions, but obviously that that this is one that is with the most sensitive to what's going on right now.
And we'll continue to work with them.
On the go forward, but as far as Q4 valuation.
They would have to be a fairly significant change in our expectations.
Got it thank you.
And I guess my next question is around Kimco.
How much upside do you guys think there is there.
When you guys have the ability to force the sales of the company.
And.
Receive some proceeds from there or do you think there's potentially more upside if you were to hold the investment rather than youre monetizing deployed into something new I am just get your thoughts on that and I guess could you remind us excluding the changes to the operating environment right now where there is an increased amount of.
Focus being put on Sanitization.
Any fundamental changes to the company that would suggest the financial performance would improve under normal operating environment. Thanks.
Yes for sure Scott.
The management team at Kimco has done a great job and.
And they were seeing gains before coven and I expect that to continue going forward with or without covance. So so yes, there have been material changes, especially on the on the sales side.
The first few years under this management team, we're really focused on Rightsizing the company and the and the cost line and now the next phase of us increasing sales. So they've had a rebuild the sales department or we're seeing some really good traction from that critical of it.
Then of course.
We've had a significant rising tide with.
With Covidien and I think most people expect.
Higher cleaning rates going forward, even after the vaccine is is developed so but thats kind of the.
The million dollar question on.
That industry in that company as you know.
What is a normalized state.
There.
There are many multiples ahead of where they were from an EBITDA perspective, just last year. So.
How much if you did sell the company how much credit are you going to get four or the current run rate.
That's that's up for debate. So that's what we're evaluating right now and working with them some advisors to get as much.
Good intelligence as we can and make that decision in concert with the management team, who we wouldn't force anything here.
But.
Yes between us and the co managers, we think it makes sense then we'll we'll move forward with the sale and if we think there is just a really long pattern of.
Growth here, and then even doing some tuck in acquisitions, and and Thats, a possibility as well but.
Right right now I would.
I would suggest our our slate.
Slight preference would be to.
To test.
Selling and recouping some at some cash out of this one that would be fired above what we've gotta lifted that on our balance sheet.
Thanks, that's it for me.
Great. Thanks.
Your next question will be from Scott Thompson at Sea RBC. Please go ahead.
Hi, Hi, gentlemen, good morning.
Yes.
Following on the Kimco can you give us an idea kimcos exposure in terms of real estate asset class and geography, just thinking about in terms of.
Market ability for.
Sales.
In terms of.
I would look.
On the business.
Post cobot.
Yes, they have vasco they have a massive footprint.
48 states they operate in.
Certainly heavier footprints in some.
On the Chicago area that last area, but really diverse across across.
Across the country.
And at reasonable.
Amount of.
The variability around the types of business lots of office towers lots of manufacturing spaces. Some some frontline retail like telecom retail better.
That's a really good diverse customer base, and avnet, and a big geographic mix as well and importantly, they vacated.
They kind of remove themselves from from malls over the last couple of years of mall business was not profitable and given the pandemic.
I think that was.
You will have very savvy move getting animals, but thats, probably not a place I want to be right now.
Okay. Thanks very helpful.
Just going back to the M&A pipeline are you revisiting many deal follows that started before the pandemic and and how have.
However, the negotiations in proposed terms changed for the warm filed you want to call.
Yes, we do have one of the deals we're working on was it was started pre pandemic.
The rest of have come about over the last.
A couple of months.
And we really don't.
Foresee much of a change in our in our typical terms.
I would say that.
Yes majority of what we're doing is that.
That kind of a standard 14% initial.
Dividend yield from from the company so.
But.
A really tremendous group of companies again, low debt levels and and companies that have performed extremely well during the pandemic. So we're excited about.
Spoke to hopefully getting some of these to the finish line.
And are you seeing sort of a revived interest on cold deal files and are you seeing a lot of new inbound.
Yes, our new inbound have returned to basically pre coven levels. They did come down for the first few months of the lockdown.
But no we haven't we haven't seen kind of a return of cold files. The one of the we're seeing our our our new opportunities.
Okay. That's it I'll turn it over for other questions. Thanks very much. Thanks.
Thank you next question will be from Gary Hall.
Ill Bank capital markets. Please go ahead.
Thanks, Good morning, gentlemen, I just first one on the BCC here sounds like that turn really turned around the corner here.
And Dan mentioning you guys mentioning a deployment in the second and third tranche I think was that.
The 45 million or so any more specific in terms of timing you can share with us and.
That improvement to the payout ratio would that look like.
In terms of timing, we wouldn't do anything with.
With BCC until we're caught up at all the deferred distributions. So three months of distribution that we deferred in Q2, but need to be caught up before we did follow.
Follow on investment with with BCC, but there certainly there.
Their EBITDA numbers.
There are sufficient to do follow on transaction and we would be ecstatic to put more money into that company talk about somebody that's proven themselves. During the most difficult times. The management team is is absolutely top notch and.
Yes.
One of the interesting things is we actually think there is a little bit of a covert tailwind behind their numbers right now as people that are staying home more and not traveling not going out for as many dinners things like that some of the more.
They've got more disposable income and we think some of that is contributing to BCC number. So we want to be cautious we want to make sure that we know exactly.
So what what part of their numbers maybe.
Tailwind.
Do they still have some headwind with some people not being comfortable going in.
We'll want to see the next next couple of months play out.
And as I say, we want to we want those that deferred distributions to be caught backup first so thats. Those are the kind of the key things were looking at on that one and then as far as the financial impact to us in the payout ratio.
Right in our outlook, we talk about kind of every $50 million Canadian of of new deployment would that would knock the payout ratio down sort of three 3.5% so that would be kind of right in that range.
Okay perfect. Thanks, and then Steve I know, it's hard to predict.
One just on the net capital deployment side I think the other questions were kind of more in that gross capital deployment side, but just looking out over the next 12 months now.
No.
And also good to see the the carry electric in GBM follow one in this environment. So just want to pick your brain on that in terms of the net side looking out over the next 12 months.
Yeah, it's one of the benefits of the pandemic is that.
With.
The M&A market isn't as as hot and and frothy as it as it would have been in the past from from private equity firms, particularly because banks are more cautious and private equity requires on high leverage levels to to do their deals. So I think it's going to reduce the number of redemptions that we get.
As you've seen.
It already has in this calendar year and it and so there is a.
A couple of our of our partners obviously.
Obviously kimco is is one that could be a possibility for redemption.
As as we've already discussed.
But in terms of material redemptions, we don't see much right now that would be.
On the radar screen, but things can change.
You know I always like to think there's probably one or two companies each year. If you just do the math.
The size of our portfolio.
You should get one or two each year based on our average hold period.
That.
That sell but maybe a little less over the next 12 months, but.
It'll really depend on how quickly things get back to normal, which I was a betting that I would say, it's going to take a while.
Okay. Okay. That's great and then my last question at year and.
You are in a much better position now in the mid 70% range you talked about planet fitness that could bring that down further and you also mentioned that.
I think your comfort range is in the 65% to 70% range. So.
When I think about historically, you've operated in the 90% range and the stock is traded quite volatile given kind of redemption and capital deployment news.
Does that change your way and how you think about raising dividends and could you bring that payout ratio down further before you think about increasing dividends here.
So I think.
I think you nailed it at 65% to 70% is kind of our target.
That gives us a huge amount of buffer and I think should really reduce the volatility of the way our stock trades.
But there's really no reason.
If the market doesn't want to pay us for dividend I guess that would be a different equation and we would just retain more and more capital ofour effort growth but.
Think we will get rewarded for for our growth and increasing a dividend keeping that fair ratio in that 65% range.
I think thats.
From what we have seen right now I think thats going to be our strategy, which as I mentioned in my little talk if you get benefit Thats on and you get some deployment, but certainly put us in a position to to increase the dividend and stay at that 65% range.
Well that that's exactly what I was trying to go because the your dividend yield is quite high.
I think you guys have talked about planet fitness coming back on but if the stock doesn't move back into kind of more high territory, even though planet fitness might come on which you, perhaps retain more that for capital deployment or or organic growth.
It's a consideration I think.
You know, what the catalyst of planet fitness and deployment.
I really don't think we'll stay at this kind of a yield.
Maybe that's wishful thinking but.
If it does then.
Then that would be a consideration to just maintain.
Retain that excess cash flow internally and and redeploy it into 14%.
Opportunity. So yes, it's a consideration we've talked about that over this period of time, but I do think that we will get rewarded for.
For those catalysts and then for increasing the dividend.
Okay, Great. That's it for me thank you.
Thank you.
Thank you.
And next question will be from Appalachia.
Uh-huh at Stifel. Please go ahead.
Hi, guys I just had a quick question.
Have you been seeing any indications so far.
Hi, good lockdown in any of the states that benefit next update.
Is that helpful concentration, that's coming up and have you had discussions that.
Senior lender then.
So.
We think that we're in a pretty good place of planet fitness.
They are as you know closures of businesses are really done at the state and county level not the enough federally and.
And planet Fitness has worked a lot with the governors in the states that they operate in and really don't see any desire to disclose any clubs.
Ever say never but no one has a crystal ball on this pandemic.
And if things go completely out of control that and then there is a possibility but as it stands today at these levels and at this time.
Closures are being considered.
So thats key to working with our lenders.
The cash flow stream is as strong as I mentioned, the kind of the underlying numbers and trends seem to be all moving in the right direction. So.
We think there is a there is a good path there and lenders seem to be working well right. Now so we'll be we'll be sitting down as lenders and the company over the next two weeks.
And hopefully coming out with with a plan on how to get.
Our distributions restarted and.
Kinda, how any potential phasing might might look like based on kind of operational targets that they'll set for the company.
Okay. Thank you that's it for me.
Great. Thank you.
Thank you.
Hi, Mr. King we have no further questions I would like to turn the call back over to you.
Great well. Thank you very much everybody for tuning in and as always Curtis Darren and myself are always available for follow up calls and conversations. So I encourage you to do that.
And in the meantime, we'll we'll look forward to coming out with new news and.
And hopefully.
Hopefully a solid fourth quarter. So thank you very much.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines have a good weekend.
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