Q1 2021 Alaris Equity Partners Income Trust Earnings Call
Good morning, ladies and gentlemen, and welcome to the <unk> equity Partners income Trust first quarter 2021 earnings conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero.
For the operator this call is being recorded on Friday May 17, 2021, I would now like to turn the conference over to Darren Driscoll. Please go ahead.
Thanks, Colin and good morning, everyone and welcome to drill interest equity partners conference call and webcast to discuss financial results for three months ended March.
31 2021.
As well as a brief corporate update on Darren Driscoll Chief Financial Officer, Hello, understood on joining the call by Steve King President and CEO of <unk>.
For a short presentation for Steve on either will be a question and answer session. All lines will be placed on mute until then to avoid background noise.
Before we begin I need to remind our listeners that all amounts given are in Canadian dollars unless otherwise noted listeners are cautioned that comments made today may contain forward looking information as for.
Forward looking information is based upon a number of important factors and assumptions.
As a result actual results could differ materially additional information concerning the underlying factors assumptions and risks is available on last night's press release, and our MD&A for the period under the headings forward looking statements and risk factors copies of which are available on SEDAR at SEDAR dot com as well as our website non.
For risk data is also presented and may differ from the way other companies present as.
As with the forward looking statements. Please for last Night's press release at R&D day for a period for more clarification regarding non <unk> measures.
Okay now we've got that important stuff on the way I'd.
I'll go through a handful of highlights for the quarter Q1 revenue of $32 2 million precisely as guided when we published our year end.
Just.
In early March.
For the comparative period, Q1, 2020 had $95 million of Spi revenue that day part.
Paid as a part of a three year make hole, which inflated the prior year numbers you back that out in Q1. This year is up approximately 17% on a per unit basis year over year.
Comment specifically to revenue new revenue in the quarter of $4 8 million from three FMC, Edgewater and brown and settle and of note our full quarter starting in Q2 from those for partners will be approximately $6 3 million.
Kimco is paying us full distributions and that includes a positive 6% reset effective January 1st planet.
Planet fitness still paying us that 40% distribution rate.
And the weighted average aggregate reset of plus one four.
<unk> is included in those numbers and really an incredible stack given what has transpired over the last 12 months 15 months.
Also included the quarter common dividends of 383000.
From New partners FMC in Q1 as they have continued their practice of paying monthly dividends and Thats, what we expect going forward.
EBITDA for $34 1 million on the quarter. It does include a $4 million bad debt recovery in the quarter as we have collected $4 million recently from 4 million U S recently from chemical.
All of the accounts receivable on from notes that were previously provided for on our financial statements.
And Thats a direct result of Kimco is exceptional financial performance over the last 15 months.
Normalized EBITDA of $28 8 million is an increase of 22, 5% on a per unit basis compared to the prior year period for.
For the increase are direct result of record gross employment of $174 million in Q1, all previously announced are now showing up on our revenue.
For perspective, Q4, 2020 was $142 million and our largest 12 month for calendar year ever was $193 million in 2019.
Our payout ratio is at its lowest historical level between 65% to 70%.
Our Q1, except of course for last year is generally a quiet quarter for fair value changes given the proximity to our year end audit, but we still have three modest increases to report for total of $4 $5 million U S. At March 31.
Chemical is up $2 2 million U S.
Global wide media up $1 3 million in federal resources up just under 1 million U S. All in about $5 5 billion Canadian or <unk> 12.
Per unit on all generally based on an exceptional outlook and start to 2021.
As previously disclosed for reminder, Q1 saw big changes on the borrowing front to match our growth in one year, our EBITDA went from $90 million to over $120 million.
And in Q1, we did increase that facility from $330 million for $400 million, while adding a seventh back to our syndicate.
Also I'll remind everyone we have that covenant flexibility over the next six months to navigate around future deployments and the potential unexpected redemptions of chemical and federal resources those.
Those two amounts could mean up upwards of $200 million Canadian on the next quarter or two.
Deployment in Q1 included.
A handful of new deals that include a common shares and FMC edgewater and brown on subtle along with a straight press deal and three eight.
Related to the comment we did update our disclosure MD&A as our expectations for our common dividends is different in each case.
But other than planet fitness and Brian on settled on the near term, we do expect cash yield on those common shares over the long term.
We assumed a small amount on a run rate, but since they are discretionary it's hard to build into our until we see a regular pattern of note.
Very different dividend paying habits, ranging from FMC paying us monthly for.
<unk> twice, a year and carry on others annually.
I will not be on every deal we do and we will continue to.
We have it only being up a small portion of our capital deployed.
From a partner update standpoint, the portfolio does continue to shine weighted average ECR is approaching 175 times and at its best level historically.
Still 15 or 20 partners at 75% have have an ECR on over one five and now eight of those 15 on over two times.
On a planet fitness is on track to restart full distributions in July.
And nothing is assured but membership numbers and EBITDA are ahead of forecast and covenants trending towards compliance for the June <unk> measurement date, and that would improve on our payout ratio by about 5% to just under 65%.
Kimco is maintaining its successful run revenue and EBITDA continue at all time high levels paying us full distribution and even paid us at 4 million U S mentioned earlier and with our support are actively looking for sources to take us out.
It could be between the U S 60 per U S $80 million and a significant gain over book value, that's just over $40 million U S.
We would need to transact to realize that but they are few more steps closer to that since we last spoke.
Again, nothing is assured and if nothing transpires, we will continue to collect our contracted and growing yield.
RMP distributions would be collected over time, rather than in a redemption event.
I should also note that at Kimco redemption would have almost no impact on our payout ratio because of all the unlocked value that I just described.
On a federal resources as another company that is exploring redemption alternatives I think imminent, nor assured, but a redemption would be above our book value over $100 million Canadian and resulted in above average IRR well above our historical average of 16% over the term of the investment.
Federal resources redemption impact on the payout ratio is more significant than simple kimco, but would largely depend on the timing of other free deploying that cash.
The combination of these two redemptions would provide over $200 million as I mentioned.
Our debt levels and more importantly provide additional capital for reinvestment into 2021.
Just a couple of quick comments on the weaker U S dollar and the impact it has on <unk>.
As it relates to those expected reductions I mentioned it will just be a pay for impact we will simply be paying U S denominated debt. So the only impact you will just see it on.
Non cash basis on our financials.
As for future quarters softness doesn't.
In fact, our revenue, but we do have over $30 million on forward contracts over the next 12 months.
At around $1 33, so youll see some realized FX gains over the next few quarters that will offset a good chunk of that softness that we're seeing today.
Our outlook for Q2.
For revenue of $33 8 million.
And as we mentioned at year end, our G&A did spike in 2020 due to the trust conversion on some additional legal bills and we do expect a more normal G&A expense the year of about 12 $5 million on our Q1 total G&A of $2 $4 million is well in line with that expectation and down about $5 million from from the same quarter last year.
Those are my comments on the financials on I'll pass it over to Steve before we go to Q&A.
Thanks, very much Darren and thanks, everybody for tuning in.
Obviously looking at our portfolio.
I certainly haven't seen for time, and our 17 year history, where literally every company in our portfolio is trending positively.
It's early in the year, but all in addition to the names that Darren mentioned I'll also highlight that gws on body contours and FMC as three of our larger partners that are all experiencing exceptional growth this year.
For all three companies as well on the way to maximum resets for 2022, and very large ECM numbers based on current run rates.
We also had an interest in classroom as it relates to our balance sheet. Darren has mentioned along with our capital deployment program. So we spent $355 million over the last 12 months, which is by far a record pace.
We've got 300.
And then change.
Drawn on our bank facility so from the outside it appears that we don't have too much more room.
Without going back to the equity markets, which is.
Not not to obviously in.
Darren has touched on chemical and federal resources, and a roughly $200 million, we expect from those so that will have.
A huge impact not only on our book value, but also fund the majority of our expected deployment over the next course of this year.
So based on transactions that are in progress we could be in a position over the next few months.
Less than $200 million drawn on our debt facility and still have a payout ratio below 70%, which is extraordinary.
So these redemptions are important for us because deal flow continues to come in at a record pace.
Multiples being paid by traditional private equity firms that are at an all time high of competition is fierce.
But we do continue to have success because of the one on the cost structure that we've created specifically for entrepreneurs, who go on to give up control of their business.
We expect to remain active through the rest of this year not just with new partners, but we also have several carrier partners that are active and current acquisition processes that will require further capital for malaria. So an exciting time for us and our shareholders and call on all three.
Turn it over to you for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear from three Toprol acknowledging your request and your questions will be pulled in the order they are received.
Should you wish to decline from the polling process. Please press star followed by two and you are using a speaker phone. Please lift the handset before pressing any keys one moment for your first question Okay.
Okay. Your first question comes from Nik Priebe from CIBC capital markets. Nick. Please go ahead.
Great. Thanks, just.
Just a couple of questions on planet fitness growth partners.
In the event that the resumed full distributions in July.
Would there also be a plan to catch up on previously deferred distributions.
So I assume you will be consistent with your prior treatment, where those revenue would only be recognized when theyre received just two comments on that would be helpful.
Yes, you bet, Nick there is a plan.
As to get full distributions going starting July and then there is a plan to start catching up about $200000 per month, starting in January of 2022 day.
Also campaign more if they have more cash to do that but thats kind of the plan that we set in place obviously subject to bank covenants and things like that but.
Is the plan and you are correct, we will only record that as it comes in and so.
That will that will provide us a little extra boost to the first handful of quarters in 2022.
Okay got it that's helpful and then thank.
Thank you had pointed out that it would improve the payout ratio of about 4% that is already building on an all time low. So I'm just wondering how youre thinking on the longer term payout ratio has evolved throughout the pandemic.
It's partly a function of the deployment opportunities you have in front of you and you discuss that a little bit, but just interested to see how youre, how youre thinking has evolved on that front.
Yes, I think.
Our strategy is to keep our payout ratio below 70% long term.
So with planet cutting back on.
And redeploying that capital that Thats expected to come in we'll be in a position I guess as a board to make a decision on whether to increase the dividend later this year or or just continue to drive our payout ratio down so low.
Consider the impact for the potential impact on our cost of equity.
And the impact of having a lower equity share so we'll figure that out probably in.
Q3 time.
Okay.
And then last one for me just a point of clarification on federal resources.
And the reset like my understanding was that it does help on the call on recent was expected, but it looks like the Q1 revenue rate was unchanged on a sequential basis, it's possible I misinterpreted that but I just wanted to get some color on that.
It certainly was a top of the call are reset or there are some small nuances from from year over year. Some people some partners.
Pay it to catch up sometimes.
I do believe it probably relates to the prior year quarter being a little higher than it should have been.
And that they are minus 6% wasn't properly set so they had on our current run rate.
Sure.
Federal resources.
$11 3 million U S and Thats, there that should be the regular quarterly dividend.
Going forward.
Got it Okay. That's helpful. All right that's it for me. Thank you.
Thank you for that.
Your next question comes from Scott Robinson from Robert <unk> from RBC capital markets Scot. Please go ahead.
Thanks, Good morning.
Good morning.
The first question I have is regarding the valuation ranges for federal and Kimco first on federal I guess why is the range.
Give a little color on the premium I thought it was contractual the second on Kimco Darrin I think in your opening remarks, you said the bottom range of 60 on the press release, It said 70 of COVID-19.
For that.
And then also.
What has developed over the past quarters that has led you to increase the range and also narrow it.
Sure, Okay, I'll start our start with kimco.
I misspoke on my comments.
Certainly don't expect anything towards that bottom of that range for kimco based on on what we're seeing so it will be.
Hearth of north of 70%.
As long as again as long as they transact.
But based on the indications of interest that we're seeing on on.
Taking us out.
We are quite quite positive on that one for federal resources, we did have to make a change in our disclosure there is.
A strange new launch in the.
And the repurchase calculation. So if it's just flat out redemption, where theyre just bias out it is $86 million.
If there is on a third party sale. There is some consideration of a third party multiple that can bring that down a little bit and so the range. We had to put in it should reach 75% to $86 million.
But we still do expect the higher end of the range, but but there is a possibility we get less if there is if the redemption does end up being a third party sale.
At.
At a lower multiple than we're expecting but again that was just something that we thought that it's not 100% the shirt at 86%. So we should provide a range, but certainly will be above our book value.
Got it okay. That's helpful.
And then I guess looking at the G&A line. This quarter was about $2 5 million Bucks.
You guys are sort of guiding towards 12 five.
Is there some sort of seasonality that we should be aware of or was this quarter just exceptionally low.
Yes included in that.
And that 12 on a half it would be the performance bonus for for management, which doesn't hit until Q4 and thats on that based on a percentage of the increase in distributable cash per share. So there's $1 million of half dollar.
Basically a placeholder, which is kind of what we put paid last year that would be a cue for the rest would be as it is so I think Q1 was a little lighter than expected I think Q2 will also be a little lighter.
On our travel expenses are still way way down.
We have a conference where we host all of our partners that is usually in Q2 that will definitely not be in Q2 might be in Q3, if we can pull it off.
But I think sort of two and a half a quarter right now looks good with a with a bump in Q4 with an accrual for the.
Discretionary bonus.
Got it Thats helpful.
My last question switching gears a bit I see on your website you guys posted on ESG report so thanks for that.
And I guess in terms of managing the ESG it layers itself, but also like investing through an ESG lens.
Do you guys think about the potential benefits to <unk>.
Do you think it could help you compete more in these bids.
Deals if you guys have a track record of being a ESG friendly company.
It could help attract better talent or potentially.
Garner more favorable credit terms, how should we think about that.
Yes.
Although it seems that it would help us too much in bidding for new deals but.
Certainly in terms of.
Attracting continued to attract good talent for something that or more people are going to look for in <unk>.
I think it will have effect on every company has a cost of capital other step, but the equity as well. So those are all considerations.
In Guinea.
Getting with the times.
Making sure that we're on.
Leaders or not.
Great. Thanks, that's it for me.
Your next question comes from Gary Ho from data or that Gary. Please go ahead.
Thanks, Dan.
Good morning.
My first question can you talk a little bit about the capital deployment pipeline on the new investment side as well in terms of the follow on net.
For BCC, where we're at in meeting the financial thresholds and or other.
Sure.
On the radar.
DTC has far surpassed the threshold that you would need to do that.
That next tranche, so that would be one of the respective follow on deals that I was referring to there also.
<unk>.
Essentially an acquisition at this time as well so simple.
Very exciting times at BCC, not just with that but they're there for organic growth has been has been from accrual. So.
That's one.
Theres a couple of other companies in our portfolio that have that have LOI is outstanding on on acquisitions that we're working through so none of them are our large on their own but you add all of those follow ons.
And I think it will have a meeting a meaningful impact on our deployment for this year.
And then on.
On the new deal side as I mentioned.
Deal flow is at record levels.
I think a lot of the industry took some time off.
I'll start on the pandemic last year.
Certainly has come Roaring back in medicine.
So that's a positive it's also a negative for the multiples being paid are at all time highs.
That doesn't affect us as much as.
As other companies on our industry because of our unique structure, but.
At the margin, there's going to be some impact but.
We continue to win deals.
It's Ben.
Quite amazing to see over the last 12 months, how we've done an extremely competitive processes, where we are.
Seem to have a.
Very high win percentage in deals where there is 20 to 30 bps or so.
We're.
We're still optimistic on non on.
On the deployment.
But obviously, we only have so much visibility in terms of.
When deals are going to land.
Been around long enough to know that we shouldn't.
Give out higher numbers on on.
On deals that are hoping to close over the next few months because anything can happen and we did have to walk away from that on a couple of deals. This year that didn't make it through due diligence I don't expect that on the ones that we're working on there kind of past that point, but.
Anything can happen.
It sounds like overall, you're fairly confident in redeploying the roughly $200 million.
Mentioned from federal resources, and kimco over the balance of the year.
That is the least lowering ACI low we've got lots of deals and in fact, we've already kind of low.
Free.
Pre spent that money, we wouldn't normally have our debt.
<unk> levels up where they are at so knowing that those were coming we've kind of free that caused some of those proceeds.
On it and then on the flip side outside of Kimco and federal resources and.
Any other potential redemptions.
The horizon from your discussions with portfolio partners.
Nothing nothing material in our portfolio.
So we'd be looking at fleet fleet is one that we've talked about for a while.
We're still looking at something like that.
<unk> been looking for a wildfire, there's nothing imminent there, but nothing nothing immediate horizon.
Got it.
And then Darren just my last question.
<unk> revenue of $135 4 million included a $2 million in common dividends.
Is that a conservative estimate.
So what is the upside too common distributions from your $70 million roughly.
Common equity investment.
Certainly we view $2 million is conservative what's the upside I really I really don't know I mean, we've got a company like Kerry electric it's small but.
Our common access it's only 900 gram, but we could see something thats.
Is quite significant compared to that size of an investment FMC is paying us a nice monthly dividend.
We expect a couple of here.
In June.
In December.
So maybe a couple of million more but I hate somewhere in two to four is probably a good range and and I hope to get even more but it depends on how you got a company like Brown settled at that right now we're focused on on <unk> and.
On balance sheet.
Repayments and so I think that one longer term will be a very good dividend payer, but but right now isn't so just really too hard to peg.
And forecast and and just because as I mentioned earlier, we have such a wide range of dividend policies as far as timing. So it will be a little lumpy, but so we thought we just throw in $2 million for an annual basis, and and give us something to beat.
Okay.
And that's it for me thank you.
Thanks, Greg.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one. Your next question comes from Zachary <unk> from National Bank Financial Zachary. Please go ahead.
Thanks, Good morning, everyone.
You bet.
You mentioned that planet fitness is trending toward bank covenant compliance I'm, assuming that they are currently noncompliant.
But based on how they are currently trending can you give us an idea.
The level of risk or the cushion comfort against the delay in resuming full distributions on the July schedule. If we do see some kind of hiccup in the vaccination rollout for instance.
Yes, I mean I think this is still the one that is without a dose for the most COVID-19 sensitive in our portfolio. So what could get in the way of that I asked that exact question on our update call with planet fitness last weekend and it would be a further lockdown if one of the states that they operate and that did revert back we certainly don't see that on the horizon.
But that is something that could get in the way otherwise their membership numbers there their covenant numbers are showing lots of room and so we view that as a much smaller the really the only the risk is just a further.
The shutdown of flare up something like that and one of the Washington State, Maryland, Florida, or Tennessee, Yes, they don't they don't need to improve at all from where they're at today.
The bank is just using June 31st as the measurement dates up while we're waiting for it.
So while these times where it.
It is nice to be a Canadian investor in the U S businesses, because we're getting locked down and Theyre getting opened up so.
Certainly for our portfolio is that.
We're in a really good place on the kind of state for COVID-19.
For the influence.
Bit of a sneak peak for the reopening.
And just one more question maybe on the philosophical side.
With the addition, because small common equity investments obviously your pool of applicants has widened.
And do you think that that leads you to be more selective in the quality of your partners or does it really increased number of deals instead.
Yes, I think I don't know if I'd say more selective with.
<unk> been very selective, but it does require a slightly different lens.
When youre looking at a deal.
Our tests have always been capped on the upside.
We've never been.
I'm concerned about company's forecast for you.
Growth and whatnot, we didn't get to participate at all.
All very nice for the entrepreneur or the common equity owners, but we were particularly looking at cash flow stability.
A chunk of common on most of these deals.
That is.
A bigger factor for us to evaluate that.
The growth prospects for each of these companies so.
Equally as selective.
In terms of the overall expected return on the investments we do have to look at it slightly differently.
That's great color I appreciate it I'll turn it over.
Thanks Yuri.
Our next question comes from Cree over Reynolds from <unk> capital. Please go ahead.
Good morning, guys.
Good morning.
Just a quick one on <unk> Tom.
Has there been any change on that front.
On the back of the T mobile and sprint merger and retail opening up or is it.
As it goes kind of on that front.
What I mentioned that Oliver to companies that are trending positively that included Cc car. So there their cash flow is.
Has improved quite a bit since the merger.
They seem to kind of made it through the <unk>.
The COVID-19 situation and there's been quite a quite a bit of consolidation in the number of stores between.
T mobile on spread there was kind of a planned closure of a certain percentage of stores.
And that has helped things out as well on a on an individual store basis.
Is that a more profitable. So so yes, we are seeing very good things that are seeing some type of work we're optimistic there.
Great. Thanks, that's it for me.
Great. Thank you.
There are no further questions at this time I'll turn it back to Steve for closing remarks.
Okay. Thanks for calling in thanks, again, everybody for listening and as always please contact US directly if you have any further questions, but we look forward to coming back in three months for us with our good results have a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.