Q3 2021 Alaris Equity Partners Income Trust Earnings Call
Good day, Thank you for standing by and welcome to the luggage third quarter 'twenty 'twenty. One earnings release calls at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. If you require further assistance jurgen.
The conference. Please press Star Zero I would now like to hand, the conference over to your speaker to be Amanda Fraser Chief Financial Officer. Thank you. Please go ahead.
Thank you Bill good morning, ladies and gentlemen, and welcome to the Alere as equity Partners conference call and webcast to discuss the financial results for the three and nine months ended September 32021.
Well as a brief corporate update I haven't had the Fraser Chief financial Officer of hilarious I am joined on this call by Steve King President and Chief Executive Officer of alerts as noted after a short presentation from Steve and I. There will be a question and answer session. All lines will be placed on mute until then to avoid background noise before we begin I would like to remind our list.
Or is that all amounts given are in Canadian dollars unless otherwise noted listeners are cautioned that comments made today may contain forward looking information. This forward looking information is based upon 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, and our MD&A for the period under.
The heading forward looking statements and risk factors copies of which are available on SEDAR at www Dot SEDAR dot com as well as our website not IRS data is also presented it may differ from the way other companies present, such data as with the forward looking statements. Please refer to last night's press release, and our MD&A for the period.
More clarification regarding non <unk> measure.
Q3 revenue of 42.
Million, where the head of 37, and a half million of guidance, primarily due to $3 4 million of U U S of unapproved distributions received from kimco relating to prior periods.
Q3 normalized EBITDA of $33 3 million was well ahead of our Q3 2022 'twenty 'twenty or 'twenty 1 million, an increase of $32 five per cent per unit record deployment in the last 12 months. A 400 million has resulted in this increase during Q3 kind of finish returned to paying a school distributions of 800.
U S millions per month after deferring distributions in Q3, 'twenty 'twenty due to the pandemic.
In the quarter. We also received 526000, you asked with common distributions and year to date, we have received over 1.8 million U S. During.
During the quarter <unk> booked a 4.6 million tax recovery due to more favorable interest treatment than initially anticipated by the U S. Cares Act legislation, we were able to carry back losses to prior periods and.
As a result, our expecting refunds.
On previous amounts paid.
We also had some fair value changes in Q3.
Aggregate, including the common units, an increase of $15 9 million to our book value or 35 cents per unit.
Kimco was increased in the period $6 5 million U S. As they continue to proceed toward a redemption at.
This as well as the businesses continued exceptional performance has led to an increase it's worth noting that in the last nine months Kimco has repaid seven point million U S of previously unpaid distributions and 4 million U S. A problem no.
FNC is preferred in common with also increased by $2 7 million U S. Looking like a top of the collar reset in 2022, the business is performing extremely well.
Unified was increased by 1.8 million U S. As the business is growing unexpected a maximum positive reset in 2022.
Brown, a subtle was increased by $1 5 million U S.
During Q2, the preferred units upfront unsubtle were reduced by $3 3 million U S. The first five months of 2020 one has seen their margin.
It seems some margin pressure due to the project and customer mix as well as project delays, which.
Reduced our expectations on the FY 'twenty to reset to negative.
Pro forma for large projects and the timing of which can impact the monthly cash flows since that time Brown unsubtle has delivered two quarters with double the revenue earned in Q1 and a significant amount of work on hand for Q4 and the following year. We now expect our reset to be at least flat as a result and that impact to the preferred valuation is a decrease of 1.8.
Million U S year to date up from the $3 3 million U S. Previously reported.
Other increases in the period included.
Three he offset by a small decrease in edgewater.
We now have eight months of financial results for all of our partners that are anticipating total aggregate resets in 2022 to be an increase of approximately $2 6 million or six cents per unit.
Of the collar resets are expected from 10 of our partners, including planet fitness body contours axiom, DNT and new partners three E and F. N C. Just to name a few while unexpected decrease from LMS will be uncovered.
And much anticipated federal resources reduction took place on October 26, the successful redemption of fed at $13 9 million U S premium on $67 million invested the redemption resulted in a 113% total return and an IRR of 19% of note our payout ratio remains in our <unk>.
The range of 65% to 75% after the transaction the proceeds of the fed transaction were used to pay down outstanding senior debt and while we had pre deployed the capital with our investment into G. M. D. N M. At the end of Q2. This leaves us with $140 million of available room on our facility and we are at roughly two times leverage.
We've been busy working through a number of potential follow on transactions with existing partners follow on transactions generally will require less third party diligence support and more upfront work performed by our own team and as a result, our transaction costs for Q3 were down compared to prior periods, but we will be returning to more historical levels Q4.
Total capital deployed for the first nine months has been a record year at $260 million.
The portfolio continues to perform well weighted average ECR has continued to be over 1.7 times and an all time high 15 of our 19 partners continue to have E. C ours of over one and a half times and now kind of those 15 or over two times last quarter was.
<unk> 16, and nine inclusive of that.
During the quarter, we did have two partners move into the one to one two range being BNS and Edgewater BNS as previously discussed the project delays and margin pressure in the beginning of the year have resulted in a slight decline in the TTM ECR into the one two range.
One to 1.2 range. If you were to look at that based on the last six months. The ECR would be back in the 1.2 to one and a half range and we expect them to move into this range or higher once the Q1 'twenty results are out of the TTM period BNS.
BNS has also deferring a small portion of their payment to better align with the free cash flows generated from projects BNS paid $1 $3 million of the $1 9 million contractually owed in the quarter and we expect any amounts deferred to be collected in the next six to 12 months and our long term outlook for the company remains unchanged.
Edgewater as results have been impacted as COVID-19 restrictions remain at most of the large doa facilities in which Edgewater operates in addition to a tight labor labor market in sourcing and staffing New engineers Edgewater has low levels of debt and the outlook for 2022 is positive and we anticipate edgewater to trend back up over the coming year.
Our outlook for Q4, 2021 calls for revenue of $36 2 million or G&A remains consistent with annual expectations of $12 million to $13 million driven slightly higher by an increase in the management bonus accruals as a result of hitting bonus targets and continued growth in distributable cash flow per share for Q.
Four.
Okay.
Okay, Thanks, Amanda and thanks, everybody.
For dialing in are obviously thrilled with the results that we were able to share yesterday in our Q3 release.
In addition to being well ahead of guidance the amount of growth that we've been able to show that our actual results isn't overlooked feature of our business model I think given that our focus has been and always will be delivering a healthy cash flow yield to our shareholders.
Our increasing EBITDA by 32% on a per unit basis for the three and nine months ended September <unk>.
Large number for any company and reflects the accretive nature of our investments given that we have two equity offerings in the previous 12 months.
One question that I've been getting a fair bit of recently, which is for good reason.
Back of supply chain and labor shortages within our portfolio.
Just as we were extremely fortunate to be in required service type businesses for the Covid shutdown last year.
The same kind of companies are weathering the supply chain issues very well in 2021 are the majority of our partners don't rely on products and materials to generate revenue.
And those that are best able to have some element of that have been able to manage their businesses around.
Stay within a pretty tight range on their budgets.
The only one having some significant declines from this.
Future is LMS, which relies on bringing a steal them from foreign countries the price of steel.
So spiked, causing that impact on the gross margins we.
We do expect the impact to stabilize and possibly reverse at some point.
Several of our companies are definitely having challenges with with labor.
Amount already noted Edgewater DMT would be another one.
Huge customer demand that they have not been able to to take full advantage of because of just a shortage of labor across the U S.
So all that being said our portfolio as a whole continues to trend up from a distribution reset to fair value and earnings coverage perspective.
The issues that Covid has created we couldn't be happier with our performance.
As Amanda also mentioned we have several follow on investments that are scheduled between now and year end, we don't anticipate being able to add another new partner in the next seven weeks, but the volume of follow ons on top of the Newport News. We already added this year will make for another record year of deployment.
2022 is already looking like another very exciting year for our company. Our team is as good as it's ever been our reputation in the industry is helping us attract ordinary partners and we're evaluating initiatives that will take greater advantage of those assets that provide more opportunities for growth for our shareholders.
Ill turn it over to you and for questions from the field.
As I reminder, to ask a question you will need to press star one on your telephone to bid for all your questions.
Sunbather, while we compile the Q&A.
Your first question comes from the line of Nick.
From CIBC capital markets. Your line is open.
Okay. Thanks.
I'm just wondering if I could ask you to elaborate a little bit on what triggered the bonus accrual in the third quarter and.
Whether we should expect Q4 now to look like.
Our more traditional Q3 from that perspective.
Our bonus accrual is triggered by the growth in distributable cash per share. So as we achieved we beat the prior period in Q3, we accrued a portion.
There would be an additional accrual in Q4, if we sustain or exceed the.
Q4 growth per share so I would expect to see some amount of additional management bonus accrual coming for the Q4 period as well.
Understood. Okay, and then I was wondering if you could I ask you to comment on how the pipeline looks for the deployment of the proceeds from the federal resources redemption.
Yes.
It's a strange time of the year. So in August early.
September there is always.
A rush of new deals come on.
He is looking to close deals before year end.
Hmm.
Once that period ends the rest of the year is very very lean.
Because every day firm is heads down.
Trying to get everything that they've signed up closed.
We are right now so.
You don't see a lot of new deals until until January once once the end of September and so.
So yes, we don't as I mentioned, we don't expect any new partners to be honest.
We now and year end, but we've got a.
Probably a record level.
Follow on deals to close in the next seven weeks, which we're looking forward to doing.
The deal flow.
At our BD guys at several conferences in the U S.
The advisors are expecting another great year Appeals for 2022.
Okay that makes sense and then last one for me I know the the payout ratio may bounce around a little bit with the natural ebb and flow of the best.
Current activity.
You did announce an increase in the distribution to unit holders last quarter I'm, just wondering what payout ratio you would be comfortable contemplating another race like should we be thinking about that 70% is being the general threshold for what you would target long term and if you were able to drive it lower than that and we we.
We might start to think about another.
Another distribution rates, just trying to get your thoughts around that.
I certainly wouldn't rule.
I commend our board obviously, it's their decision but.
I wouldn't recommend the dividend increase anywhere about 65% payout ratio.
Personally I'd like to see it below 60 before we raise it again so that you know after a raise where we're back in the low 60. So.
That's kind of my target for it.
Okay that makes sense.
That's it for me thanks for taking my questions.
Thanks, Matt.
Your next question comes from the line of Garvey, who form did sorry.
Your line is open.
Thanks, and good morning, Steve just Steve just follow on that last question.
On capital deployment can you maybe elaborate on those one to one and maybe the magnitude I know, there's the BCC one I'm not sure. If that's the one that you're referring to and or others that that's in the pipeline.
And also.
You talked about I'm not.
That's a larger kind of chunky.
Tier ones, maybe in 2022 weeks are there something that's driving that and maybe U S capital tax issues and whatnot and maybe just talk about the environment in the U S as well.
Yeah. So.
I won't give any specifics on follow ons for us. This year, you mentioned B C. C. A 25 million U S. That's one that we've had.
Actually in place, but it is expected to close before year end.
There are several others on.
Talk about that would be that would.
Add up to more than D. C Z. So we're excited about that.
In terms of.
Kind of the deal flow environment.
One of the things that has made us.
Better deploy our capital that has been the addition of some common equity along with our press.
That continues to be a major selling point, where we can reach deals where they need more of the capital.
<unk> replaced them.
Up until two years ago, we were kind of limited to companies that needed only.
50 to 60 at a maximum 1% of their cap stock replaced now we can compete on deals up to 80%, which is the vast majority of deals most.
But equity owned businesses or our 80% owned by <unk> 20 per cent owned by management.
Management are as long as management is willing to roll their 20% and with US we can now bid on those deals so.
We've seen that dramatically increase the number of deals we can content.
And our people continue to love our crafts.
The.
You know the financial leverage that that gives them on success because there are perhaps are capped.
Their growth so that gives us a huge competitive advantage in the market.
So we're still seeing really good interest in the same ton of deal terms that we've always had averaging 14% kind of current yield on our press and still with vast majority that we'd be looking at being able to pay common dividends to us as well.
Okay, Great and then may be just the beginning.
Your picture question just in terms of the rising rates that we're seeing how does it how does that impact your <unk>.
Business model I think in the past you've talked about.
Maybe some competition from the Mezz debt side I'm, just wondering like if you look out over the next couple of years. If we are still in this environment how that might impact.
You're you're offering I know previously you've been offered something in the 15% like would you potentially move back in.
In a higher rate environment.
Yeah.
I think there would be.
Room to move it in a higher rate environment to a point.
We've been doing this for 18 years, so we've seen we've.
We've seen different interest rate environments, although without being said, it's been pretty low for the vast majority of that period, but.
When we first started 18 years ago, we were starting at 16%.
As interest rates move down multiples went up we.
It came down to an average of 14, so I think there would be room to move back up to that 16% range if interest rates go up.
Significantly.
Too much past that I don't think it's it's a viable it certainly wouldn't be.
Regardless of where rates go I think starting with something.
Starting with the two.
20, and above I think it's really difficult just from an opex point of view so but.
But we will certainly be able to move.
Two to 300 basis points.
Okay.
And then maybe just my last question.
Steve You mentioned, some labor shortage issues that that's water and DMT, how do you think.
We see potentially a decline in the ECR a little bit when you look out to 2022.
I'm just wondering like over the next 12 months, what we should expect from some of these companies.
So I think we've already seen the impact in Edgewater and that's why you've seen their ECR move down I don't anticipate them. They don't anticipate that moving down any further.
Part of it is labor shortage part of it is.
Still workers not being allowed on site at some of the department of energy sites. So.
We do expect that to change positively in the next few months knock on wood.
And with the N T.
They have hit records. This year, so even though there's a there's a labor shortage. It's really a matter of you know probably not being able to fill as many of the potential orders as they could have but theres still hitting records. So.
It would be nice to have more labor, but it's not it's not causing them at the clients.
If that makes sense.
Yeah, Okay perfect. That's all my questions. Thank you.
Thanks, Greg.
Again, okay.
To ask a question you will need to press star one on your telephone.
Next question comes from the line of Zaccardi every said from National Bank. Your line is open.
Good morning, everyone. Thanks for taking my question.
Alright.
With the cash injection from said, putting you very comfortably onside of covenants after running a little bit tight.
How high are you willing to take leverage before tapping the equity markets again.
I've always said that in order for us to bid on large new deals.
At the show that company and their advisor.
I want to have $100 million of deployable capital on our balance sheet at all times. So you know we're at 140 right now we do expect.
For the proceeds coming in from Kimco. So we've got a little bit of room without being said and I think I mentioned this in the last quarter.
There are other options for us other than coming back to the equity markets.
The high yield debt market that I think is a is a viable option for us as well which would be a.
Lower cost of capital for our shareholders. So.
So yeah I think we're in good shape, but if we got everything from.
From kimco, where that would be another $80 million to $90 million Canadian.
So that obviously makes a big difference and would certainly give us a many months of leeway.
And on the topic of kimco any updates on timing or likelihood of redemption.
No updates on timing I would say that the likelihood is has increased since we last spoke.
Things seem to be progressing well, but we're not quite at the point, where we can.
Call it eight on it yet.
Works for me, Thanks, I'll turn it over.
Yeah.
Great. Thanks, Ed.
Your next question comes from the line of Lloyd <unk>. Your line is open.
Thank you.
Hi, Steve.
Alright. Thanks.
Updating on the potential for future deals.
I listened to a couple of Oh.
Patients are from U S firms than in the same line of business Carla was one.
And on the universe of potential companies going forward in a higher interest rate and inflation environment as you touched on you've mostly operated in a lower inflation lower interest you see that universe increasing.
Or.
How do you see that and also on the federal deal what really caught my eye was the endorsement by management.
How satisfied they were and.
With those kind of endorsements from AR partners are you getting a lot of referral business. Thank you.
Yes, no I appreciate the good questions. We are and always have once we've done a deal with somebody and I would include there their advisors advise them through their processes, we tend to get a lot of repeat business with people that we've already done deals with we're pretty unique structure, there's a lot of advisors.
Just don't take the time to really understand the benefits to their clients. So the more case studies, we have like fat and.
And many many others that we've had over 18 years the more of those that we have the better it is for us.
From a marketing tool.
We've been really blessed that are almost all of our current and former partners have been more than willing to talk to.
Prospective new partners when we are bidding on those deals and as.
As he mentioned a guy that fed will be.
It will be no different are they they would love to talk to people in a kind of reiterate what the what they talked about in that press release. So.
And it's another Great example, I'm also why we have started putting common shares and as a small piece of the pie here, we got a 19% IRR the common shareholders long said that significantly more than that.
Cause of the muted growth in aircrafts, they had an extreme amount of growth, especially over the last couple of years. So they've benefited greatly from our structure.
As it relates to your first question on the interest rate environment to a certain extent a higher interest rate environment helps us from a competitive.
Standpoint, we use very little debt.
In our transactions and their structures. So most of our companies have no termed.
The ones that do would have less than three three times EBITDA debt. So in the U S marketplace those considered under Levered.
Most of the firms are bidding with a four to seven times.
Leverage on average.
So higher interest rates for them really impacts their economic model much more than it does us.
So we've.
We've seen that in the past when when the credit markets and either tightened or gotten more expensive.
It's actually better for us from a competitive point of view.
Yeah.
Carey next question comes from the line of Scott <unk> from RBC. Your line is open.
Great. Thank you.
Steve The first question I have is going back to the comments you made at the end of your opening remarks, just regarding I believe you said something to the effect of Youre going to try and take better advantage of opportunities.
Next year for growth just wondering if you could speak a bit about that if that's more from the capital.
Structure perspective, like I know you mentioned you are looking at high yield debt like do you think you're going to try and.
Change the capital structure that way or perhaps.
I'm speaking more towards.
A change in our new product offering like the way you guys introduced common equity. If you can just provide a little bit more color around that.
Yeah, no thanks for that Scott.
We've got a really great team here and we've also got kind of a.
Pseudo proprietary structure that no one else in the world does so we get fantastic deal flow.
We're getting between 601000 deals and per year now.
Because of our reputation and because of our unique structure.
I think we can take better advantage of our team and our reputation.
And grow outside of the confines of our own balance sheet.
And by that I mean, I think we can raise outside capital and.
Get fees on managing that capital for others within our within our team here for Valero.
Shareholder so.
Both on the senior debt side and going further into the common equity side I think there is opportunities for us there too to make money on other people's money and not just our shareholders.
Interesting okay.
Would you envision a like.
Like you were able to use the existing team you have or do you think you would need to also then I build out I'll call. It an asset management team.
That does more fundraising marketing kind of thing where are you guys able to do that with your in house capabilities today.
I think we would need some add Scott.
You know, especially on the on the common equity side.
We need to work through some of the corporate governance issues, but.
Certainly we'd be able to kind of piggyback on the work that our business development team does our due diligence and monitoring teams.
But I think you know from a corporate governance point of view you'd have to build out the team more so there's there's a different group kind.
Kind of solely evaluating common equity and whatnot. So so those are the things we're evaluating it's early stages right now, but I'm quite excited about it and I think it's the right thing to do we.
My mind, we've got one of the best teams in the industry.
Great Thanks for that.
The second question I have is on planet fitness.
The franchise orders reporting improving fundamentals within the system in general just wondering how that may play out for P. F. G P and ultimately it'll there isn't I guess, specifically do you think the cash flow generation. There. If it continues to increase could result in advance payments of those deferred distributions rather than over the 32.
Last month time horizon.
Or alternatively, do you think that.
There could be increased follow on capital deployment with that partner.
Given the environment that they're starting to see.
Yeah, they're they're doing really really well so I always see that the results that youre seeing at the parent company or on the backs of the.
Franchisees like like our partners at <unk>. So.
<unk> numbers have been continually getting better and better.
They've also had the benefit I think of some people migrating from some of the smaller footprint more expensive.
Type systems to the planet.
System.
And in terms of getting our deferred distributions back quicker I think that is likely.
Although it'll be balanced with the fact that they have quite a few growth opportunities as well so we don't want to.
Diminish their their growth possibilities by by stripping almost too much cash so we'll balance that.
We want to be patient.
Patient good long term partners for them, which we have it.
And we greatly appreciate that.
The question about.
Endorsements from our partners.
You should talk to a doctor and I'd break it up.
They will.
Talk endlessly about how great we've been a partner so.
Yeah.
There probably is more capital deployment opportunities with planet I think theres, some acquisition opportunities that they're looking at and as.
And as such.
Stable.
System that we'd be we'd be happy to put more money into that.
Great. Thanks, that's it for me.
Okay.
Your next question comes from the line of Jeff Van <unk> from Macquarie Securities.
Your line is open.
Hi, good morning, everyone.
Good morning.
I think most of my questions have been answered, but did want to touch at least briefly on the common dividend picture here heading through the end of the year.
FMC has been a great a nice to hear for you over the course of the year pretty consistently and I know the other ones can be a little more sporadic. So can you just remind us is there.
Is it through the fourth quarter that you might see a couple of them true up like a more I'm sure has had a decent year any color. There you can offer up on that.
So we do expect emera has been paying them twice.
Twice twice a year of Covid and then we would expect to be receiving another one.
And this December as well Carey pants and annual distributions and then on top of our more regular payers being FNC.
FNC.
So yeah I was just a board meeting with him or couple of weeks ago, where they are doing extremely well so I'm expecting that.
And then to continue to grow and same with FNC, we're putting up just huge results. This is carey for that matter. So.
Planet fitness.
Just touched on.
Don't anticipate any common dividends from them, Phil I think their focus will be on growth and debt repayment.
Needless to say when Covid hit they were real pleased with what's.
With our lenders and.
Having having the debt so I think there are.
They're gonna be in repayment hold which is fine by us for every dollar they pay off as the dollar to the common equity value. So.
So yes, we are.
We're seeing some good things.
For sure with our common equity distributions.
Okay, and then maybe just one more on kimco and sorry, if this has been asked already but.
But you know they topped up.
The quarter for you with some sort of deferred payments, owing and I know, there's a fairly sizeable balance still outstanding there. So do you do you expect that.
Regardless of the transaction picture on them do you see a few more of these payments coming in in the coming quarters.
It looks like.
Probably.
<unk> of some sort is more likely than just continued payments over hopefully we're closing in on it and I would say that if there are additional payments during Q4, they will likely to be for the next quarter paying down the problem now so they've sort of thing.
Going back and forth between Providence.
Our distribution so I do know that if they have some additional cash and nothing gets done before the end of the year, we could probably expect another problem no payment.
Okay, great. Thanks for that color Oh, Thank you.
Alright, Thanks, Jeff.
As a reminder to ask a question you will need to press star one on your telephone.
We have no further questions at this time I would now like to turn the call back to Steve King Chief Executive Officer for any closing remarks.
Great. Thanks, again, everybody for tuning in as as always please.
Please don't hesitate to give us call directly if you have any follow up questions and look forward to talking to you I guess in March after Q2 for us thanks very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Good day, Thank you for standing by and welcome to the allergies third quarter 2021 earnings release calls at this time all participants are in a listen only mode.
Third the speaker's presentation, there will be a question and answer session. If you require further assistance during the conference. Please press Star Zero I would now like to hand, the conference over to your speaker at the B Amanda Fraser Chief Financial Officer. Thank you. Please go ahead.
Thank you Gail good morning, ladies and gentlemen, and welcome to the Alere as equity partners conference call and webcast to discuss the financial results for the three and nine months ended September 32021.
Well, it's a brief corporate update I haven't got the Fraser Chief Financial Officer of the Louis I Am joined on this call by Steve King, President and Chief Executive Officer and Larry.
As noted after a short presentation from Steve and I, there will be a question and answer session. All lines will be placed on mute until then to avoid background noise before we begin I would like 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 that is forward looking.
Information is based upon a number of important factors and assumptions and as a result actual results could differ materially.
Additional information concerning the underlying factors assumptions and risks is available in last night's press release.
Our MD&A for the period under the.
The heading forward looking statements and risk factors copies of which are available on SEDAR at www Dot SEDAR dot com as well as our website.
Yeah for US data is also presented it may differ from the way other companies present, such data as with the forward looking statements. Please refer to last night's press release, and our MD&A for the period for more clarification regarding non <unk> measure.
Q3 revenue of 42.
Million, where the head of $37 5 million of guidance, primarily due to $3 4 million of you you asked of unapproved distributions received from kimco relating to prior periods Q.
Q3 normalized EBITDA of $33 3 million was well ahead of our Q3, 2020, 2020 21 million and an increase of 32, 5% per unit record deployment in the last 12 months. A 400 million has resulted in this increase during Q3 planet fitness return to paying us full distributions of 800.
U S millions per month after deferring distributions in Q3 2020 due to the pandemic.
In the quarter. We also received 526000 U S. A common distributions and year to date, we have received over $1 8 million.
During the quarter <unk> booked a 4.6 million tax recovery due to more favorable interest treatment than initially anticipated by the U S. Cares Act legislation, we were able to carry back losses to prior periods and I've never looked at.
As a result, our expecting refund.
On previous amounts paid.
We also had some fair value changes in Q3 in aggregate, including the common units an increase of $15 9 million to our book value or 35 cents per unit.
Kimco was increased in the period $6 5 million U S. As they continue to proceed toward a redemption.
This as well as the businesses continued exceptional performance has led to an increase it's worth noting that in the last nine months Kimco has repaid seven point million U S of previously unpaid distributions and 4 million U S problem no.
F N T is preferred in common with also increased by $2 7 million U S. Looking like a top of the collar reset in 2022, the business is performing extremely well.
In a fight with increased by $1 8 million U S businesses growing unexpected maximum positive reset in 2022.
Brian a subtle was increased by $1 5 million U S.
During Q2 with the preferred units of Kratos that'll were reduced by 3.3 million U S. The first five months of 2021 have seen their margin has.
I've seen some margin pressure due to the project and customer mix as well as project delays, which.
We reduced our expectations on the FY 'twenty to reset to negative.
Dana performed large projects and the timing of which can impact monthly cash flows since that time Brennan subtle has delivered two quarters with double the revenue earned in Q1 and a significant amount of work on hand for Q4 and the following year. We now expect our reset to be at least flat as a result and that impact to the preferred valuation is a decrease of one point.
8 million U S.
Year to date up from the $3 3 million U S. Previously reported.
Other increases.
In the period included.
Three E offset by a small decrease in edgewater.
We now have eight months of financial results for all of our partners that are anticipating total aggregate reset in 2022 to be an increase of approximately $2 6 million or six cents per unit top of the collar resets are expected from 10 of our partners, including planet fitness body contours, Oksana DMT and new partners three.
E and F N C. Just to name a few while unexpected decrease from LMS will be on call. It.
Our much anticipated federal resources reduction took place on October 26, the successful redemption of Fad at $13 9 million U S premium on $67 million invested the redemption resulted in a 113% of total return and an IRR of 19% of note our payout ratio remains in our.
Targeted range of 65% to 75% after the transaction the proceeds of the fed transaction were used to pay down outstanding senior debt and while we had pre deployed the capital with our investment into G. M. D. N M. At the end of Q2. This leaves us with $140 million of available room on our facility and we are at roughly two times leverage.
We've been busy working through a number of potential follow on transactions with existing partners follow on transactions generally require less third party diligence support and more upfront work performed by our own team and as a result, our transaction costs for Q3 were down compared to prior periods, but we will be returning to more historical levels for Q4.
Total capital deployed for the first nine months has been a record year at $260 million.
The portfolio continues to perform well weighted average ECR has continued to be over one seven times and an all time high 15 of our 19 partners continue to have ECR is of over one five times and now 10 of those 15 or over two times last quarter was.
<unk> 16, and nine inclusive of that.
During the quarter, we did have two partners move into the one to one two range being BNS and Edgewater DNS as previously discussed the project delays and margin pressure in the beginning of the year have resulted in a slight decline in the TTM ECR into the one two range.
One to one two range. If you were to look at that based on the last six months the ECR would be back in the one two to one and a half range and we expect them to move into this range or higher once the Q1 'twenty results are out of the TTM period BNS.
BNS has also deferring a small portion of their payment to better align with the free cash flows generated from projects BNS paid $1 3 million of the $1 9 million contractually owed in the quarter and we expect any amounts deferred to be collected in the next six to 12 months and our long term outlook for the company remains unchanged.
Edgewater as results have been impacted as COVID-19 restrictions remain at most of the large doa facilities in which Edgewater operates in addition to a tight later labor market in sourcing and staffing New engineers Edgewater has low levels of debt and the outlook for 2022 is positive and we anticipate edgewater to trend back up over the coming year.
Our outlook for Q4, 2021 calls for revenue of $36 $2 million, our G&A remains consistent with annual expectations of 12 $5 million to $13 million driven slightly higher by an increase in the management bonus accruals as a result of hitting bonus targets and continued growth in distributable cash flow per share for Q.
Four.
Yeah.
Okay, Thanks, Amanda and thanks, everybody.
For dialing in I would say, we're thrilled with the results that we were able to share yesterday and in our Q3 release.
In addition to being well ahead of guidance the amount of growth that we've been able to show that our actual results is an overlooked feature of our business model I think given that our focus has been and always will be delivering a healthy cash flow yield to our shareholders.
Our increasing EBITDA by 32% on a per unit basis for the three and nine months ended September is a large number for any company and reflects the accretive nature of our investments given that we have two equity offerings in the previous 12 months.
One question I've been getting a fair bit of recently, which is for good reason.
Pact of supply chain and labor shortages within our portfolio.
Just as we were extremely fortunate to be in required service type businesses for the Covid shutdown last year.
Same kind of companies are weathering the supply chain issues very well in 2021 are the.
The majority of our partners don't rely on products and materials to generate revenue.
And then those that have.
Some elements of that have been able to manage their businesses around that.
Within a pretty tight range on their budgets.
Only one having some significant declines from this.
Feature is LMS, which relies on bringing.
Steel and from foreign countries the price of steel has spiked.
The impact on our gross margins, we do expect the impact to stabilize and possibly reverse at some point.
Several of our companies are definitely having challenges with with labor.
Amount already noted Edgewater DMT would be another one.
Huge customer demand that they have not been able to to take full advantage of because of just a shortage of labor across the U S.
So all that being said our portfolio as a whole continues to trend up from a distribution reset to fair value and in earnings coverage perspective.
Given the issues that Covid has created we couldnt be happier with our performance.
As Amanda also mentioned we have several follow on investments that are scheduled between now and yearend, we don't anticipate being able to add another new partner in the next seven weeks, but the volume of follow ons on top of the New partners. We already added this year will make for another record year of deployment.
2022 is already looking like another very exciting year for our company. Our team is as good as it's ever been our reputation in the industry is helping us attract more great partners and we're evaluating initiatives that will take greater advantage of those assets that provide more opportunities for growth for our shareholders.
Okay ill turn it over to you and for questions from the field.
As a reminder to ask a question you will need to press star one on your telephone stupid, but all your question press the pound.
Please stand by while we compile the Q&A roster.
Your first question comes from the line of Nick.
<unk> from CIBC capital markets. Your line is open.
Okay. Thanks.
I'm just wondering if I could ask you to elaborate a little bit on what triggered the bonus accrual in the third quarter and whether we should expect Q4 now to look like.
More traditional Q3 from that perspective.
Our bonus accrual is triggered by the growth in distributable cash per share and so.
We achieved we beat the prior period in Q3, we accrued a portion.
There would be an additional accrual in Q4, if we sustain our exceed the.
Q4 growth per share so I would expect to see some amount of additional management bonus accrual coming for the Q4 period as well.
Understood. Okay, and then I was wondering if I could ask you to comment on how the pipeline looks for the deployment of the proceeds from the federal resources redemption.
Yes.
It's a strange time of the year so.
August early September Theres always.
A rush of new deals.
He is looking to close deals before year end.
Once that period ends the.
The rest of the year is very very lean.
Because every day firm and hands down.
Trying to get everything that they've signed up close as we are right now so.
Typically you don't see a lot of new deals until until January once once the end of September and so.
So yes, we don't as I mentioned, we don't expect and as new partners to be honest.
Between now and year end, but we've got a.
Probably a record level.
Follow on deals to close in the next seven weeks, which we're looking forward to doing.
Sure.
The deal flow.
At our BD guys at several conferences in the U S.
The advisors are expecting another great year Appeals for 2022.
Okay that makes sense and then last one for me I know the payout ratio may bounce around a little bit with the natural ebb and flow of investment activity.
You did announce an increase in the distribution to unit holders last quarter, just wondering what payout ratio you would be comfortable contemplating another rates like should we be thinking about that 70% is being the general threshold for what you would target long term and if you are able to drive it lower than that then we might start to think of.
Another distribution rates, just trying to get your thoughts around that.
I certainly wouldnt recommend to our board obviously, it's their decision but.
Wouldn't recommend the dividend increase.
We're about 65% payout ratio.
Firstly I'd like to see it below 60 before we raise it again.
After a raise where we're back in the low 60 so.
That's kind of my target for.
Okay that makes sense.
That's it for me thanks for taking my questions. Thank.
Thanks, Matt.
Your next question comes from the line of Gary Ho from <unk> Your.
Your line is open.
Thanks, and good morning, Steve.
We've just follow on that last question.
On capital deployment can you maybe elaborate on those well one maybe the magnitude I know theres. The BCC one I'm not sure. If that's the one that you're referring to and or others that stuff in the pipeline.
And also.
You talked about a potential larger chunk.
Chunkier ones, maybe in 2022 are there subsets.
Driving that BB U S capital tax issues and whatnot, maybe just talk about the <unk>.
<unk> in the U S as well.
Yeah. So.
I won't give any specifics on follow ons for us This year you mentioned BCC.
5 million U S. That's one that we've had.
Contractually in place, but it is expected to close before year end.
There are several others.
That would be that would add up to more than BCC. So we're excited about that and in terms of.
Kind of the deal flow environment.
One of the things that has made us.
A better deploy our capital that has been the addition of some common equity along with our press.
That continues to be a major selling point, where we can reach deals where they need more of the capital.
<unk> replaced.
You know up until two years ago, we were kind of limited to companies that needed only 50% to 60 at a maximum percent other cap stock replaced now we can compete on deals up to 80%, which is the vast majority of deals most.
<unk> equity owned businesses or.
80% owned by GE, 20% owned by <unk>.
Management as long as management is willing to roll their 20% and with US we can now.
Bid on those deals so.
We've seen that dramatically increase the number of deals we can.
<unk>.
And we will continue to love our press.
The.
The financial leverage that that gives them on success, because perhaps they're capped.
Their growth so that gives us a huge competitive advantage in the market.
So we're still seeing really good interest in our same kind of deal terms that we've always had averaging 14% kind of current yield on our press and still is the vast majority that we'd be looking at being able to pay common dividends to us as well.
Okay, Great and then maybe the bigger question bigger picture question.
Just in terms of the rising rates that we're seeing how does this how does that impact your.
Business model I think in the past you've talked about.
Maybe some competition from the net debt side.
Just wondering like if you look out over the next couple of years. If we are still in this rising rate environment, how that might impact them.
You're you're offering and then previously you've been offered something in the 15% like would you potentially move back.
In a higher rate environment.
Yes.
I think there would be.
Room to move it at a higher rate environment to a point.
We've been doing this for 18 years, we've seen.
We've seen different interest rate environments, although with that being said, it's been pretty low for the vast majority of our Permian, but.
When we first started 18 years ago.
We were starting at 16%.
As interest rates move down multiples went up we came down to an average of 14. So I think there would be room to move back up to that 16% range if interest rates go up.
<unk>, but too much past that I don't think its viable certainly wouldn't be.
Regardless of where rates go I think starting with something.
Starting with the two.
If you think 'twenty at about I think it's really difficult just from an opex point of view so.
But we will certainly be able to move.
Two to 300 basis points.
Okay.
And then maybe just my last question Steve.
Steve You mentioned, some labor shortage issues that Edgewater and DMT, how do you think.
Yes.
Will we see potentially a decline in the ECR a little bit when you look out to 2022.
I'm just wondering like over the next 12 months, what we should expect from some of these companies.
Yes, I think we've already seen the impact in Edgewater and Thats why youre seeing there.
Move down I don't anticipate them, they don't anticipate that moving down any further.
Part of it is labor shortage part of it is.
Still workers not being allowed on site at some of US department of energy sites. So.
We do expect that to change positively in the next few months not downward.
And with DMT.
<unk> hit records. This year, so even though there is there is a labor shortage, it's really a matter of.
Probably not being able to fill as many of the potential orders as they could have but theres still hitting records so that.
It would be nice to have more labor, but it's not it's not causing them a decline.
That makes sense.
Yes, Okay perfect. That's all my questions. Thank you.
Thanks, Greg.
Again as a reminder to ask a question you will need to press star one on your telephone.
Next question comes from the line of Zaccardi every ship from National Bank. Your line is open.
Good morning, everyone. Thanks for taking my question.
Right.
With the cash injection from said, putting you very comfortably onside of covenants after running a little bit tight.
How high are you willing to take leverage before tapping the equity markets again.
I've always said that in order for us to bid on large new deals I need to show that company and their advisor.
I want to have $100 million of deployable capital on our balance sheet at all times. So we're at 140 right now we do expect.
For the proceeds coming in from Kimco. So.
We've got a little bit of room with that being said I think I mentioned this in the last quarter.
There are other options for us other than coming back to the equity markets.
The high yield debt market that I think is a viable option for us as well which would be.
Lower cost of capital for our shareholders. So.
So I think we're in good shape, but if we got everything from from Kimco that would be another $80 million to $90 million Canadian.
First obviously makes a big difference.
Certainly give us.
Many months of leeway.
And on the topic of kimco any updates on timing or likelihood of redemption.
No updates on timing I would say that the likelihood is has increased since we last spoke.
Things seem to be progressing well, but we're not quite at the point, where we can.
Call it eight on it yes.
That works for me, Thanks, I'll turn it over.
Yeah.
Great. Thanks, Ed.
Your next question comes from the line of Lloyd <unk>. Your line is open.
Thank you.
Hi, Steve.
Alright. Thanks.
Updating on the potential for future deals.
Listened to a couple of.
Presentations from U S firms and the same.
Line of business carloads one.
And on the universe of potential companies going forward in a higher interest rate and inflation environment. As you touched on you have mostly operated in a lower inflation lower interest you see that universe increasing.
Or how.
How do you see that and also on the federal deal what really caught my eye was the endorsement by management.
How satisfied they were in the.
With those kind of endorsements from <unk>.
Partners are you getting a lot of referral business. Thank you.
Yes, no I appreciate the good questions.
We are and always have once we have done a deal with somebody and I would include there their advisors advise them through their processes, we tend to get a lot of repeat business with people that we've already done deals with.
We're a pretty unique structure, there's a lot of advisers that just don't take the time to really understand the benefits to their clients. So the more case studies, we have legs.
And many many others that we've had over 18 years the more of those that we have the better it is for us.
From a marketing tool.
We've been really blessed.
Almost all of our current and former partners have been more than willing to talk to.
Prospective new partners when we are bidding on those deals.
And as you mentioned the guidance will be.
We will be no different.
They would love to talk to people in.
Kind of reiterate what they talked about in our press release so.
And it's another Great example of also why we have started putting common shares.
As a small piece of the pie here.
We got a 19% IRR is the common shareholders onset, thus significantly more than that.
As of the muted growth in aircrafts, they had an extreme amount of growth, especially over the last couple of years. So they've benefited greatly from our structure.
As it relates to your first question on midstream environment to a certain extent a higher interest rate environment helps us from a competitive.
Standpoint, we use very little debt.
In our transactions and their structures. So most of our companies abnormal termed.
The ones that do would have less than three three times EBITDA debt. So in the U S marketplace that is considered under levered.
BD firms are bidding with four to seven times.
Leverage on average.
So higher interest rates for them really impacts their economic model much more than it does us.
No.
We've seen that in the past when when the credit markets and either tightening doors on core expenses.
I think it's actually better for us from a competitive point of view.
Carey next question comes from the line of Scott.
Great songs from RBC Your line is open.
Great. Thank you.
Steve The first question I have is going back to the comments you made at the end of your opening remarks, just regarding I believe you said something to the effect of <unk>.
Youre going to try to take better advantage of opportunities.
<unk> year for growth just wondering if you could.
Speak a bit about that if that's more from the capital.
Structure perspective.
Like I know you mentioned Youre looking at high yield debt like do you think you're going to try and.
<unk> capital structure that way or perhaps it was were you speaking more towards.
The change in our new product offerings like the way you guys introduced common equity. If you can just provide a little bit more color around that.
Yes, no thanks for that Scott.
We've got a really great team here and we've also got kind of a.
Pseudo proprietary structure that no one else in the world does so we get fantastic deal flow we're getting.
<unk> 601000 deals per year now.
Because of our reputation and because of our unique structure.
I think we can take better advantage of our team.
And our reputation.
And grow outside of the confines of our own balance sheet.
And by that I mean, I think we can raise outside capital.
Yes fees on managing that capital for others.
Within our within our team here for Valero shareholders. So.
Both on the senior debt side.
Going further into the common equity side I think there is opportunities for us there too to make money on other people's money and not just our shareholders.
Interesting okay.
Would you envision a.
When you are able to use the existing team you have or do you think you would need to also then I build out.
All of an asset management team.
That does more fundraising marketing kind of thing or are you guys able to do that with your in house capabilities today.
I think we would need some add Scott.
Especially on the common equity side.
<unk>.
We need to work through some of the corporate governance issues, but you all.
Certainly we'd be able to kind of piggyback on the work that our business development team does our due diligence and monitoring teams.
I think from a corporate governance point of view you have to build out the team more so there's that.
There is a different group.
Kind of solely evaluating common equity and whatnot. So so those are the things we're evaluating it's early stages right now but.
Im quite excited about it and I think it's the right thing to do we.
In my mind was that one of the best teams in the industry.
Great Thanks for that.
And the second question I have is on planet fitness. So the franchise orders reporting improving fundamentals within the system in general just wondering how that may play out for P. F. G. P <unk>.
Ultimately all areas and I guess, specifically do you think the cash flow generation.
If it continues to increase could result in advanced payments of those deferred distributions rather than over the 36 month time horizon.
Or alternatively, do you think that there could be increased.
Follow on capital deployment with that partner given the environment that we're starting to see.
Yes, they're doing really really well so obviously the.
The results that Youre seeing at the parent company or on the backs of <unk>.
Franchise these like like our partners at <unk>. So.
<unk> numbers have been continually getting better and better.
They have also had the benefit I think.
Some people migrating from some of the smaller footprint more expensive type.
<unk> systems to the planet.
System.
And in terms of getting our deferred distributions back quicker I think that is likely.
Although it will be balanced with the fact that they have quite a few growth opportunities as well. So we don't want to.
Diminish their their growth possibilities by by stripping almost too much cash so we will balance that.
We want to be patient.
Patient good long term partners for them, which we have been.
And there is greatly appreciated that.
Sure.
The question about having endorsements from our partners.
You should talk to victory Lane.
They will.
Endlessly about how great we have been as partners. So.
So yes.
There probably is more capital deployment opportunities.
I think there is some acquisition opportunities that theyre looking at.
And as such.
Stable.
System that we'd be we'd be happy to procure many of them.
Great. Thanks, that's it for me.
Yes.
Your next question comes from the line of Jeff Van <unk> from Macquarie Securities.
Your line is open.
Hi, good morning, everyone.
Good morning.
I think most of my questions have been answered, but did want to touch at least briefly on the common dividend picture here heading through the end of the year.
FMC has been a great.
Nice to hear for you over the course of the year pretty consistently and I know the other ones can be a little more sporadic. So can you just remind us is there.
Is it through the fourth quarter that you might see a couple of them true up.
We're I'm sure has had a decent year.
Any color there you can offer on that.
So we do expect emera has been paying.
Twice twice a year dividend and we would expect to be receiving another one.
And this December as Bob Carey pants, and annual distribution and then on top of our more regular payers being.
FNC.
So yes.
At the board meeting with him or couple of weeks ago. They are doing extremely well, so I'm expecting that dividend to continue to grow and same with FNC youre, putting up just huge results. This is carey for that matter. So.
Planet fitness that I've just touched on.
I don't anticipate any common dividends from them still I think their focus will be on growth and debt repayment.
Needless to say when Covid hit they were real pleased with.
With our lenders.
Having having the debt so I think there are.
They're going to be in repayment hold which is fine by us in order for every dollar of that pay off.
The dollar to the common equity value so.
So yes, we are.
We're seeing some good things.
For sure with our common equity distributions.
Okay, and then maybe just one more on kimco and sorry, if this has been asked already but.
They talked up.
The quarter for you with some sort of deferred payments, owing and I know there was a fairly sizeable balance still outstanding there. So do you expect that.
Regardless of the transaction picture on them.
<unk> more of these payments coming in in the coming quarters.
It looks like.
Probably.
Redemption of some sort is more likely than just <unk>.
Continued payments over hopefully we're closing in on it.
And I would say that if there are additional payments during Q4, they will likely to be.
For the next quarter paying down the problem now so they've sort of thing.
Going back and forth between Prime Nelson and accrued distribution. So I do know that if they have some additional cash and nothing gets done before the end of the year, we can probably expect another problem note payment.
Okay, great. Thanks for that color for.
For Q.
Alright, Thanks, Jeff.
As a reminder to ask a question you will need to press star one on your telephone.
We have no further questions at this time I would now like to turn the call back to Steve King Chief Exec.
The officer for any closing remarks.
Great. Thanks, again, everybody for tuning in as as always please don't hesitate to give us call directly if you have any follow up questions.
We look forward to talking to you I guess in March after Q4, thanks very much.
This concludes today's conference call. Thank you for participating you may now disconnect.