Q4 2021 Alaris Equity Partners Income Trust Earnings Call
Thank you for standing by and welcome to Alliance equity Partners income Trust fourth quarter 2021 earnings release conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question during the session.
You will need to press star one on your telephone please be advised that today's call is being recorded should you require any further assistance. Please press star zero.
Now I'd like to hand, the call over to Amanda Fraser Chief Financial Officer. Please go ahead.
Thank you Betty and good morning, ladies and gentlemen, and welcome to Alere as equity Partners conference call and webcast to discuss the financial results for the three and 12 months ended December 31st 2021.
Well as a brief trusts update I am Amanda Appraiser financial Chiefs.
<unk> financial Officer, and I'm joined on this call by Steve King President and CEO .
After a short presentation from Stephen I, there will be a question and answer session. The lines will be placed on mute until then to avoid background noise.
Before we begin I'd 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. This forward looking information is based upon a number of important factors and assumptions and as a result actual results could differ materially additional information.
Asian concerning the underlying factors assumptions and risks is available in 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-GAAP data is also presented and 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-GAAP measures.
Yeah.
I appreciate everyone, taking the time to join US. This morning, we're excited to present, our 2021 resolved. Some of the highlights include Q4 revenue of $37 6 million in cash generated from operations of $34 5 million.
Both boosted by higher than expected common dividends from FMC and the additional follow on investment in November and December including three D. N N M. D C C, causing us to beat our recent guidance.
2021 revenue of $147 7 million and cash generated from operations of $124 7 million represents a 35% increase in revenue and a 44% increase in cash generated from operation. The increases were largely driven by the significant deployment that occurred at the end of 2020 and <unk>.
Getting a 2021 as well as the additional payments received from kimco for unpaid and unapproved distributions relating to the prior period.
Deployment in the year totalled $357 8 million, including 93 million in Q4, resulting in four new partners and six follow on investments run rate revenue of $150 7 million or $3.34 per unit as compared to $136 7 million and $3 and of course, that's pretty.
Unit in the prior year.
Run rate net cash from operating activities of $92 1 million or $2.04 per unit compared to $81 1 million and $2 80 per unit in the prior year, our payout ratio remains at historically low levels between 60 and 65%.
We're expecting net positive resets for 2022 of approximately two 4%. Despite LMS has uncovered we sat down of 18%, resulting in $2 6 million of additional revenue or six cents per unit.
We are expecting Oh, sorry, there were significant increases in fair value at December 31st $23 8 million or 54 cents per unit demonstrating both an almost complete recovery from the portfolio from the effects of Covid driven write downs as well as significant growth and strong performance of new partners such as F. N B.
D M D N M P.
Planet fitness up $6 7 million U S. Both on preferred and common restoring what was written down in 2020, and reflecting expected growth in 2022 F. N C up $4 8 million U S. On both preferred and common reflects significant growth in the company over the short time of our investment.
PNM up $3 4 million you asked on common as a result of strong performance over the last six months unexpected in the coming year.
Other preferred increases, including 1.6 million U S.
From TNT accident.
$1 5 million U S. AMR in Vienna, each up 1.8 million reflect an outlook for 2022 that maintain and build on the growth experienced in 2021.
Do you think what he says were offset by cumulative decreases of $5 million of Edgewater Fleet C. R.
During the year that fair value increases.
I told all of $63 2 million contributing to a 13% increase in book value per unit from $15.51 in 2020 up to 17 93 in 2021.
Subsequent to year end, we completed a $65 million bought deal offering of senior unsecured debentures cause was used to reduce our senior debt outstanding to $265 million. This results in $175 million of available capacity and we do also continue to expect a redemption of chemical which would add another six.
Five to 70 million U S to the amounts we have available for deployment.
Our portfolio.
Palio continues to perform extremely well and has a weighted average ECR now over one eight times as compared to one seven times in the prior year. This metric has continued to beat the all time high in previous quarters with it last year.
15 of our 19 partners or 80% have an ECR over 1.5, and 12 of those are over two times as compared to six over two times a year ago.
Previously mentioned, we are expecting net positive resets based on unaudited information 11 up four down and one slot.
Planet fitness it started at a small catch up payments for the deferred distributions associated with 2020 of 196000 in the U S per month as of this January overall, we are extremely pleased with the performance of our partners.
A couple of unique items from our release worth expanding on due to the changes in non-GAAP measures. We are no longer presenting normalized EBITDA, replacing this metric as cash generated from operating activities. This metric does include the effects of unit based compensation expense current income tax and changes in working.
Capital as compared to normal normalized EBITDA in prior periods, the material normalizing items quite merrily related to unrealized gains and losses and foreign exchange as well as realized and unrealized gains and losses to investments at fair value all of which are only moved from cash generated from operating activities, which is why we've determined.
Most comparable figure within our financial statements.
Also worth mentioning since converting to a truck the tax profile of our distributions changed from being 100% eligible dividend to a combination of.
Return of capital eligible dividends capital gains and interest income.
Active tax rate of hilarious is distribution for in Alberta individual in the top tax bracket for 2021 was 37.5%. If the same distribution was received from a corporation the effective tax rate would be 34, 3%.
We also continued to work with our external advisers and producing our ESG report and targets are released in Q2, we have paid close attention to these issues throughout our company's history, and we look forward to presenting our first report.
Our outlook for 2022 based on recent deployment calls for $38 6 million of revenue in Q1.
And our run rate for the year of $157 million, we do expect our G&A to increase in line with our growth in revenue to around 14 million.
I'll pass it over to Steve to add a few comments before we continue with the G&A.
Yeah.
Great. Thanks, very much Amanda Thank you all for tuning in.
Simply it's an extraordinary year for our company, showing 35% revenue growing 40%, 44% cash flow growth.
Not including the fair value increases is something that everyone. At <unk> is very proud of.
There's no question that the small change initiated two years ago to add a portion of common equity through our traditional preferred shares.
Tax benefit that we had hoped for.
We're already seeing the prospect of increased overall returns and the fact that we've deployed over $500 million within the last 18 months has undoubtedly been helped by the addition of common equity and allowed us to pay for a more flexible solution for partners new and old.
Amanda has already talked about the unprecedented performance within our portfolio, but I'll speak a little bit on the specific risks that are out there in the economy right now.
First of all we have no company that has any exposure whatsoever to Russia.
Given the service nature of our entire portfolio.
I have very little exposure to the increasing commodity prices.
<unk> has won a out of Vancouver that relies on imported steel for their rebar installation. So the current environment is certainly negatively impacted their gross margins as you saw on their negative risa and steel as spike, but they've also been experiencing record volumes. So that is buffered some of the hardship.
The only other partner that is experiencing anything negative fundamentally is edgewater, where it has been difficult labor environment.
The company has done an excellent job recruiting new nuclear engineers, but the scarce labor market is certainly inhibited their result.
Unusual to have only two out of our 19 partners, where there's anything negative to say higher portfolio continues to show record results in average earnings coverage ratios and growing distributions to alere I suppose preferred distributions and common.
Adding over $63 million of book value and they are from a fair value increases door and our partners is another all time record.
Looking forward, we expect 2020 to be another year of record results for our company deal flow remains strong.
Both new partner and follow on opportunities that have near term visibility.
Rising interest rates were hilarious is actually mostly positive thing.
Primary competitors traditional private equity firms.
The most part use extremely high levels of debt to produce the returns that they look for even a small change in interest rates materially affects their economics are those leveraged buyouts.
Conversely on half of our portfolio doesn't have a sense of term debt than them and even our most highly levered partners would be considered under levered within the PV industry.
In general we feel is a very favorable environment for us to continue to deploy capital as we should.
So on for the last many years, despite the highly competitive landscape.
So latif I'll turn it over to you and open the floor for any questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Nik Priebe of CIBC. Your line is open.
Okay. Thanks.
Sure.
Last quarter, you indicated that you might explore the management of third party Liberty partner capital to generate a fee based earnings stream, but I was wondering if you could tell us a little bit more about that opportunity.
How seriously you've considered it and whether you have any indication of institutional interest yet.
Yes, thanks, Nick.
We have been going down that road, we've been learning a lot over the last over the last three months since we started talking about that and we do feel that there is a there is interest out there.
And having us manage third party capital in addition to our public investors capital as well. So we've got a 18 year track record.
With very high returns for the industry, especially on a risk adjusted basis. So that is certainly raised a lot of eyebrows and we think that that is a realistic.
Opportunity for us the exact form of it still needs to be figured out there is corporate governance conflict of interest issues.
And just structurally how it happens remains to be seen but suffice.
Suffice to say that we are still very interested in adding that to our company and.
Based on preliminary results, we think theres, a good chance of that happening.
Understood Okay.
And then on Kimco.
Kimco has been contemplating a redemption for some time.
Yes, I understand there's a pretty healthy level of unpaid distributions as well can you just update us on the status of that investment.
Why that redemption has no crude quite yet.
And just whether you have any visibility on potential timing there.
I I'm sounding like a broken record on this topic, but we continue to expect it in the very near term nothing.
Nothing has changed.
Last three quarters in this situation or our expectations on anything clothing, and we hope that we'll be able to announce that in the near term.
Okay.
And then just one last one.
Brown unsettled deferred a portion of their contractual payment last quarter could you just give us an update there have they caught up on that and if not other plants to collect over the next 12 months.
They did pay their Q4 distribution a bit late we collected 90% of that I'm going to say distribution in Q1.
We expect that they'll probably be a bit of a deferral for Q1 into Q2 as you recall from I believe our last conference call. We had a bit of a discussion that brown and settle had some challenges in Q1 of 2020, and that's putting some pressure on their T. T M covenants and as soon as we can roll back period out of their results, we fully expect them to.
Be paid on that.
As as contracted so probably one more month with the with our Q1 results will be a bit of a delay in the BNS payments and then we expect for them to be back on track. There currently they have the highest backlog in our company's history. We have there one month results and they're performing extremely well. So we really have no no concerns on the beach.
S front and we're nearing the end of Q1 period, and we should see both of the D C. Our Ani and BNS rebound back up and our payments to continue to be in Poland on time.
Understood. Okay very good I'll pass the line. Thank you.
Thanks, Dan.
Thank you. Our next question comes from Geoff Kwan of RBC. Your line is open.
Hi, good morning.
Steve you talked about it I guess, a little bit just talking about with some of the companies.
With elements and niche water, but just maybe thinking about it from another perspective and also taking into account how big an individual company investment has to your overall portfolio, but which companies within your within your book would you say are best positioned for a higher inflation environment, and which ones might be more vulnerable.
Yeah, you know one of our largest investments is planet fitness planet fitness has been known as a.
So very much.
I call it a recession resistant.
Program because they are you know on the budget and.
Of the fitness industry, where they're charging you know between 10 and $20 a month.
Compared to multiples of that for for other clubs. So that is one where if interest rates go up in discretionary income.
<unk> declined because of inflation in that cost.
It's one that I think will will actually benefit from that and succeed very well they've shown that historically.
Other than that.
Gosh, there is there's very few that would have.
Much correlation with our with inflation and interest rates to tell you the truth or as I mentioned before you know whether they are very much kind of required service type of businesses and the whole reason, we invested in them in the first place as you know we do have oftentimes a 20% to 40 year track record.
<unk> put up by these companies. So that's something that we look at it as a historical flux.
Fluctuations based on different economic and interest rate environment. So.
Feel pretty good about where we're going to be here over the medium term.
Okay and just my second question just given some of the volatility we've seen in credit markets and the overall market you know what impact if any you're just having on the competitive environment for making new investments.
Yes, we haven't seen that much to be honest Jeff.
It's still a highly competitive industry Theres still you know over a trillion dollars of private equity capital that is a that is uninvested.
Right now.
You know and then to the previous question about how about forming an asset management business and raising a new fund.
<unk> gotten to know even more about that industry and.
There is still just a huge amount of capital coming into private equity at the end of the day only 2% of the middle market.
Companies in the U S are public so you know the private equity industry is covering a huge amount and people need to be in that sector.
And so there is still a huge amount of capital coming in so regardless of the kind of the.
Day to day week to week and stability that we're seeing.
The liquidity in the market is overriding that.
Okay. Thank you.
Thank you. Our next question comes from Jeff Fenwick.
Core Mark Securities. Your line is open.
Hi, good morning, everyone.
Just one follow up guys.
Guys on the the brown and settle.
Amounts owing to a two layer is are those accrued as revenue in the period or or are you going to capture that revenue later on it like is it a receivable or is this something that's going to roll into the beginning of this year.
The amended the payment we received in Q1 related to Q4.
What is worse with a crude and you can see that in our accounts receivable.
We did not accrue any amounts beyond what was received in Q1.
Okay, and I'm, just trying to square the the revenue guidance for the beginning of the year and some of the factors that might be at play there and so it's a bit above where my modeling might suggest it might be and maybe its maybe its common dividends or other items like that that oh that much.
Eric.
Brown and subtle.
No Brian its subtle how it played out within that guidance, which is sort of as expected.
Payments as expected I think that there's a $250000 on accrued them out right now, but wouldn't have a material impact on <unk>.
Okay, and then I did want to ask you about the common dividends you gave us some guidance on 2022 bad luck.
I think $3 1 million is the number that you're you're guiding to here. So.
Could you speak to how that's coming together for you and May I know a lot of them. They might pay you periodically some of them don't pay it all because they're investing for growth. So how do you get a sense of.
That number and is it tilted towards the beginning of the year.
We do have some visibility there are certain F N T pays a very regular distribution.
Our generally pays a very that.
<unk>, so we have visibility on those.
History with.
Companies like Kerry.
Whereas the other one the newer ones D N and planet fitness.
Those will be.
Sort of just as declared we don't have a ton of visibility on those ones and I think if you look to our M. D. N. A we started giving guidance on who we see as being regular payers and who we see as being in that category and to investing for growth upon a fitness with the D M et cetera.
Okay, and then one more on the common dividend investments.
Interestingly the end of the year when you did the G Wm.
Investment there you effectively swap data prep for Com and you know what what drove that decision between you and them and how does that change your position in terms of the <unk>.
Your ability to sort of influence what's going on there.
Yeah, Gws as a company that we've been trying to become common investor then really since the day. We met them. This is a very high performing company and a very high performing industries like the industry growth rate.
For them in the programmatic.
Programmatic media spaces as well into the double digits annually just from an industry perspective. So this is something that we wanted for a long time as with a lot of situations.
After we've been partners for a few years.
People enjoy being our partners to be to be bright.
And so even people that were very reluctant to bring us into is common equity holders.
You know, we can hopefully sopping up over time, and that's what happened with GW them at the same time, they had quite a bit of a.
Senior debt capability.
Because of their growth and under Levered balance sheet.
So from a cost of capital point of view are replacing some of our perhaps with a little bit of that is something that was prudent for the company to do and then we wanted to help facilitate for them, but you know in exchange for that because we do have full veto rights over any increased debt.
We did say hey like at this.
It's time to to bring us in as common shareholders. So that we both benefit from doing that so that's that's kind of how it came.
Came to be and we do expect to you know to get common dividends from from Gws and.
Also experience in their <unk> and their high growth.
Okay. That's good color thanks and.
There was one more I wanted to ask you here or.
Just in terms of our pipeline, Steve maybe just a comment there.
Giving yourself some out of capacity with the hybrid debenture offering that you did and you know how how does the pipeline lineup right now versus funding capacity and then I know youre trying to handicap the timing on the kimco redemption as well.
Yeah, it's it's been a it's been a challenge obviously with with.
How long kimco has dragged on so we as Amanda said, we do.
To have that done.
In the very near term.
That obviously helps our our.
Our balance sheet quite a bit.
And.
We do expect to have that <unk>.
Reinvest it almost immediately.
The nice thing about that swap is that.
A good chunk of the capital coming in from Kimco.
As for previous unpaid distributions.
We will be able to deploy that capital into a new <unk>.
Situation.
And increase our revenue considerably.
You know by losing the kimco revenue, adding the new one.
We should be up.
Several million dollars of revenue and I've actually you still have more money on our balance sheet. So it's a rare opportunity for us and we do expect that to happen in the very near term.
Okay. That's all I had thank you.
Thank you.
Thank you. Our next question comes from Zachary ever shed of National Bank Finance Your line is open.
Morning, everyone congrats on the quarter.
Thank you.
So with the strong <unk>.
<unk> pipeline ahead, and likely won't take too long to deploy your available dry powder and it sounds like kimco will be.
Out as soon as it's in so excluding organic cash flows and the funds from kimco, What's your pecking order for increment incremental sources of funding.
Yeah I think.
You know we're at the last round of funding that we just did was a was a debt offering. So you know we want to keep.
You know, our conservative and balanced approach to our balance sheet. So I would I would expect the next offering after that would be would be common equity.
But we don't expect to need that for a for a decent period of time.
Things.
May be alleviated as well if if we can set up an asset management business and have outside institutional capital as well that you know that.
It may.
Allow us to grow for longer without a without adding common equity.
Makes sense, thanks, I'll turn it over.
Great. Thank you.
Again to ask a question. Please press star one and you touched on telephone again, that's star one on your touch tone telephone to ask a question on.
Our next question comes from the line of Gary Ho of Deja, Dan Your line is open.
Thanks, and good morning, Steve when I think about your payout ratio in the low sixty's.
Probably have the kimco redemption coming first half of this year, so that might increase it just marginally but I know historically the company has been known to be had there been a grower.
In your recent last year, obviously, so Steve now where your thoughts are around kind of excess capital and potential <unk> did increase this year.
Yeah.
You know as I just went through like we should be able to decrease our payout ratio.
With a swap of kimco proceeds for for new opportunities.
So that will drive our payout ratio down even further.
We will still have a decent amount of deployable capital so.
As you get even halfway through that.
Excess deployable capital will be well below 60% and I think that is.
As a as I've indicated in the past I think that probably the tipping point on increasing the dividend. So we're we're pretty close.
You know, there's there's definitely things.
You know on the front burner that would that would trigger that but.
Not going to get ahead of ourselves I will wait for after those events to happen.
Okay, Great and then my second one.
Going back to Jeff's question on inflation, so when I look at your private equity structure the color a base for the most part on revenue as opposed to kind of bottom line am I reading. This correctly that you know if your for your companies could pass through higher costs inflation and whatnot on the topline.
Are you, perhaps benefit disproportionately from elevated inflation in this current environment.
You're absolutely correct, yeah, no. That's a one of the nice features of our setup and that was one of the things that.
You know I really wanted.
Wanted to ensure when we started.
Over a decade ago with just color concept have of capping the volatility of our distribution changes I wanted to make sure that in all cases that they're at the top end of the collar would.
B within the bounds of what typical inflation would be so we're not losing out to inflation, but you're absolutely right are we actually do benefit from that if it's a company's revenue and cost supposed to go up at the same amount.
Our bottomline investor would not benefit from that but we do.
Okay.
We just want to confirm that those are my questions. Thank you.
Thanks.
Thank you. Our next question comes from Trevor Reynolds of Acumen capital. Please go ahead.
Good morning, guys I'm, just curious on the deployment levels that you guys expect coming off of the records that we've seen over the last kind of 12 and 18 months that are well highlighted.
Yeah, it's impossible to tell a driver all I can tell you is that our deal flow would be would be comparable to last year.
But.
We are a very.
Opportunity based.
The company so you can.
Can't put a forecast out there or an expectation on capital deployment other than kind of you know the overall health of the market and the number of deals that we're seeing so I would I.
I would say that on that front, it's at least as good as what we've ever seen.
Or kind of reputation and credibility within the advisory market I don't think has ever been higher but you got to they've got to go out and you got to win those deals and you've got to close them. So so yeah I feel very good about it but I can't I can't kind of go get into any specifics.
Got it and then in terms of.
As we've seen.
Restrictions rolling off across North America, Covid restrictions rolling off but how is how does that impact of the deal flow and have you seen an increase or decrease.
No. It's it's been a you know either.
We're a U S business, so I would say that.
Things have been pretty normal for some time already are in the U S in terms of car.
Conferences, and a face to face meetings with management et cetera. So so yeah. We've been we've been backing out at our our business development guys are are they are on the road right now they've been on the road most weeks for the last several.
So yeah.
We haven't seen much of an impact from Covid and then sometimes.
Got it and then last one just in terms of.
New deals and follow ons is there a balance there or is it mostly new deals at this point that you're looking at.
No a good a good mix a we'll have a we'll have.
The next thing that we'll do will be a follow on in our current partner to fund an acquisition that they are closing.
But we've got a few new opportunities as well. So yeah. I think you just like last year I think it'll be a really good mix of the two witches, which is kind of perfect for us.
Perfect. Thanks.
Thank you.
Thank you at this time I'd like to turn the call back over to Steve King for closing remarks, Sir.
Thank you Latif and thank you for everybody that are tuned in and for your support through this past year, we whereas I mentioned, where we're really excited about.
What happened over the last 12 months and also where we're going over the next 12. So as usual please feel free to reach out to myself, Andrew or Amanda if you have any follow up questions and thanks again for tuning in.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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