Q1 2022 Alaris Equity Partners Income Trust Earnings Call
Operator: Hello, and welcome to Alaris Q1, 2022 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.
Q1, 2022 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.
Operator: To ask a question during this session you will need to press star one on your telephone. If you require any further assistance, please press star zero. It is now my pleasure to introduce Chief Financial Officer, Amanda Frazer.
Amanda Frazer: Thank you, Andrew. Good morning, ladies and gentlemen, and welcome to the Alaris Equity Partners conference call and webcast to discuss the financial results for the three months ended March 31st 2022.
Amanda Frazer: I'm Amanda Frazer, Chief Financial Officer of Alaris and I'm joined on this call by Stephen Walter King, President and Chief Executive Officer.
Amanda Frazer: After a short presentation from Stephen and I, there will be a question and answer session. The lines will be placed on mute until then to avoid background noise. Before I 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.
Amanda Frazer: This forward looking information is based upon a number of important factors and assumptions and as a result actual results could differ material materially. Additional 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 headings forward looking statements and risk factors.
Amanda Frazer: Copies of which are available on SEDAR, at sedar.com, as well as our website. Non-IFRS data is also presented and 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-IFRS sector.
SEDAR dot com as well as our website.
Amanda Frazer: Non-IFRS data is also presented and 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 IFRS sector.
Amanda Frazer: I appreciate everyone taking the time to join us this morning. We are excited to present our Q1 results. I'll begin with a brief summary of the Q1 highlights. Q1 revenue of $39.6 million in cash from operations prior to changes in working capital of $35.4 million, were increases of 23% and 40% respectively, as compared to the prior year period. Both were boosted by higher than expected common dividends from FNC, AMR [inaudible], the additional investments throughout 2021 and follow on in 2022, and the approximate 2.4% positive reset realized on the portfolio.
I appreciate everyone, taking the time to join US. This morning, we are excited to present, our Q1 results I'll begin with a brief summary of the Q1 highlights Q1 revenue of $39 6 million in cash from operations prior to changes in working capital of $35 4 million were increases of 23% and 40% respectively as compared to the.
Your period, both were boosted by higher than expected common dividends from FNC AMR emptying out.
The additional investments throughout 2021 and follow on in 2022.
Amanda Frazer: and the approximate 2.4% positive reset realized on the portfolio.
Amanda Frazer: We deployed a further $65 million in the quarter to BCC.
Amanda Frazer: The follow on preferred equity contribution attracts an $8.5 million US annual distributions. We are happy to report that though it took much longer than anticipated, we received proceeds of $67.1 million US from the redemption of Kimco subsequent to Q1.
Amanda Frazer: This represents all contractually owed distributions outstanding of $13.7 million US, the full value of our preferred investment and exit premium on our units for a total of $35.7 million US.
Amanda Frazer: And negotiated share of the common equity proceeds of $9 million US, only 7.9 million have been recorded until the release of the additional proceeds from Escrow.
And negotiate a share of the common equity proceeds of 9 million U S. Only 7.9 million have been recorded until the release of the additional proceeds from escrow.
Amanda Frazer: Full payment of all promissory notes at $9.8 million US.
Amanda Frazer: This represents an unlevered IRR of over 13% on the combined preferred equity and debt.
Amanda Frazer: This was an excellent result for a challenged partner and demonstrate some lessons learned on previous files. Our monitoring team identified challenges and we brought in a third party to help with the investigation. We moved quickly to remove management and brought in our own group to address the identified issues. We waited patiently for the distributions to recharge contracted levels, while never fill billings on full amounts.
Amanda Frazer: We stayed involved with the new management throughout the process and when the opportunity to realize this return presented itself, we strongly encouraged management to redeem our position.
Amanda Frazer: The net impact from the receipt of $67.1 US from Kimco and the redeployment into BCC is incremental revenue on that capital of $2.9 million US annually, a 51% increase over the annual cash paid from Kimco.
Amanda Frazer: Q1 is generally a quiet quarter for our fair value adjustments, given the proximity to the ear and audit, our only fair value adjustment was to recognize the $9.9 million or 22 cent per unit gain resulting from the Kimco transaction.
Amanda Frazer: As discussed at year end, in the quarter we completed a $65 million bought deal offering of a senior unsecured debentures that was used to reduce our senior debt outstanding. We currently have $137 million of capacity available for deployment.
Amanda Frazer: Our portfolio continues to perform extremely well with a weighted average ECR continuing to be over 1.75 times.
Amanda Frazer: 14 of our 18 partners have an ECR over 1.5, and 10 of those over 2 times.
Amanda Frazer: Brown & Settles ECR moved into the 1.2 to 1.5 range with the reporting of their March results and we expect full payment of all outstanding deferred distributions $2.2 million US in the coming weeks.
Amanda Frazer: Overall, we're extremely pleased with the continued performance of our partners.
Amanda Frazer: Our outlook calls for $38.9 million of revenue in Q2, excluding the $17.2 million Canadian from Kimco, or a total revenue in the quarter of $56.1 million.
Amanda Frazer: The expected 12 month run rate is $154.8 million before Kimco. I`ll hand it over to Steve now for his thoughts.
Stephen Walter King: Great. Thanks, Amanda. And thanks everybody for tuning in.
Stephen Walter King: Honestly, we continue to track the growth trajectory that we've been on for the last several quarters now, and for low volatility cash flow company that pays an attractive dividend yield, being able to produce an increase in operating cash flow by almost 26% on a per unit basis, is an exceptional number.
Stephen Walter King: Events, such as the Kimco redemption and the reinvestment into BCC that Amanda just discussed, have set the stage for continued solid results for the rest of the year.
Stephen Walter King: Despite record levels of capital deployment over the last 18 months, our balance sheet is in excellent shape, ample room for growth, full proceeds from Kimco, 2 different public capital raises in the last year have allowed us to take advantage of our position in the North American private equity industry and provide access to a much sought after asset class, where the vast majority of investors never have access to other than through Alaris.
Never have access to other than through Polaris.
Stephen Walter King: Looking forward, it's difficult to predict how the various market forces are going to play out.
Stephen Walter King: Between the lasting impact of the pandemic to the impacts of the Russian invasion on Ukraine, general supply chain issues and the growing threat of inflation and interest rate increases, we`re in the midst of a very volatile world, obviously. Given the nature of our partners' businesses being largely required service businesses, our exposure to these forces are actually quite limited.
Ukraine.
The general supply chain issues and the growing threat of inflation and interest rate increases were in the midst of a very volatile world obviously given.
Given the nature of our partners' businesses.
Being largely required service businesses.
Our exposure to these forces are actually quite limited.
Stephen Walter King: The earnings coverage ratios of our partners remain at historical highs, and they also are quite under-levered, so the risk of interest rate increases for our partners is quite minimal.
And they also are quite under Levered. So the risk of interest rate increases for our partners is quite minimal.
Stephen Walter King: We also feel very comfortable that, given our dividend pay-out ratio was in the low 60s, we`re generating a meaningful amount of free cash flow to help fund our ongoing growth and we will not be beholden to a very volatile capital market.
Given our dividend payout ratio was in the low sixty's were generating a meaningful amount of free cash flow to help fund our ongoing growth and we will not be beholden to a very volatile capital market.
Stephen Walter King: The one place that we're seeing an impact is on the number of quality companies that are going out to the market to access private equity capital.
Stephen Walter King: We've noticed a noticeable decrease in the number of opportunities being presented to us by the advisory network over the last two months.
Stephen Walter King: But with that being said as a niche player in the broader private equity industry, we've always found unique opportunities to deploy our capital in any scenario.
Stephen Walter King: We're uniquely suited to withstand an inflationary environment, as well, given that our cash distributions we received from our partners go up with the revenue that they achieve on an annual basis.
Stephen Walter King: And then inflationary environment, those resets should elevate, giving our company a higher growth rate.
Stephen Walter King: Higher interest rates actually help us quite a bit in our capital deployment program as well, because it's less attractive to use traditional private equity options that have high levels of debt involved.
The options that have high levels of debt involved.
Stephen Walter King: We have not seen a meaningful decrease in the valuations in the private markets as of yet, despite the decline in the public markets. This is largely due, in my opinion, to the massive amount of unemployed capital that still remains in the private markets.
Despite the decline in like in the public markets. This is largely due in my opinion to the massive amount of unemployed capital that still remains in the private markets.
Stephen Walter King: We will continue to be cautious in our growth and stay vigilant to our investment criteria as we work our way through this volatile time.
Stephen Walter King: We will only do transactions where we feel that the partner company can successfully navigate all of the risk factors that we see before us.
Stephen Walter King: Thank you very much for your time, and Andrew will open it up to any questions.
Operator: Thank you. As a reminder, to ask a question you will need to press star one on your telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.
Operator: And our first question comes from the line of Jeff Fenwick with Cormark Securities.
Jeffrey Michael Fenwick: Hi, good morning, guys.
Jeffrey Michael Fenwick: So, Steve I thought maybe we just check in on a couple of the partners there, I mean, the BCC investment that you made just recently, you know, makes that your largest partner by a pretty wide margin. Can you maybe just speak to that business in the context of a, sort of, potential cyclical pressures that are there? I mean, I think of that as being a consumer discretionary type of business. So what's your comfort level around the dynamics of the BCC business?
Potential cyclical pressures that are there I mean, I think of that as being a discretionary consumer discretionary type of business. So what's your comfort level around that the dynamics of the BCC business.
Stephen Walter King: Yeah, significant Jeff. When we first invested in BCC, just over 4 years ago, that was one of our main areas of diligence, and if you look back at that industry, even in 08-09 crash, there was really a very small decline in that industry. They are kind of specialists in liposuction, they don't do some of the larger ticket type of plastic surgery that are maybe a little bit more discretionary.
When we first invested in B C. C. Just over four years ago that was one of our main areas of diligence and if you look back at that industry.
Even in Oh wait or nine crash, there was really a very small decline in that industry. They are kind of specialists and liposuction. They don't do some of the larger ticket type of plastic surgery that are maybe a little bit more discretionary.
Stephen Walter King: So yeah. They have been full systems go really, ever since they got shut down from Covid, they've been through a couple of acquisitions and just tremendous growth.
Stephen Walter King: They've actually tripled their earnings over the last three years, so it's been a huge success story, it's a company with a very high coverage ratio, even after our new deployment into them, they don't have any bad debt on their balance sheet. So, it's certainly one of our safest investments.
Deployment into them they don't have any bad debt on their balance sheet. So it's a it's certainly one of our safest investments okay.
Jeffrey Michael Fenwick: Okay, and this latest investment, it sounded like it was opportunistic, this was, I guess, an external partner that was a sort of like a franchise relationship or what was the background of this transaction that made it attractive for them?
Stephen Walter King: They had, all of their stores are corporate stores, it`s not a franchise system, but they did have one licensee that have licensed their brand from them and has grown it to about 14 locations. So, they had a right of first refusal on that company.
Have licensed their brand from them and has grown it to about 14 locations. So.
Hum.
They had a right of first refusal on that company.
Stephen Walter King: The Doctor that started it was looking to exit the exercise that roper in and bought it and it was extremely accretive for BCC, because as a licensee, it didn't trade at a very high multiple, because BCC had full control over whether that license was renewed, so it didn't come out of the kind of multiple that BCC would. So, it was very attractive deal for them, and they couldn't have been happier to use our capital for something like that.
It didn't trade at a very high multiple because BCC had full control over whether that license was renewed so it didn't come out of the kind of multiple that BCC with so it was very attractive deal for them and they couldn't have been happier that to use our capital for something like that.
Jeffrey Michael Fenwick: That's great color and then, maybe one other one here on planet fitness.
Jeffrey Michael Fenwick: Certainly, I think some pretty positive commentary about people getting back to the gym and activity picking up at a planet fitness and I guess, they're now making those catch up payments.
Jeffrey Michael Fenwick: I assume that this sort of runs right. I think the plan was to pay back over several years the amounts owed, but any thought there, that there might be a window where they might choose to accelerate those payments if the business is doing really well?
Stephen Walter King: It could. They're waiting on something that could accelerate that, in terms of a rebate from the US government, that could allow us to get a lump sum.
They're waiting on on something that they.
It could accelerate that.
In terms of a rebate from the U S government.
That could allow us to get a lump sum.
Stephen Walter King: But in general we're not in a rush. The company has so many great growth opportunities, we don't want to make them capital constrained just by trying to catch up on our deferred distributions, which we know we're going to get.
It makes them capital constrained just by trying to catch up on our on our deferred distributions, which we know we're going to get.
Stephen Walter King: Companies are in excess of 2019 levels now pre-COVID-19. So yeah, all of their metrics are excellent.
Jeffrey Michael Fenwick: Right. And maybe one on, one of the metrics you referred to here is your operating cash flow before working capital.
Jeffrey Michael Fenwick: Just a question on that one because the CFO pre-working capital, it adds back the finance expense on the income statement, but you don't deduct back out what the actual cash interest paid, and I know that's a question for Amanda or not, or you know, why would you not deduct that from that CFO metric?
The finance expense on the income statement, but you don't deduct back out what the actual cash interest paid and I know that's a question for Amanda or not or what you know why would you not deduct that from the time that CFO metric.
Amanda Frazer: Really what we were trying to replace with this metric was our normalized EBITDA changes. The non-GAAP measures don't allow us to remove from EBITDA things that a crime recorded and we wanted to remove unrealized gains, some of the other items. So really, we chose to put that above the interest line, really, to track something as close to normal EBITDA as we could. That's normally what we previously were disclosing in normalized EBITDA.
Hum.
The non-GAAP measures.
Don't don't allow us to remove from EBITDA things that a crime require and we wanted to remove.
The.
Unrealized gains some of the other items. So really we chose to put that above the interest line really to track something close to normal might be but as we could.
Okay. That's all our previously what we were disclosing in normalized EBITDA.
Jeffrey Michael Fenwick: Perfect. Okay. That's great. Thanks for the answers. I'll get back in the queue.
Stephen Walter King: Okay. Thanks, Jeff.
Operator: Thank you. Once again, ladies and gentlemen, if you have a question, please press star one on your telephone.
Once again, ladies and gentlemen, if you have a question. Please press star one on your telephone.
Operator: Our next question comes from the line of Zachary Evershed with National Bank Financial.
Zachary Evershed: Morning, everyone. Congrats on the quarter.
Stephen Walter King: Thanks, Zach.
Zachary Evershed: So with setting Kimco out the door, are there any other partners giving signs of a redemption in the near future?
Stephen Walter King: There could be. It's interesting because it`s something that, quite frankly, I would be quite comfortable with in this environment.
It's interesting because.
It's something that quite frankly, I would be quite comfortable with in this environment.
Stephen Walter King: With the cost of our capital going up, especially on the debt side.
You know, having a combination of free cash flow.
Some recycling of capital through redemptions.
And the room on our credit line.
I like the fact that I don't think we're going to be any need to go to the market in the foreseeable future.
Going to be any need to go to the market.
Foreseeable future so.
A couple of situations where we have some common equity, in addition to our press, where we could crystallize some significant gains and I would very much welcome that we do have the opportunity set in front of us to redeploy that capital. So, I'm not worried about having declines in our revenue or increases in our pay ratio or anything like that, so it's really just kind of balancing one financing method versus the other.
Having declines in our revenue or increases in our pay ratio or anything like that, so it's really just kind of balancing one financing method versus the other.
And like I said, crystallizing from gains, especially on some of our common equity positions would be, I think, a nice thing for us in this year, so nothing imminent at all.
But, there are a couple of companies that are in our portfolio that we're having discussions with about that.
<unk> with about that and.
Yes, certainly not anything in the next the next few months, but we will see after that.
Zachary Evershed: That's helpful. Thanks. And then, on that opportunity set, what's the rough split between new and follow on investments in the pipeline?
Stephen Walter King: Yeah, we've got both.
As I mentioned.
Uh huh.
The number of deals being shown to us has gone down, which is not surprising. If you're a really successful, profitable company that isn't desperate, now would not be the time that you would choose to go to the market. So you know, it's not surprising that we're seeing a little bit of a decrease in the kind of companies that we're looking for.
In the kind of companies that we're looking for.
But like I said, we're kind of a niche investor.
So, I think what you can expect, is maybe the average deal size to be a little smaller and some of the big companies just wait it out.
<unk>, maybe the average deal size to be a little smaller and some of the big companies just wait it out.
And some of the kind of the more niche-y, smaller type investments are still going to be there for us. So that's typically the way it's worked, even going through 08-09, that's what we saw, as well, although that was obviously much bigger impact than this one.
Still going to be there for us. So that's typically the way it's worked even going through low eight or nine that's what we saw as well although that was obviously.
Much bigger impact than that on this one but.
But, yeah. We also do have several follow on opportunities with our current partners as well, so, I`m still confident in our ability to deploy capital this year, but it could be slightly slower than what it has been for the last 18 months.
Follow on opportunities with our current partners as well so.
You are confident in our and our ability to deploy capital this year, but it could be slightly slower than what it has been for the last 18 months.
Zachary Evershed: Gotcha.
Zachary Evershed: And then in terms of your leverage comfort. Do you like the balance sheet where it currently stands or would you like to take it a bit higher for efficiency?
Amanda Frazer: I think that where it currently stands is probably a good place to be, you know, there`s a lot of interest restrictions and some new maybe limiting factors for deducting interest within Canada. So, I think that we're probably in the best place to take advantage of the tax deductibility of the interest on this debt.
Amanda Frazer: So, without growing larger, I think that we`re probably, you know, sitting in a good spot.
Stephen Walter King: The other thing I'd mention too is we're feeling pretty good having a decent amount of our debt in fixed public debentures that we did over the last few years. So, we don't have a huge sensitivity to the increasing interest rates.
A decent amount of our debt.
And fixed public debentures that we did over the last few years. So we don't have a huge sensitivity to the increasing interest rates.
Zachary Evershed: Great color, guys. Thanks, I'll turn it over.
Stephen Walter King: Great. Thank you.
Operator: Thank you. And our next question comes from the line of Trevor Reynolds with Acumen capital.
Trevor Reynolds: Good morning, guys.
Stephen Walter King: Hi, Trevor.
Trevor Reynolds: Just on the LMS, that is one that you highlighted as being previously Subject to commodity, price risk and and inflation, just wondering where that sits?
Subject to commodity.
Commodity price risk and and inflation, just wondering where that sits.
Stephen Walter King: Yeah. This deal market continues to be just the wild west. It has gone up dramatically, even since we spoke five weeks ago on our last quarter call.
<unk> market continues to be just the wild west.
Has gone up dramatically even since we spoke five weeks ago on our last quarter call.
Stephen Walter King: A difficult position for LMS and their customers is, you know, if you're say you're building a condo building, you`re a condo developer, and you had a bid from LMS that the rebar was going to cost, you know, X dollars.
A difficult position for LMS and their customers.
If you're say you're building a condo building.
Or a condo developer.
And you had I been from LMS that the <unk>.
Rebar wasn't going to cost you know X dollars.
Stephen Walter King: That rebar tripled in price, but you pre-sold all of your condo units to finance the development. So, you have you built an asset margin based on what you thought the cost base was. So, it's very difficult to pass on some of that volatility immediately for projects that are already underway.
You pre sold all of your condo units to finance the development. So you have you built in.
Asset margin based on what you thought the cost base was so it's very difficult to pass on some of those.
Some of that volatility.
Really for projects that are already underway.
Stephen Walter King: The good news for LMS is that they have been able to negotiate cost acceleration clauses into their new contracts, and that they've been doing this for about 30 years, and that's the first time that customers have agreed to basically take the risk on steel price increases going forward.
Price, sorry cost acceleration clauses into their new contracts and that they've been doing this for about 30 years and that's the first time that customers have agreed to basically take the risk on steel price increases going forward. So long term I think it's actually going up.
So, long term, I think it's gonna be a very good thing for their business model that they've now been able to have that as the standard contract. But, they've probably got about six months where they`re going to have to chew through some very low to no margin business.
Because of not being able to pass it on in the very short term. So long term, we don't have any concerns. A very strong company, strong demand.
But we've got a probably a six month period here before those new types of contracts kick in and they can get back to kind of more regular margins.
Trevor Reynolds: So, expect to maybe see a negative revision on that one in 2023?
Revision on that one.
Okay.
Stephen Walter King: It's gonna be close, I don't think it's going to be anything significant, there won't be like the decline we had from last year.
But you know.
We're not expecting any gains from it, that's for sure, but, I don't think it'll be as bad as last year.
I don't think I don't think it'll be as bad as last year.
Yeah.
Trevor Reynolds: Okay, great. And then, just one more just on the the Edgewater. Maybe you can just provide an update on the, obviously the only one with the ECR, kind of, in the 1 to 1.2 range. So, maybe just an update on that.
Stephen Walter King: Yeah, Edgewater actually has improved over the last couple of months and we're actually very optimistic about their continued recovery.
Their continued recovery.
The department of energy sites that they fully reopened, and one of the nice things there is with the Russia and Ukraine more, a lot of the budgets for Department of Defence and Energy have been increased dramatically.
Our out of fully reopened and one of the nice things there is with the Russia and Ukraine more a lot of the budgets.
For Department of Defense and energy have been increased dramatically.
Things that usually take a lot of time have been streamlined and put through by the Democrats very quickly, and so, they're seeing good gains actually in their pipeline and workflow.
Been streamlined and put through by the Democrats are very quickly and so they're seeing good gains actually in there and their pipeline and workflow.
Trevor Reynolds: Perfect, those were my questions. Thanks.
Stephen Walter King: Great. Thanks very much.
Operator: Thank you. I'm showing no further questions so with that I'll turn the call back over to the CEO, Steve King, for any closing remarks.
I'm showing no further questions so with that I'll turn the call back over to Steve.
The key for any closing remarks.
Stephen Walter King: Well. Thank you very much, everybody. I know there is only a few weeks since our Q4, so it wasn't a whole lot to talk about.
But, we`re just ecstatic with how our portfolio is behaving and that's kind of where we sit in the market. So, we look forward to reporting another good quarter in Q2. Thanks very much.
That's kind of where we sit in the market. So we look forward to reporting another good quarter in Q2, thanks very much.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating.
And you may now disconnect.
[music].
Yes.