Q2 2023 Alaris Equity Partners Income Trust Earnings Call
Irritation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone you will then hear an automated message advising your hand is racing towards your all your question. Please press star one again.
Be advised that today's conference is being recorded I would now like to introduce your host for today's call Amanda Frazier CFO . Please go ahead.
Thank you Jeff.
We appreciate everyone, taking the time to join US. This morning, as we present, our Q2 results I'm joined on this call by Steve King President and Chief Executive Officer of Allegra.
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's forward looking information is based upon.
A number of important factors and assumptions and therefore.
Therefore actual results could differ materially additional information concerning the underlying factors assumptions and risks is available in last night's press release, and our MD&A under the heading forward looking statements and risk factors.
Copies of which are available on SEDAR, plus as well as our website. Non IRS data is also presented and may differ from the way other companies present such data.
The forward looking statements. Please refer to last night's press release and MD&A for more and.
More clarification regarding non <unk> measures.
Now for the Q2 highlights.
Q2 revenue of $36 9 million was down 35% over the prior year period, driven largely by $17 2 million of deferred kimco distributions received upon their redemption in 2022.
The remaining Q2 2022 revenue of $39 3 million as compared to the Q2 2023 represents a six 2% decrease over the prior period drivers of this decrease include the deferral of the Q2, LMS distributions, which will be resuming in Q3 and a reduction in BCC distributions as a result of.
The strategic transaction announced last quarter cash generated from operations prior to changes in working capital of $28 3 million was a decrease of 36% over the $44 4 million in the prior period again, mainly as a result of the deferred distributions received from Kimco was redemption last year. After adjusting Q2 2022.
Results for Kimco as distributions.
The adjusted change in cash flow.
From operations prior to changes in working capital was a decrease of four and increase I'm, sorry, a four 2%.
Also contributing to the adjusted increase.
Increase in cash generated from operations prior to changes in working capital for Q2 was at 26% to keep decrease in G&A and after adjusting for the settlement of the Sandbox litigation, which was resolved in the quarter, although crude in Q1 to six months 2023, G&A amount is down 19% with ongoing legal and accounting.
He is returning to historical levels.
With the wrap up of the sandbox matter in salaries and wages based on more normalized operations as compared to an unusually profitable 'twenty 'twenty. Two we expect G&A to maintain these lower levels and have updated our outlook to reflect an anticipated $15 5 million in Gulf War 12 month G&A.
Quite a few fair value changes in Q2 on a net basis, including the common units an increase of $9 9 million as net changes in market rates had a positive impact on discount rates and strong performance in a number of our partners resulted in increases in fair value.
We saw increasing fair values for BCC of $8 5 million U S fleet of $4 9 million U S. I know how on a growth partner, formerly planet fitness growth partners of $3 6 million U S. All of these companies continue to see record highs in their respective businesses with significant growth over prior periods.
BCC continues to see impressive year over year growth with record high activity.
The past number of months.
As they execute on their development plans.
So it has been able to continue to generate.
Increases in syndication through both new customers and growth in current relationships with a large backlog their outlook for the remainder of 2023 and 'twenty 'twenty four continues to be very positive on.
On our partners saw a rebound in fair value after a number of quarters with adjustments related to increasing discount rates as a result of movement in the risk equity risk premium.
This coupled with increasing year over year memberships and the expectation of a positive reset on the preferred distributions for 'twenty 'twenty four drove increase in fair value.
Offsetting these increases were declines in Ax, and a 7.7 million U S M.
An SCR a $3 5 million.
Axiom, while the business continues to maintain high levels of revenue pressure on margins and in investment and corporate support and structure has impacted EBITDA, while they expect month over month improvements and results. These pressures are expected to continue throughout 2023 as a result, the common and preferred equity value decreased further in the quarter.
As a result of an adjustment to the timing of Str's project based revenue the cash sweep anticipated for 2022 with decreased our Crs business can be impacted by the timing of project related work throughout the year.
See ours distributions were previously adjusted to include a monthly fixed distribution on a cash sweep that varies with the profitability of the business.
Expectations for future cash wheat distributions have also been revised to reflect current market conditions and resulted in the fair value decline results for the first five months are up compared to last year and we expect the last half of the year to remain consistent.
Other less significant movements included Dnm Edgewater and T. W. M.
As previously announced during the quarter, we invested $36 five U S into a new partner F. N P. A professional services firm that provides workforce and organizational management solutions to the public sector. The investment includes 35 million U S of preferred equity and $6 million worth of common equity. This brings our year to date deployment.
To $49 5 million.
Subsequent to the quarter proceeds from excess cash flow were used to repay debt, bringing the outstanding amount to approximately $184 million, resulting in 266 million of available capacity.
Our portfolio continues to perform well and has maintained a weighted average ECR of approximately 1.6.
Our current outlook calls for $37 6 million of revenue in Q3, and a 12 month run rate of $157 3 million I'll turn it over to Steve now for his comments great. Thanks, Amanda a corner.
They're very stable result for our portfolio.
And then the gain from fair value adjustments the value of our portfolio has increased quarter over quarter thrown in 'twenty. One so for sure that the increase in our book value for sure from a fair value write ups.
Specifically, we were pleased to see the recovery from LMS worked very hard through the way of a.
Short term inventory issues in them.
Port strike.
West Coast over the last couple of months.
We expect full distributions to return this month.
GW is another country.
That's come through some underperformance in the back and is that one of the very solid trajectory.
Our largest partners BCC and planet fitness.
<unk> continued to be among our strongest performers and I would point out that the.
The decision that we made as management to trade in our traditional preferred shares with a capped.
Growth option.
Four.
For preferred shares that are convertible into common shares without any job that's really started to show its benefits.
Large rate up this quarter, which we expect more of.
On the negative side is Amanda said the accident in SCR had been under pressure for very different reasons Solaris management is digging in and helping those companies as much as we can.
Overall, we've seen the portfolio wide earnings coverage remained very stable and I would say the bell curve for her 19 company portfolio is little higher than what you would expect.
With happy you're already reported by our partners and we're starting to get a good sense for what our distribution resets are going to be for 2024 is looking like another strong year.
Looking forward, we've seen a very productive increase.
The deployment opportunities from our advisory community.
After a relatively slow 18 months period, largely attributable to the private equity markets finding its footing.
Rapid lead rising interest rates activity appears to be higher in Q3 and indications from the M&A advisers in the U S is that Q4 will be a very busy quarter.
Well, there's several transactions in process that we believe will allow us to meet or exceed our deployment targets that we've set for the year.
And along with good opportunities the other part of our growth is access to appropriately priced capital while our current share price doesn't make equity offerings economic we are in a very strong position on our balance sheet by using the $266 million on our on our credit facility as well as our free cash flow that we generate every month.
So Justin.
Open it up to questions. If you would please.
Thank you.
A reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby we compile the Q&A roster.
And one moment for our first question.
And our first question comes from Nick <unk> from CIBC capital markets. Your line is now open.
Okay. Thanks for the question.
For companies like elements that have experienced temporary headwinds.
Inventory your willingness to be accommodating regarding <unk>.
Temporary suspension of distributions until cash flow pressures that beat.
Have you ever contemplated less conventional workout efforts like.
Conversion of some component of the preferred equity investment into common.
That's an option that could be considered to help layer in more.
More common equity exposure over time.
Yes, it definitely good Nick and it has been considered in the past and in all of these cases, it really depends on what the situation is and Lms's case. It really was a very almost a formulaic issue that they have.
It wasn't you know that.
We knew exactly what their backlog of orders were exactly what the margins were on those on those contracts exactly what price their inventory with us So we knew.
The other day, but we knew pretty well when this issue was going to resolve itself and we worked with the company.
There are lenders.
To get through it and so it all came out.
Walsh almost exactly as we had hoped and these guys. We've been partners with LMS for 17 years, they've been running this business for over 30. So a lot of familiarity a lot of trust in that situation and again. It was a very kind of formulaic type of situations in other situations, where you may not have as good a handle.
The outcome.
You know.
Kind of shifting the capital structure like what you suggested it could be it.
It could be a good solution for it but.
Each one has its own kind of story.
Yeah, Okay, no that makes sense.
And then can we spend a little bit of timeline dnm leasing just revisiting that partner.
It sounds like higher interest rates are pushing vehicle leasing rates higher which in turn is having an impact on demand is that business also impacted by the chip shortage in the core.
Corresponding curtailment of new vehicle supply just be interested to hear a bit more about some of the headwinds.
Impacting that business and maybe your outlook there on a go forward basis.
Okay.
It had been impacted by the chip shortage and just the general supply of new vehicles into the market.
What we saw last year with high used vehicle pricing and lower interest rates was that a lot of people were able to get out of and renew leases sooner.
And get into newer and maybe a step up level of cars just because of the value that was in the used car that they were returning and that pulled a lot of their volume forward. So their results I think in last year and the year before that were quite a bit higher than we were expecting as they were able to turn it over there they are customers.
<unk>.
Now that we're getting into a period, where interest rates are higher it's really starting to see a lot of people hold onto their vehicles for a longer period of time, although they've been able to bring in a lot of new customers.
Fill that gap.
They turn their customers they have a lot of repeat business. So in the long term, we see this as a big advantage for them.
They have seen.
Vehicle access improve in the last year, so that's bearing on them a lot less than it had in the past.
Okay. That's good color and then last one for me.
It sounds like you are optimistic about the pipeline of transaction activity that you have in front of you.
Just on the other side of the coin if you look across the portfolio today do you see potential for any redemption activity in the second half of the year.
We don't have anything.
That's on the radar in terms of redemptions.
I guess, it's one of the nice things about having an unsteady.
Capital markets out there that most companies.
Note that this is probably not the right time to get their optimal sale price. So so no. We don't we don't anticipate any any redemptions in the second half.
Yes, okay very good.
That's it for me thank you.
Thanks, Mike and thank you.
And one moment our next question.
And our next question comes from Gary Ho from Chardan. Your line is now open.
Thanks, Good morning.
Steve.
Start off here, just going back to your comments on the active deal pipeline for the back half of the year.
I'm wondering if you can share kind of what you're looking at any update on the <unk> environment in general valuations and the type of deals that come across your desk here.
Yeah. It's a good cross section of deals that we've seen I would say quality is has improved.
And at the same kind of comment I was just saying to Nick about.
Lack of of redemptions expected.
It's the same thing on the deployment side, where we saw a lot of the best companies just stay away from the market for the last 18 months that seems to be.
Coming back and I would say the reason, they're coming back is because the <unk> market as it recovered quite a bit in terms of valuations.
It is still a very aggressive.
Competitive environment.
The amount of capital that is.
Uninvested NPA overrides. The fact that credit is still more expensive in tighter than it used to be a couple of years ago. So the liquidity in the in the private equity industry.
A very very high.
So.
So multiples really have not come down very much from where they would have been a pretty.
Three interest rate increases so.
It's an interesting Brian .
Brian .
Different industries.
Are treated differently within that but overall, that's kind of an environment we're seeing.
Okay. Thanks for the color and then second question I just wanted to touch on the BCC for sack here, so decent fair value write up $8 million I think you provided some hurdles relates to the allocation of profit in the MD&A certain targets are achieved maybe can you just refresh me on that on the mechanics of that.
Is that only recognized upon monetization and also remind me is there a catch up distribution piece.
Ann.
And I'll, let the business continues to perform as expected.
So with regards to the hurdles those will be.
<unk> realized in the financial statements as they are hit I think theres a note in there that says we have not had any of those.
Profit allocation hurdles as of yet but.
But when we do it will start to impact of fair value. Further BCC is there'll be recorded as part of that number.
We see in the financials.
What was the second part of your question that makeup the make up so if at the end of the year Bcc's common equity declares a dividend in excess.
Of that 85%, we will see a catch up payments. So it is possible that the BCC return may be higher than that eight 5% for the year, but that isn't something that we're in control of and we'll have to wait and see what the common shareholders decided.
And we wouldn't expect that this year in the first year of the investment.
Essentially next year would be the earliest.
Okay, and then also just going back to the first piece of the <unk> the hurdles.
Could that be significant or is that going to be like gradually.
And then since then you guys are hitting those those hurdles.
I would expect it to be gradual.
Okay.
Okay, Great and then just my last question.
Steve any update on the managing third party capital.
Got it.
You see here.
Yes, we do have.
One of the things that is in process that we're working on is.
What would be a similar type of.
Transaction.
<unk>, So you know where.
So we're excited about that I think that is.
A really interesting.
And a boost to our for a return on equity and our earnings possibilities. When we can make a make profits on other people's money as well so.
From a.
Capital raise perspective, we're not out of share price as I mentioned that we would ever raise equity so being able to grow our company and increase our earnings without needing to raise any of our own capital really effective in this type of environment.
Okay got it those are my questions. Thank you.
Thanks, Ryan and thank you.
And one moment our next question.
And our next question comes from Jeff Fenwick from <unk>. Your line is now open.
Hi, good morning, everyone.
Maybe we could start with a couple of follow ups on the BCC a discussion in the queue.
Maybe just give us a quick overview on how the fair value is calculated for that one that it is obviously a bit of a different structure and you. As you mentioned you haven't actually surpass certain hurdles yet so what is it that it takes to fair value higher and then they go the way you are calculating it.
So right now that we have based on fair value at the discounted cash flow model based on them achieving the forecast was and their business plan that was laid out at the time, we did the deal and just as time passes we will see.
As time passes I think hit that forecast, we will see a continuous trend of improvement in the fair value.
In addition in this quarter there was a change to the equity risk premium there.
There was a couple of changes just to those market driven rates, but the net impact was an additional write up.
So about 5 million is due to the performance of the business and about another $3 million is due to just.
Just some change in the discount rate driven by external factors.
Keep in mind, Jeff.
The fair value write up was just on our own investment as principal so that has nothing to do with the hurdles on the on the carry on the Brookfield capital yet, but it is an indication that the business is trending towards meeting them in the future.
Yeah, no. Thanks for that that's an important clarification and I guess a follow up there is.
You know this is obviously continues to be a bit of.
A roll up of rollout story in new locations and money being invested in the platform.
Was it structured that deal structured where they were going to be drawing down on a on an existing funding package or is there a potential in the future that are.
No more capital to be injected here in all areas might might play in something along those lines in terms of putting incremental investment into BCC.
Yeah, you know it's interesting it's been a phenomenal model in that.
Every one of there now 100 locations closing in on 100 locations has been funded out of free cash flow they've never had.
Had a penny of that in this company until this transaction and that was just for some liquidity capital. So they're kind of capex budget for the year is all financed by a by a free cash flow and theirs.
Theres going to be probably another strategy layered on to expand their offerings and that will include some some acquisitions, but <unk>.
There'll be small acquisitions and are expected to still be funded out of cash flow.
So.
If there if there was ever a larger acquisition and that is not completely out of the question.
If they wanted to dig in to get get into other areas of cosmetic surgery.
I would anticipate that we probably wouldn't participate in that along with with Brookfield as other kind of investment partners.
Okay. Thanks, that's helpful and then.
Yeah.
I heard your commentary there about the opportunities in front of you guys heading through the back half, but just given where the stocks trading today and the significant distributions.
Associated with that have you given any thought to ramp ramping up buyback activity. It seems like that might be made.
An accretive use of capital in the short term.
Yeah, we certainly considered it and we will continue to consider it but because of the opportunities that we have in front of us and the IRR is expected on those opportunities we still feel that that is the best place for shareholders capital.
That's where our focus is going to be if we're ever in a situation where that that equation.
Flip flops and then we change but right now we're looking at very good opportunities with very high expected IRR. So that's that's the focus.
Okay, and then maybe one quick one just in terms of Q3 partner revenue guidance does that include the assumption of the returned to the LMS payment. There I'm just trying to get my numbers just to square because I think you've got that that would come on and then the first full quarter of the F N B investment.
Yes, that's correct.
Great. Thank you very much.
Sure.
Hey, Ed Thank you.
And one moment, Brian next question.
And our next question comes from Zachary <unk> from National Bank Financial Your line is now open.
Good morning, everyone. Good quarter, thanks for taking my questions.
Thanks, Matt.
So you mentioned that the quality of deals landing on your desk is higher can you go through the factors that differentiate a great opportunity for layers in this type of macro environment.
Yeah, Youre really looking at better kind of quality of earnings type companies.
Theres always a company that's in demand in private equity and it's it's the cash cow business and.
So we're looking at that.
Companies that meet our criteria and a low debt low capex industries that don't have.
Either obsolescence risk or high volatility.
Management teams that are confident enough in their business, where they will do anything to stay in as opposed to wanting to exit so.
So yes.
It's a good list of opportunities for us.
Yeah.
They tend to go in.
It's a completely random cycles, but.
<unk> is opportunity based and Theres only so many companies out there that fit all of those criteria for us. So we're lucky enough to have a good list of them right now and.
I would say in this environment our win rate when we are interested in the company I would say our win rate is much higher than it has been historically because of the increased cost of capital of those options around us.
We're having success and are we just have to execute.
Great color. Thanks, and then with the debenture maturity on the Horizon what are your plans, thus far for refinancing given where the stock price and interest rates are.
Yeah, we've got.
We've got a lot of room on our on our balance sheet to take those out just on a revolver. If we want to so really we're going to keep on kind of judging.
Our deployment opportunities.
Along with that that take out of our converts.
So we can either just to use our line or if we have so much opportunity on the deployment side, then we would probably replace the convert with another convert.
Given the cost of that capital that's attractive to hold onto it probably a little longer here yeah. It's at five 5%. So needless to say, we can't we can't replace it at five 5% so.
But as long as we go.
No doubt.
On your revolver right now with the Ah <unk>.
What's the incremental borrowing is that on a grid.
So incrementally.
It varies because if we were to move that on there it was definitely changed.
The rating and the premium we're paying to so far on that line, but that would be about eight.
775 to eight.
Yeah.
Perfect. Thank you very much I'll turn it over.
Thanks.
And thank you.
And I am showing no further questions I would now like to turn the call back over to Steve King for closing remarks.
Great. Thanks, very much Justin and thanks, everybody for tuning in right before a long weekend so.
Pleased with the quarter.
I expect more of the same next quarter basically.
We hope to be back with a with good deployment news and another things formulary. So have a good rest of your summer and we'll talk to you next quarter. This concludes today's conference call. Thank you for participating you may now disconnect.