Q3 2023 Alaris Equity Partners Income Trust Earnings Call
Good day, and thank you for standing by and welcome to <unk> Q3, 2023 earnings release conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask a question during this session you will need to press star one one on your telephone you will then hear an automated message. It buys your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Amanda Fraser Chief Financial Officer. Please go ahead.
Thank you Amy we appreciate everyone, taking the time to join US. This morning, as we present, our Q3 results I'm joined on this call by Steve King President and Chief Executive Officer of hilarious.
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 the comments made today may contain forward looking information. This forward looking information is based upon a number of important factors and assumptions and therefore actual results could differ materially additional information concern.
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 at SEDAR dot com as well as our website.
Yeah for US data is also presented and may differ from the way that other companies present such data.
With the forward looking statements. Please refer to last night's press release, and our MD&A for more clarifying information regarding these non <unk> measures.
No for Q3 highlights.
Q3 revenue of $47 2 million was up 10% over the prior period, driven largely by the $5 9 million U S distribution received from fleet well comparable to the prior year's distribution. A portion had previously been recorded as an unrealized gain there was the impact of our new investments and Sycamore F N P and the shipyard.
<unk> also increased our three months results.
EBITDA for Q3 of $83 9 million and per unit of $1 85 represents an increase of approximately 110% as compared to Q3 2022.
And for the nine month period, an increase of approximately 3% respectively.
Increase in EBITDA was largely attributable to capital appreciation on our common portfolio EBITDA isn't a metric that we have historically focused on as we primarily look to cash flow metrics as our portfolio over the last four years was introduced comments currently in 13 of our 20 companies unrealized gains have become a more meaningful metric, reflecting the <unk>.
<unk> value with this portfolio.
Cash generated from operations prior to changes in working capital of $36 2 million was a decrease of 17, 7% over the prior period and a result of an increase in current tax expense in the quarter.
Basic earnings per unit of $1.40 is 109% above the prior period and represents a record quarter for <unk> as we paid out 34 cents per unit of distributions. The resulting dollar six increase to book value represents a 7% increase in brings book value per unit to $20.
Antisense at September 30th.
Also contributing to the increase in the noted.
<unk> metrics.
It was our second consecutive quarter with a greater than 26% decrease in G&A with the wrap up of the sandbox matter and salaries and wages based on a more normalized operations as compared to an unusually profitable 2022, we expect G&A to maintain these lower levels.
Q3 earnings were impacted by a $39 6 million gain in net realized and unrealized fair value of investment.
As compared to a net loss of $7 1 million in the prior period.
<unk> was driven by a $37 2 million increase in the common portfolio and a 2.2 million gain on the preferred investment key drivers of these fair value increases where fleet of 25 million U S. Opana, formerly planet fitness growth partners.
$5 2 million U S umbrella and scuttle about $4 8 million U S.
Fleet continues to general rate increases and syndications through both new customers and growth in current relationships with an ever growing backlog their outlook for the remainder of 2023 and 2024 continues to be very positive. The business continues to prove that their data driven approach to fleet management is entrenched them within their syndication Custer.
Well, we continue expect there to be cycles within the business and the industry. There has been a permanent and sustainable growth in the business.
<unk> partners is firmly back in growth mode. After emerging from the aftermath of Covid expecting to finish 2023 ahead of budget and further aided by the tail winds of positive announcement from planet fitness corporate a hot I expect this momentum to continue well into 2024 in the coming years.
Continued growth in demand in the Nova data center market has driven year over year increases in both revenue and EBITDA for brown of subtle as well as our continued record level of backlog.
Other less significant movements in a number of our partners, including D. N N accent alert SCR Edgewater heritage and carry electric rounded out our changes in the quarter.
With the completion of our investment into the shipyard at the end of August we have invested a total of approximately 130 million year to date and with no redemptions. So far in 2023, the incremental annual yield contributes 30 cents a revenue per unit.
We currently have 265 million of senior debt outstanding, resulting in a $185 million of that.
Favorable capacity for new investments.
On the portfolio side, our portfolio continues to perform well with a slight decline in weighted.
Average ECR to above one five times with 10 of our 20 partners continuing to be above this threshold slight movements in a number of partners have contributed to the decrease 13 of our 20 partners have either no debt or less than one times.
[noise] death, as compared to EBITDA in their businesses.
Our current outlook calls for $39 9 million of revenue in Q4, and the 12 month run rate of $166 4 million up from $157 3 million last quarter, our G&A expectations remained consistent with the prior quarter at $15 5 million.
I'll turn it over to Steve now for his comments.
Great. Thank you Amanda and thanks, everybody for tuning in and obviously, we're very pleased with the performance of the portfolio in this quarter.
Our investment criteria that we strive for and executed on for the last 20 years has resulted in a group of companies on a combined and diversified basis.
Shown that it's capable of delivering low volatility cash flow and every different economic and physical environment. So we're very pleased with that.
We don't see any change in that.
Performance going forward for the portfolio.
Obviously, adding a dollar of book value per share just in the quarter. Despite the value creation, that's occurring a good portion of which is tied to the common equity positions that we've been building over the last five years.
Well there is just not clear from looking at that.
The graphs.
Directly correlated to our fixed income.
And if you're just basically is our cash yield you're going to be missing out on a really good cash.
The creation story that we've developed here by.
My added commentary to our portfolio.
Cheers.
You see ours have come down marginally I, we're still very comfortable at the levels that they're at.
1.55 is actually above historical levels.
With such a little debt in the portfolio as well as some fundamentals.
We already know who have reversed.
Any such as LMS.
Soon Julien.
Climate front, we look forward to adding onto our successful additions of F. N B shipyard this year.
With additional new partners hopefully by year end.
Continued to be very competitive in this higher rate environment.
And our capital is better but.
But.
We do have to stay very disciplined in our approach, particularly give us very high cost of our own equity at the current valuation of our stock.
So operator, we'll turn it back to you and happy to.
Open it up to any questions.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from the line of Gary Ho with Dusk Jordans. Your line is open.
Thanks and good.
Good morning, just first question is on fleet.
I'm wondering if you can just walk us through the drivers behind the sizable fair value Mark up on all of that investment.
Sure.
Fleet has a June 30th yearend and we were.
Received there on our financial results as well as their budget and outlook for 2024 and beyond and really the cash flow drivers within that.
Those two items are what fed into our DCF model on the right.
We have always been somewhat discounting for a cycle downward cycle in the business and the industry and while we continue to think that that's.
Uh huh.
Potential could be.
I think that the.
Low point in that cycle, given the sustained growth of the fleet has been able to achieve is a permanent step from where it would've been maybe two two years ago.
Okay great.
Great and then second question is on planet fitness.
And I did.
Your prepared remarks, you know there has been talks at least from the corporate franchise or side.
The potential membership rate increase.
I don't think you bake that into your fair value.
But can you also kind of walk us through what that could do to your perhaps and I think you also have some comments.
<unk> as well.
Yeah, Gary I'll take that one I would just that planet fitness.
Corporate conference.
Oh yeah.
There has been some testing of new pricing, including at some of our clubs.
I think it's going to be kind of a phased approach where theres going to be.
Maybe some different.
Yeah.
The basic chemical or book.
Following part so.
Uh huh.
Okay.
Rich.
Average revenue per customer based on the different levels that will be available what can be.
A little higher than what they are today.
Probably the bigger movies, though.
Concessions that corporate made on.
On on renovating.
Clubs and also the requirements on Newbuild.
We'll make economic of Newbuild and and refreshes are much better for franchisees. So we actually view that as.
Your move in terms of unit economics the prices.
We're very pleased with all of that none of that it doesn't take into account.
Into our forecast at this point, but provide some really good upside for us.
Yeah.
Great. Thanks, Steve those are helpful. And then just lastly, while I have you.
I was interested in hearing your comments on the deal activity environment. What are you seeing on both the capital deployment and any redemptions that you are aware up near term.
And Steve.
Oh go ahead.
It's just going to say youre cutting out a little bit. So I don't know if theres a way to just adjust I know youre on a cell phone.
Yeah, Okay, I'll I'll do I'll try and answer hopefully it's a it doesn't go too bad.
On the on the capital deployment front. It is very active right now we are kind of being forced to be very very selective.
Got it.
Certain amount of capital, which you know is adequate but because we haven't had any redemptions for some time, we are making sure that we can kind of spend within our means because it had these valuations for our equity it's not something that we're not going to go out and raise equity at.
At anywhere near this is Brian.
So on the redemption front, we are starting to see some potential activity there.
We have had unsolicited offers on a on a couple of our of our portfolio partners.
So we will see whether those will be adequate for our for our partners and whether they go through but for.
For the first time in a couple of years there has been some activity there which would be very welcome by us.
Would be able to show some some more gains on some of the common.
Parts of our portfolio that we're not getting credit for and we would obviously be able to redeploy that capital very easily so.
We are starting to get some some more activity on that front beyond.
Yeah.
Perfect. Okay. Those are my questions. Thank you.
Thanks, Greg.
One moment for our next question.
Okay.
Our next question comes from Nick <unk> with CIBC capital markets. Your line is open.
Okay. Thanks for the question.
I was just wondering if theres any additional color that you could provide on how fleet is funding distributions to common shareholders.
There been any chunky asset sales or other corporate development action that has helped facilitate those large payouts or is that just entirely been funded by the organic free cash flow the business.
That's been entirely through cash flow today.
Just this indicator so they don't really have large assets to sell there really a service driven organization. So that is purely a cash flow and growth.
Understood, Okay, well, that's encouraging and then I was just.
Hoping I could ask a little bit more color.
On the events that have driven str's earnings coverage ratio, a little bit lower I recognize it only represents about 3% of run rate distributions, but can you just give us a bit of an update there and your outlook for distribution sustainability from that relatively smaller partner.
Yeah, SCR I mean, it's always been a very project based business and Theres always been ebbs and flows to the cycle of when they have those large project hits.
So I think as you look back over the course of our relationship with them, they're always sort of bouncing around quarter to quarter.
We believe that the there.
<unk>.
$4 2 million of your distribution is.
Secure at this point is what we're basing our DCF on so.
Yes, just always always a little bit of one that's a little hard to predict just with how those projects fall into the to the earnings.
Okay very good.
Is it for me I'll re queue. Thanks.
One moment for our next question.
Our next question comes from Jeff Fenwick with <unk> Securities. Your line is open.
Hi, good morning, everyone.
I guess I wanted to start off just maybe with a bit of a discussion around the fair value accounting.
In the context of having that larger common equity portfolio today like should we be expecting to see more of this type of.
These types of moves quarter by quarter, and maybe a bit more volatile just given the nature of common valuation versus <unk> or are you contemplating anything there that might change the approach to how you are how you tackle that fair value calculation.
Definitely no contemplated changes in the approach.
Definitely it will be a more volatile part of the portfolio as.
Common.
<unk> doesn't have the same Florida callers that we benefit from on the preferred side.
It is a bigger piece of the portfolio. So I do think that as it continues to grow it will become a meaningful portion.
Movement wise.
There was.
Yes.
Common that was being held sort of below cost and we have really seen some recovery from that standpoint that brought those numbers up but I do think that we will see fair value movements on the common side being a bit more significant over over them.
Sure.
Yeah, I'll just add in on that Jeff one of the the main driver for Kpmg's valuation on our both our <unk> and the comment is.
As discounted cash flow, but then every now and then you'll have whether it's.
Sale of shares between parties within the company or maybe it's an unsolicited takeover offer that then kind of sets the value of those shares and may override a DCF calculation and thats when youll see some some bigger moves like you've seen here so.
That's one thing that will trigger some some larger moves then.
Ongoing DCF model well.
That's helpful color. Thank you and then maybe just another question on fleet I mean, I think the headlines generally that the trucking market has been pretty terrible.
Across North America, you know over the last number of months and these guys are sort of blowing the lights out so what's.
Whats driving that difference and and performance is that they are trying to help these trucking companies perform better or how should we be thinking about that.
They're really not servicing trucking companies per se there their area of focus is really in larger businesses that have a fleet component to their business, but it's not the main focus of.
The business and Thats really where they can have their service offering can help manage a fleet as they don't have it it's not the sole focus of the business. So they are generally working with a fleet manager who is running a division of the business, but their operations are much more focused on services and delivery Walmart is a large customer of theirs.
They have a lot of grocery delivery delivery trucks, so theres a lot of <unk>.
Focus more on.
Businesses that have operations, where they just need things delivered.
Three stores as you can imagine they just need the food there.
Certain point everyday regardless of that trucking.
Trucking industry overall metrics. So that's really what is driving them more so than the macro dynamics.
Okay. Thanks for that and then.
Uh huh.
A question just on the SG&A I mean, it came down for a couple of reasons that you cited there I think in the fourth quarter I know you've been accruing bonus more so on a quarterly basis now, but usually in Q4 I recall there is a bit of a true up that can happen. So should we expect to see that this year that might might take the salary line a bit higher through the end of the year.
Hum.
It is being accrued based on earnings in the quarter. So the only thing that we should really take that estimate higher is if were.
We had say suddenly large happened.
If there was a redemption that drove a lot of gain that could factor into the bonus, but three 5% of distributable cash flows without a change.
Change in cash flow to drive that there shouldn't necessarily be any true up with regards to what's already happened in the first three quarters that hits in the fourth quarter as an adjustment.
Okay. Thanks for that that's all I had thank you.
As a reminder to ask a question. Please press star one one on your phone.
And our next question comes from the line of <unk>.
<unk> ever shed with MBS Your line is open.
Hi, good morning, its actually Thomas calling in for Zach.
Most of my questions have been answered so maybe one last one for me.
Would you would you increase the <unk>.
Yield on perhaps if rates stay higher for longer.
Okay.
Yes, it's been a great area of discussion internally.
Now for 20 years, we have been through some some various.
Just rate environments, and what we've tried to do it.
In order to make.
Our product more.
<unk> in the market more appetizing to two entrepreneurs, we've decided to leave the current yield.
In a fairly tight band.
And increase the total return expectations of what we do in other ways. So for example on aircrafts, we are building in a higher premium on exit.
And what we've built in before in different environments.
We've we've added the common equity, which you know we have priced so that we don't believe that we will be getting a much higher IRR on those investments and then we are on our perhaps so we look at it on a total return basis and we feel like we've moved up our total return expectations.
Probably at least 5% from where we would've been several years ago and the lower rate environment. So.
But with that being said.
The the kind of the headline sticker shock of a bad deal is always is the current pay yields and so for that reason from a marketing perspective, we've chosen and believe that.
As as it is and.
It's looking very appetizing for for entrepreneurs. So that that's the way we've decided to do it to deploy more capital into better companies, but we have and be moved up our return expectations.
Yes.
Perfect. Thank you for your time.
Thank you.
And I'm showing no further questions at this time I would now like to turn the conference back to Steve King for closing remarks.
Great. Thank you very much.
Thank you Megan.
Very pleased to have a surprise in the market.
Weak and we hope to do more of that we are continuing to build on on more sources.
Our revenue outside of the current yield.
I again point to the listener Bello our investment that we.
We switched over from great, perhaps two convertible prefs that one is going to lead to.
Surprises in nature.
We're doing.
In another deal in process that will be similar to that with the current portfolio of company that we're hoping to really use them.
Cool.
We'll get a fee and a carry on as well as CNS principles. So.
We feel like we've got some very exciting things going on and we're creating a lot of value for our shareholders. So well.
We will be excited to report back on our year end in March so thank you very much.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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