Q1 2024 Alaris Equity Partners Income Trust Earnings Call

May 10, 2024

Operator: Good day, and thank you for standing by. Welcome to the first quarter of 2024 Alaris Earnings conference call.

Yeah.

Speaker Change: Good day and thank you for standing by welcome to the first quarter of 2020 for a large earnings conference call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message revising your hand.

Operator: At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Amanda Frazer, Chief Financial Officer. Please go ahead. Thank you, Marvin.

Speaker Change: This race to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.

Speaker Change: I like to hand, the conference over to your first speaker today, Amanda Fraser Chief Financial Officer. Please go ahead.

Amanda Frazer: Thank you, Marvin. We appreciate everyone taking the time to join us this morning as we present our Q1 results, and I'm joined on this call by Steve King, President and Chief Executive Officer of Alaris. 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, and forward-looking information is based upon a number of important factors and assumptions, and they could, for actual results, differ materially.

Amanda Frazer: Thank you Marvin.

Amanda Frazer: We see it everyone, taking the time to join us.

Amanda Frazer: Morning, as we present, our Q1 results and I'm joined on this call by Steve King President and Chief Executive Officer of 11.

Amanda Frazer: 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 and forward looking information is based upon a number of important factors and assumptions in there or.

Amanda Frazer: Additional information concerning the underlying factors, assumptions, and risks is available in last night's press release and our MD&A under the headings Forward-Looking Statements and Risk Factors, copies of which are available on CDAR at CDARplus.com, as well as on our website. Non-IFRS data is also presented and may differ from the way that other companies present this data. As with the forward-looking statements, please refer to last night's press release and our MD&A for more clarification regarding this non-IFRS measure.

Amanda Frazer: Actual results could differ materially additional information concerning the underlying factors assumptions and risks as the basal only last night's press release, and our MD&A under the headings forward looking statements and risk factors copies of which are available on SEDAR at SEDAR, plus dot com as well as our website non Io for US data is also presented it may differ from the way that <unk>.

Amanda Frazer: Other companies present this data.

Amanda Frazer: As with the forward looking statements. Please refer to last night's press release, and our MD&A for more clarification regarding the non <unk> measures.

Amanda Frazer: As discussed last quarter, with the evolution of Alaris' investment model over the last few years, beginning with the introduction of common equity and continuing to evolve with the expansion of SPV investment. In Q1, Alaris determined it had met the requirements of an investment entity under IFRS 10.

Amanda Frazer: As discussed last quarter with the evolution of the <unk> investment.

Amanda Frazer: Model over the last few years, beginning with the introduction of common equity and continuing to evolve with the expansion of SPV investments.

Amanda Frazer: In Q1 allowance determined it had met the requirements of an investment entity under Ian firsthand.

Amanda Frazer: As a result of this prescribed change, Alaris no longer consolidates its investment entity subsidiaries into its financial results. These entities, which are now referred to as acquisition entities in our financial statements, include Alaris Equity Partners USA, the subsidiary which holds Alaris' U.S. investments, as well as Alaris Equity Partners Inc., which holds Alaris' Canadian investments, in addition to the senior credit facility and convertible debentures. These entities are now reflected in the trust balance sheet as corporate investments and are held at fair value.

Amanda Frazer: As a result of this prescribed change no. There is no longer consolidates its investment entity subsidiaries into the financial results. These entities, which are now referred to as acquisition entities in our financial statements include a laris equity partners USA, a subsidiary, which holds the layers of U S investments as well as alerts equity Partners Inc.

Amanda Frazer: Polaris is Canadian investments in addition to the senior credit facility and convertible debentures.

Amanda Frazer: These are now reflected in the trust balance sheet at corporate investments and are held at fair value.

Amanda Frazer: While this method of accounting has had a pervasive effect on the financial statements on the face of the statements, NIFRS requires that this change in accounting is made prospectively, and as a result, prior periods are not restated. Therefore, no disclosures surrounding corporate investments have been..., located in Note 3, have been updated to contain as many details as possible with regard to the acquisition entity's results. And the MD&A has been crafted in such a way that, to the extent possible, information is presented alongside its prior quarter comparative.

Amanda Frazer: This method of accounting has had a pervasive effect on the financial statements on the face of the statements and I refer US requires at this change in accounting is made prospectively and as a result prior periods are not restated so no disclosure surrounding corporate investments have been.

Amanda Frazer: Located in note three have been updated to contain as many details as possible with regards to the acquisition entities results in the MD&A has been crafted in a way that to the extent possible information is presented alongside its prior quarter comparatively.

Amanda Frazer: Accordingly, users of the interim reporting should exercise caution in reviewing, considering, and drawing conclusions from period-to-period comparisons and changes. Direct comparisons between dates or across periods may be inappropriate or not meaningful if they're not considered carefully and in context.

Amanda Frazer: Accordingly users of the interim reporting should exercise caution in reviewing considering and drawing conclusions from period to period comparison of changes direct comparisons between dates or across periods may be inappropriate or not meaningful if they're not considered carefully and in context.

Amanda Frazer: Aside from this accounting change, Q1 was a fairly standard quarter for Alaris. Net book value increased by $0.54 per unit in the quarter to $21.66, which continues to be a record for Alaris, driven by earnings less... The $0.34 per unit dividend paid in the quarter. Alaris' partner distribution and transaction fee revenue of $39.3 million was in line with previous guidance of $39.2 million, despite heritage restoration, and deferring distributions for 2024. And ahead of Q1. Sorry, end.

Amanda Frazer: Aside from this accounting change Q1 was a fairly standard quarter for hilarious net book value increased by 54 cents per unit in the quarter to $21 66, which continues to be a record for <unk> driven by earnings less.

Amanda Frazer: The 34 cents per unit dividends paid in the quarter.

Amanda Frazer: <unk> partner distribution.

Amanda Frazer: And transaction fee revenue of $39 3 million was in line with previous guidance of $39 2 million. Despite heritage restoration to spring distributions for 2024 and <unk>.

Amanda Frazer: Head of Q1.

Amanda Frazer: Revenue was ahead of its Q1 2023 result of $36.7 million. To put Q1 2024 on the same comparative basis as Q1 2023, as well as to remove one-time items such as the deconsolidation gain as a result of this change in accounting and the legal costs related to the sandbox and Q1 of 2023, was $39.1 million per unit, or $0.86, which represents an increase of approximately 28% as compared to Q1 2023 of $0.67 per unit.

Amanda Frazer: Sorry.

Revenue was ahead of Q1 2020, Three's result of $36 7 million.

Amanda Frazer: Adjusted EBITDA, which adjust.

Amanda Frazer: To put Q1 2024 on the same comparative basis as Q1 2023, as well as removing one time items such as the deconsolidation gain as a result of this change in accounting and legal costs related to sandbox in Q1 of 2023.

Amanda Frazer: Was $39 1 million per unit or <unk>, 86 cents, which represents an increase of approximately 28% as compared to Q1 2023, a 67 cents per unit.

Amanda Frazer: The actual payout ratio for the quarter was 66% in Q1, driven by Alaris' net distributable cash flow of $0.51 per unit. Subsequent to the quarter, Brown and Settle redeemed their investment for gross proceeds of $71.5 million U.S., resulting in a total return on the Brown and Settle investment of $30.8 million U.S., representing an unlevered IRR of 15 percent and a multiple of capital invested of Alaris expects to use the incremental borrowing capacity under its credit facility as a result of the redemption of Brown and Settle to repay its convertible debentures.

Amanda Frazer: The actual payout ratio for the quarter was 66% in Q1, driven by all areas net distributable cash flow of 51 cents per unit.

Amanda Frazer: Subsequent to the quarter brought us that will redeem delores as investment for gross proceeds of $71 5 million U S. Resulting in total return on the Brown and federal investment of $30 8 million U S representing an unlevered IRR of 15% on a multiple of capital invested of one five times Polaris expects to use the incremental.

Amanda Frazer: Borrowing capacity under the.

Amanda Frazer: Under its credit facility as a result of the redemption of brown and settle to repay hilarious is convertible debentures.

Amanda Frazer: At their maturity date in June of 2024, Alaris currently has $305 million of capacity available on the credit facility to fund both future transactions and the convertible debenture repayment. Our portfolio updates include a continued weighted average of approximately one and a half times, with 11 out of 20 partners continuing to be above this threshold. With regard to partner performance, Sonobello continues to see growth in the first quarter as they execute on their development and expansion plans. Organic growth through the quarter saw Sonobello at five locations for a total of 103 centers.

Amanda Frazer: Their maturity date in June of 2024 hilarious currently has $305 million of capacity available on the credit facility to fund both future transactions and the convertible debenture repayment.

Amanda Frazer: Okay.

Amanda Frazer: Our portfolio updates include.

Amanda Frazer: Continued weighted average of approximately one and a half times with 11 out of 20 partners continuing.

Amanda Frazer: To be above this threshold.

Amanda Frazer: With regards to partner performance solar Belo continues to see growth in the first quarter as they execute on their development and expansion plans organic growth through the quarter Safina below at five locations for a total of 103 centers their fair value increased by $2 8 million U S. In the quarter Edgewater is results in 2023 and sustained.

Amanda Frazer: Their fair value increased by 2.8 million U.S. in the quarter. Edgewater's results in 2023 and sustained growth expectations for 2024 have impacted future reset expectations with positive impacts on future cash flow expected. And fair value has increased to 2.4 million U.S. in the quarter. Fleet continues to grow, with another record year expected for their fiscal year ending June of 2024. This continued performance has resulted in an increase in fair value; 2.3 million U.S. LMS's results for the beginning of 2024 have been a significant improvement over the prior year, resulting in a rebound in ECR above two times.

Amanda Frazer: Growth expectations for 2024 have impacted future reset expectations with positive impacts to future cash flow expected in fair value has increased to by $2 4 million U S in the quarter.

Amanda Frazer: Our fleet continues to grow with another record year expected for their fiscal year ending June of 2020 for this continued performance has resulted in an increase in fair value of $2 3 million.

Amanda Frazer: Lms's results to begin 2024 have been a significant improvement over the prior year, resulting in the rebound in ECR to above two times.

Amanda Frazer: With these improvements, we expect LMS to begin catch-up payments on their deferred distributions in the latter half of the year based on an actual growth in our reset metric of gross profit of 13.9% rather than 12% expected at year-end and the early results for 2024. There was a further increase in our value of LMS during the quarter of $1.1 million in addition to $4.3 million, which increased last quarter. Ohana continues to execute on its growth plans.

Amanda Frazer: With these improvements we expect LMS to begin catch up payments on their deferred distributions in the later half of the year and based on.

Amanda Frazer: Or I'm, sorry, based on actual growth in our reset metric of gross profit of $13, 9% rather than 12% expected at year end.

Amanda Frazer: And the early results for 2024.

Amanda Frazer: There was a further increase in our fair value of LMR during the quarter of $1 1 million. In addition to a $4 3 million, which increased last quarter.

Amanda Frazer: <unk> continues to execute on its growth plans the impact of this growth and anticipated increase in cash flows as a resulted in an increase of $1 1 million U S. In the valuation of our preferred equity this week planet fitness corporate announced pricing increase for the system, increasing pricing from 10 to $15 per month. This change will drive an increase.

Amanda Frazer: The impact of this growth and anticipated increase in cash flows has resulted in an increase of $1.1 million U.S. in the valuation of our preferred equity. This week, Planet Fitness Corporate announced a price increase for the system, increasing prices from $10 to $15 per month. This change will drive an increase in earnings over time as incremental members at this new price build the membership base. Alaris has brought in a professional management team to facilitate a management transition within Heritage due to the expedited retirement of the CEO.

Amanda Frazer: And earnings over time as incremental members at this new pricing built in the membership base.

Amanda Frazer: <unk> has brought in a professional management team to facilitate a management transition within heritage due to the expedited retirement of the CEO.

Amanda Frazer: The company is also navigating margin decreases on certain projects, and to provide cash flow flexibility to the business during this period, Heritage has deferred its distribution for the quarter and is expected to defer its distribution for 2024. Other less significant impacts of fair value in the quarter were driven by GWM, Shipyard, Axiant, and Cary. Over 20 partners, 11 have either no debt or less than one times debt as compared to EBITDA in the business.

Amanda Frazer: The company is also navigating margin decreases on certain projects and to provide cash flow flexibility to the business. During this period heritage has deferred our distribution for the quarter and is expected to defer their distribution for 2024.

Amanda Frazer: Other less significant impacts to fair value in the quarter were driven by GW, Adam shipyard accent and Carrie.

Amanda Frazer: Of our 20 partners 11 have either no dad, where less than one times debt as compared to EBITDA in the business.

Amanda Frazer: And our outlook calls for $39.3 million of revenue in Q2 and a 12-month run rate of $157.7 million, with no changes to our GNA expectations from year end of $16.5 million. And on that note, I'll turn it over to Steve for his comments.

Amanda Frazer: And our outlook calls for $39 3 million of revenue in Q2 in a 12 month run rate of $157 7 million.

Amanda Frazer: With no changes to our G&A.

Amanda Frazer: G&A expectations from year end of $16 5 million.

Amanda Frazer: And on that note I'll turn it over to Steve for his comments, great. Thanks, Amanda and thanks, everybody for tuning in obviously coming so close to our year end report from six weeks ago or first quarter delivered little in term in terms of surprises, but that's exactly what we're trying to deliver consistently and perhaps over many years the value of our portfolio on a per share basis.

Stephen Walter King: Great. Thanks, Amanda.

Stephen Walter King: Thanks, everybody, for tuning in. Obviously, coming so close to our year-end report from six weeks ago, our first quarter delivered little in terms of surprises, but that's exactly what we try and deliver consistently and have done for many years. The value of our portfolio on a per-share basis continues to consistently climb, delivering the steady cash yield that we've been known for, as well as building some very valuable equity value at the same time.

Stephen Walter King: Continues to consistently.

Delivering the steady cash yield that we've been known for as well as building some very valuable equity value at the same time.

Stephen Walter King: One of the comments that I'll make on the change in accounting policy is that it actually does have some practical advantages for us on a day-to-day basis. One of the problems that we've had in the past is being a little bit hamstrung if a deal required more control, more equity participation than around 40% or as deemed by KPMG. Their financials would have to have been consolidated into ours, which is a non-starter both for the private companies that we invest in as well as ourselves. Under this new accounting method, that's no longer an issue.

Stephen Walter King: One of the notes that I'll make on the change in accounting policy is that it actually does have some practical advantages for us on a day to day basis.

Stephen Walter King: One of the problems that we've had in the past as being a little bit hamstrung if if.

Stephen Walter King: Deal required more control more equity participation.

Stephen Walter King: Around 40% or as deemed by KPMG.

Stephen Walter King: Their financials would have to have been consolidated into ours, which is a non starter both for the private companies that we invest in as well as ourselves under this new accounting method, that's no longer an issue and if the company.

Stephen Walter King: And if a company has an opportunity that we've already invested in where we can invest more capital and take more control because it's a great investment opportunity, we can now do so. If a company goes into default and we need to step in and take control, we can now do so without fearing the complexities of consolidation. So it has actual practical value for us as well as comes into line with what other companies in our industry do.

Stephen Walter King: Has an opportunity that we've already invested in where we can invest more capital and take more control because it is a great investment opportunity. We can now do so if a company goes under default and we need to step in and take control. We can now do so without without fearing the complexities of consolidation so actual practical.

Stephen Walter King: <unk> for us.

Stephen Walter King: As well as coming into line with with what other companies in our industry do.

Stephen Walter King: Subsequent to Quarter End, Alaris added our 20th current partner to our portfolio in Cresa, LLC. Cresa is one of the top commercial real estate advisory firms in the world with offices in 35 different markets. It has really created a wonderful niche in advising only tenants and retaining impartiality in their advice to their clients.

Stephen Walter King: Subsequent to quarter end <unk> added our 20th current partner to our portfolio and our Cressa LLC.

Stephen Walter King: This is one of the top commercial real estate advisory firms in the world with offices in 35 different markets.

Stephen Walter King: Chris has really created a wonderful niche and advising only tenants and retaining impartiality and their advice to their clients are.

Stephen Walter King: Our $20 million U.S. investment will be all used for growth capital, as the company has identified several acquisition targets, and we expect this to be a very active partnership for us in the future, even past this initial investment with follow-ons. On that topic, we have two more follow-on investments that will be made in the very near term that will put us right on track to deploy more capital than we did in the previous year, which was our target.

Stephen Walter King: $20 million of U S investment.

Stephen Walter King: It will be all used for growth capital as the company has identified several acquisition targets and we expect this to be a very active partnership for us in the future even past this initial investment with follow ons.

Stephen Walter King: That topic, we have two more follow on investments that will be made in the very near term.

Stephen Walter King: Is right on track to deploy more capital than we did in the previous year, which was our target.

Stephen Walter King: Last week, myself and our business development team attended the ACG DealMax conference, basically known as the Super Bowl of the private equity industry. Hundreds of investment bankers, and hundreds of private equity firms all got together to discuss transactions. And universally, the advisors in attendance agreed that the 18-month lull that the industry has experienced in deal flow is about to end. As interest rates rose and PE firms struggled with borrowing costs and availability, many companies decided to wait to raise money until times were better.

Stephen Walter King: Last week myself and our business development team attended the ACG deal Max Conference, a basically an order, but the Super Bowl of the private equity industry hundreds of investment bankers are hundreds of private equity firms all getting together to discuss transactions.

Stephen Walter King: And universally the advisors and attendants agreed that the 18 month, while the industry has experienced and deal flow is about to end as interest rates rose and p/e firms struggled with borrowing costs and availability many companies decided to wait to raise money until times were better.

Stephen Walter King: Lulls like that can only last for so long before these companies need to transact, and it appears that many are now preparing to go to the market. The list of companies that have now given mandates to advisors and are preparing to go to market in the second half of this year is very encouraging. With interest rates still high and debt markets still constrained, Alaris is in an excellent position to capitalize on this deal flow.

Stephen Walter King: Hello, like that can only last for so long before these companies need to transact and it appears that many are now preparing to go to the market.

Stephen Walter King: The list of companies that have been a bit of now given mandates to advisors and are preparing to go to market in the second half of this year is very encouraging.

Stephen Walter King: With interest rates still high and that market is still constrained electricity is in an excellent position to capitalize on this deal flow.

Stephen Walter King: Our mix of less expensive preferred equity along with flexible common resonates with entrepreneurs and their advisors and differentiates us in the market. Our third-party capital initiative is also going very well, and we expect to have another transaction closed in the coming months to increase our capital under management and our earning potential without needing to raise money on our own balance sheet. Our reputation in the industry is becoming much better known because of these transactions, which will help us greatly in future initiatives, whether that's more single-asset special-purpose vehicles or sidecar blind pool funds to increase the speed of our growth and increase our return on equity. So Marvin, I'm happy to throw it open to questions from the floor now. Thank you.

Stephen Walter King: Our mix of less expensive preferred equity along with flexible common resonates with entrepreneurs and their advisors and differentiates us in the market.

Stephen Walter King: Our third party capital initiative is also going very well and we expect to have another transaction closed in the coming months to increase our capital under management, and our earning potential without needing to raise money on our own balance sheet.

Stephen Walter King: Our reputation in the industry is becoming much better known because of these transactions, which will hopefully help us greatly in future initiatives, whether that's more single asset special purpose vehicles or sidecar blind pool funds to increase the speed of our growth and increase our return on equity.

Speaker Change: So Marvin and I are happy to throw it open to questions from the floor now.

Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A list. Our first question comes from the line of Nik Priebe of CIBC Capital Markets. Your line is now

Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone we've renamed to be announce to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

Speaker Change: Okay.

Speaker Change: Our first question comes from the line of Nik Priebe of CIBC capital markets. Your line is now open.

Nikolaus Priebe: Okay, thanks. I'll just start with a question on Heritage. Can you just expand a bit on the nature of the setbacks that they experienced there and just what the plan is to restore profitability to a level that would exceed the preferred distribution going forward?

Okay. Thanks, I'll just start with a question on heritage can you just expand a bit on the nature's setbacks.

Speaker Change: There.

Nikolaus Priebe: And just what the plan is to restore profitability to a level that would exceed the preferred distribution going forward.

Stephen Walter King: Sure, yeah, we've had a really unfortunate and unexpected situation at Heritage. Unfortunately, the majority equity owner and CEO has fallen quite ill and has had to step away very suddenly. So, we brought in a professional management team to step in on an interim basis, and they've done a great job of really kind of solidifying what's going on there in terms of their back office and reporting. The next step is to really buttress the senior management team.

Nikolaus Priebe: Sure Yeah, we've had a really unfortunate and unexpected situation in inherited unfortunately.

Nikolaus Priebe: The majority equity owner and CEO has has fallen quite a bill and has decided to step away very suddenly.

Nikolaus Priebe: We have brought in.

Nikolaus Priebe: Professional management team.

Nikolaus Priebe: Step in on an interim basis, they've done a great job of really kind of solidifying what's going on there in terms of their back office and reporting.

Nikolaus Priebe: Next step is to really buttressed the senior management team, we've got a good second level of managers, there, but we need we need a leader and so that's something that we're we're working on very.

Stephen Walter King: We've got a good second level of managers there, but we need a leader. And so that's something that we're working on very closely with the company, and we really have taken control of that situation. And it's still a very good business. We think there's absolutely something to save there and go on with. And we think it's going to be a very attractive situation for someone coming in because there's a fair bit of equity that we can grant somebody new from the past CEO's position.

Nikolaus Priebe: Very closely with with the company and really have taken control of that situation.

Nikolaus Priebe: It's still a very good business.

Nikolaus Priebe: We think there's you know absolutely something too to save there and continue on with them.

Nikolaus Priebe: We think it's going to be a very attractive situation for someone coming in because there's a fair bit of equity that we can that we can grant.

Nikolaus Priebe: Somebody knew from from the past Ceos position so.

Stephen Walter King: So, we're still very positive on that one. It'll take us a few months to work through it, but we expect to be back to where we were, which is a really solid, steady business as it has been for over 30 years, fairly soon.

Nikolaus Priebe: We're still very positive on that one and it'll take us a few months to work through it but we expect to be back.

To where we were which is a really solid steady business as it has been for over 30 years fairly shortly.

Stephen Walter King: And then, maybe on a more positive note, the ECR at LMS has recovered quite sharply, now above two times. What sort of top-line growth trends is that business experiencing? I'm just wondering as it relates to the future reset, given the uncapped nature of that investment.

Speaker Change: Okay, and then maybe on a more positive note. The ECR at elements has recovered quite sharply now above two times, what sort of topline growth trends as that business experiencing I'm just wondering as it relates to the future reset given the encap nature of that investment.

Stephen Walter King: Yeah, if you remember, Nick, the main problem with LMS over the last two years was not on the revenue side; it was on their margin side as steel prices went crazy post-COVID, and they had to work through that high-priced inventory. And our reset on this one is on gross profit, not on revenue. And so that was the issue there with our resets and with their earnings. And so that problem, as we expected, worked its way through.

Speaker Change: If you remember Nick that May.

Speaker Change: <unk> problem with LMS over the last two years was not on the revenue side. It was on their margin side US steel prices went crazy post COVID-19 and they have to work through that high priced inventory. So.

Speaker Change: And our reset on this one is on gross profit not on revenue and so that was that was the issue there with our with our resets and with her where they're earning so.

Stephen Walter King: We got a nice, almost 14% increase this past year, and we expect probably at least as much this year, if not more. And that's based on just more of a normalized gross profit as opposed to huge revenue growth.

Speaker Change: That problem as we expected work its way through we got a nice almost 14% increase this past year and we expect probably at least as much this year.

Speaker Change: If not more so.

Speaker Change: And that's based on just more of a.

Speaker Change: Our normalized gross profit as opposed to huge revenue growth.

Nikolaus Priebe: Got it. Okay, that's helpful. That's it for me for now. I'll pass the line. Thank you.

Speaker Change: Got it okay. That's helpful.

Speaker Change: Is it for me for now I'll pass the line. Thank you.

Speaker Change: Right.

Operator: Thank you. One moment for our next question. Again, as a reminder to ask a question, you will need to press star 1-1 on your telephone. Our next question comes from the line of Gary Ho of Desjardins. Your line is now open.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Again as a reminder to ask a question you will need to press star one on your telephone.

Speaker Change: Okay.

Speaker Change: Our next question comes from the line of Gary Ho of Vista Arden's. Your line is now open.

Gary Ho: Thanks, good morning. Steve, maybe Planet Fitness, just following up on yesterday's announcement to increase the base membership fee from $10 to $15. Probably gradual, but what are you hearing from your Planet Fitness partner there? I think in the past you've also talked about potential follow-on opportunities as they consolidate other franchisees. Maybe just give us an update on that.

Speaker Change: Thanks.

Gary Ho: Steve just on maybe planet fitness, just following up on that yesterday's announcement to increase the spend.

Gary Ho: Membership fee from 10 to 15.

Gary Ho: Probably gradual but what are you hearing from your planet fitness partner there I think in the past you've also talked about potential follow on opportunities.

They consolidate other franchisees, maybe just give us an update on that.

Stephen Walter King: Yeah, obviously hugely positive for our company, you know, that's our second largest investment in our portfolio. And this is something that we've expected for some time, but to be honest, Gary, I'm not sure I expected $15. I thought they'd go to something like $12.99. So what it's going to mean in the short term is you're probably going to have almost nobody cancelling their memberships because you're going to get grandfathered in at $10 a month.

Speaker Change: Yeah, obviously hugely positive.

For our.

Speaker Change: Our second largest investment in our portfolio.

Speaker Change: This is something that we've expected for some time, but to be honest Gary.

Speaker Change: I'm not sure I expect that the $15.

Speaker Change: I thought that go to something like 12 99.

So what it's going to mean in the short term as youre going to probably have almost nobody canceling their memberships.

Speaker Change: Because youre going to get grandfathered in at $10 a month.

Stephen Walter King: The $15 doesn't start for a couple of months, so I think you're going to see a rush of new members join in the next two months at $10. So then, after that, it'll take a few years to really work through the membership because obviously, the $15 will just be for new members, but in every fitness chain, you do get some pretty good churn on your members, so we think over the next few years that's going to add, you know, I can't remember what the... Ten to fifteen percent, I believe.

Speaker Change: The $15 doesn't start for a couple of months. So I think youre going to see a rush of new members joined in the next two months at 10 10 Bucks.

Speaker Change: So then after that it will take a few years to really work through.

Speaker Change: The membership.

Speaker Change: Obviously, the $15 will just be for new members, but in every fitness.

Speaker Change: Jane you do get some pretty good churn on your members so.

Speaker Change: We think over the next few years, that's going to add.

Speaker Change: I can't remember, what the 10%, 15% I believe 10% to 15%. So we're looking at.

Stephen Walter King: Yeah, ten to fifteen percent, so you know, we're looking at.., you know, six to ten million of additional EBITDA in our, just in our system, so a really significant positive development for us, and we've got a great management team there, and yes, they're, you know, OHANA is definitely a partner that we're looking at doing more with, and we think there's good acquisition opportunities out there where there's smaller Smaller club owners that, You know, with the cost of building and maintaining clubs having increased over the last few years, borrowing costs being so much higher now than they used to be, we think there's small acquisitions to be done here. And we've got a lot of white space. We have 78 clubs today.

Speaker Change: You know $6 million to $10 million of additional EBITDA in our and our and our just in our system. So a really significant.

Speaker Change: A positive development for us and.

Speaker Change: We've got a great management team, there and yes there.

Speaker Change: Oh Hana is definitely a partner that we're looking at doing more with them.

Speaker Change: We think theres good acquisition opportunities out there where there is smaller.

Speaker Change: Other club owners that.

Speaker Change: You know with the cost of building them.

Speaker Change: Maintaining clubs, having increased over the last few years borrowing costs being so much higher now than they used to be we think there is there is a small acquisitions to be done here and.

Speaker Change: We've got a lot of white space, we have 78 clubs today, we've got.

Stephen Walter King: We've got identified growth of another 55 on top of that, just within our current areas. And that will be the goal of our acquisition strategy with Ohana, to increase that white space. We're also looking at, with corporate head office, smaller box concepts that will take the 55 and increase that from there, where we can put a little bit more density into our areas. The one thing about having a lot more density is that more people buy the black card memberships, which give them reciprocal rights to every gym.

Speaker Change: Identified growth of another 55 on top of that just within our current.

Speaker Change: Current areas and.

Speaker Change: So that will be the goal of our acquisition strategy with <unk> is to increase that white space. We're also looking at with.

Speaker Change: Corporate head office smaller box concepts that will take the 55 and an increase that from there where we can put a little bit more density into our into our areas. The one thing about having a lot more density as the more people buy the black card memberships, which give you reciprocal rights to every Jim right.

Stephen Walter King: Right now, we have about 65% of our members with black cards, which is $25 a month, as opposed to the $10, now $15 for the regular membership. The more density you have, the more likely someone is to buy the black card. So lots of really good stuff going on with Ohana, and yeah, it's certainly just a wonderful investment for us.

Speaker Change: Now we have about 65% of our members with black cards, which is <unk>.

Speaker Change: $25 a month.

Speaker Change: As opposed to that $10 15 on a regular membership the more density you have the more likely someone has to buy the black card. So lots of really good stuff going on and so on and.

Speaker Change: Yeah.

Speaker Change: And just a wonderful investment for us.

Amanda Frazer: Great, that's a great update. Maybe it's a follow-on to that, maybe for Amanda.

Speaker Change: Great Thats great update.

Speaker Change: The follow on to that maybe for Matt.

Matt: So when I think about what's built into your DCF for.

Matt: How should we think about those positives coming in through your modeling and when should we see maybe the fair value bumps come come in is it more gradual this year and then ramping up 25 and so forth.

Gary Ho: So when I think about what's built into your DCF for OHANA, how should we think about those positives coming in through your modeling? And when should we see maybe the fair value bumps come in? Is it more gradual this year and then ramping up 25 and so forth?

Amanda Frazer: Yeah, they'll be more gradual. With regard to the preparation piece of that investment, you know, we still have fairly modest expectations for resets, and we'll let those come in as they fall through. You know, that price increases are expected to be gradual over time, as well as growth. You know, the new clubs do create a bit of a drag to start, but then they quickly become cash flow positive. But while the bank adjusts for that negative drag, we do not, and that's why you see them with a bit of a lower ECR.

Matt: Yes, there'll be more gradual with regards to the Kraft piece of that investment we still have fairly modest expectations for our research and we'll let those come in as they age they fall through that pricing increases are expected to be gradual over time as well as the growth.

Matt: The new clubs do create a bit of a drag to start and then they quickly become cash flow positive, but while the bank adjust out that negative drag we do not and Thats why you see them with a bit of a lower ECR on the common side, we have adjusted their organic growth into our model for their evaluation, but yeah, I mean, the incremental <unk>.

Amanda Frazer: On the common side, we have adjusted their organic growth into our model for their valuation. But I mean, the incremental acquisition activity would be something that we build in over time as they, you know, find prospects that they move on and close.

Matt: This activity would be something that we built in over time as they find.

Matt: Prospects that that.

Matt: They move on and closed.

Gary Ho: Okay, great. And then maybe a second question, Steve, maybe back to you on the deployment pipeline. I think I heard you say there's maybe two more follow-ons. I just want to confirm that that's on top of the shipyard and DNM that you might have. Can you share kind of if that is correct and maybe the potential size?

Speaker Change: Okay, Great and then maybe second question, Steve maybe back to you on the deployment pipeline I think I think I heard you say there is maybe two more smaller ones.

Stephen Walter King: I just want to confirm that that's on top of the shipyard and Dnm debt that you might have maybe just can you share.

Stephen Walter King: That is correct and maybe the potential size.

Stephen Walter King: Yeah, we've got, as you know, in several of our deals, we've had kind of multi-tranches built into our original deal. So we've got one company that's hit their targets that we should have just a small follow-on with, and then another of our partners that we're working on a decent-sized acquisition with that will require some of our funding. So those two things are on the front burner, not the back burner, so you can expect those fairly shortly. OK, and those who will be.

Stephen Walter King: Yeah, We've got as you know and several of our deals. We've we've had kind of multi tranches built into our original deal. So we've got one company that's let's hit their targets that that we should have.

Stephen Walter King: Just a small follow on with and then another of our partners that we're working on on a decent sized acquisition with that.

Stephen Walter King: Will require some of our funding so those two things are are alright.

Stephen Walter King: Yes, there are there and they are on the front burner and on the back burner. So you can expect those fairly shortly.

Stephen Walter King: Okay, and those will be separate then from the third-party capital that you also just mentioned, right? That's correct, yeah. Got it. Okay. No, those are my questions.

Speaker Change: Okay, and those will be separate from the third party capital that you also did mention two right now, but that's correct yep yep Okay.

Speaker Change: Got it okay. Those are my questions.

Speaker Change: Thanks Kurt.

Operator: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Steve King for closing remarks.

Speaker Change: Thank you I'm showing no further questions at this time.

Speaker Change: I'd like to turn it back to Steve King for closing remarks.

Stephen Walter King: Great, thank you Marvin and thank you everybody for, oh looks like we've got another question in there Marvin if you want to take that. Okay, our next question comes from the line of Zachary...

Stephen Walter King: Thank you Marvin and thank you everybody for Oh, it looks like we've got another question in there, but if you want to take that.

Operator: Okay, our next question comes from the line of Zachary Evershed of National Bank Financials. Your line is now open.

Stephen Walter King: Okay. Our next question comes from the line of Zachary <unk> of National Bank financials. Your line is now open.

Stephen Walter King: Okay.

Zachary: Good luck.

Zachary Evershed: So on the CRESA investment, do you think there's any chance they'd allow common equity, or is that something that they're opposed to?

Zachary: So on.

The Cressa investment do you think there's any chance that allow common equity or is that something that they are opposed to.

Stephen Walter King: So Cressa is a fairly acquisitive group, and they also have a really widespread shareholder base. So they use their common equity very regularly for both compensation and for acquisitions.

So.

Zachary: Yes.

Zachary: It is a fairly acquisitive group and they also have.

Zachary: A really widespread shareholder base. So they use their common equity very regularly for both comp and for acquisitions and we just felt the complexity of that with the dilution that that causes. It was it was a little too murky for us to be a common equity.

Stephen Walter King: And we just felt the complexity of that with the dilution that that causes. It was a little too murky for us to be a common equity partner. We couldn't add any common equity in the future, but deals are complicated and tricky in the best of times, and that just added to it, so we took it out to start this relationship, and for the time being, we're just going to stay with the preferreds.

Zachary: So we just stayed with the proper investment at this time not to say that we.

Zachary: Couldnt add some comment in the future but.

Zachary: Deals are complicated and tricky in the best of times and that just added to it. So we took it out.

Zachary: To start this relationship.

Zachary: For the time being we're just going to stay with the breath.

Zachary Evershed: Gotcha, so really no read-through on your willingness to continue pursuing the common equity strategy?

Speaker Change: Got you so really no read through on your willingness to continue pursuing the common equity strategy I would say the vast vast majority of every investment.

Stephen Walter King: I would say the vast, vast majority of every investment of all the investments we make will include common.

Of all the investments we make will will include common.

Zachary Evershed: And then, flipping back to heritage for a moment, could this be a situation where Alaris might take direct control, or if you're unable to find a professional manager, would that be something that you'd look to divest, ultimately? Yeah.

Speaker Change: Thank you and then flipping back to the heritage for a moment.

Speaker Change: Could this be a situation, where others might take direct control or if youre unable to find a professional manager would that be something you would look to divest ultimately.

Stephen Walter King: Yeah, for sure. As I was mentioning about this accounting change, that's one of the real advantages. Right now, we own about 40% of the company, and the owner that has now departed owns the other 60%. We've got that 60% to play with as it relates to our own investment as well as bringing in somebody new. It's a huge opportunity for somebody to come in and take over this. If that means it's us and we just find a professional manager and set them up with a lot of equity, that's great because, in a situation like this, you'd be buying from a low, and we think there's a really clear path there to getting back to stability and creating some significant value.

Yes, yes for sure.

Speaker Change: As I was mentioning about this accounting change that that's one of the real advantages, though right now.

Speaker Change: We own about 40% of the of the common.

Speaker Change: And.

Speaker Change: The owner of that is now departed.

Speaker Change: <unk> owns the other 60% so we've got about 60% to play with as it relates to our own and our own investment as well as bringing in somebody new so it's a huge opportunity for somebody to come in and take over this and if that means it's us and we would just by a professional.

Speaker Change: <unk> and set them with a lot of equity that's that's great because.

Speaker Change: Youre in a situation like this year, you would be buying from a low and we think there's a really clear path there to getting back to stability, so creating some significant value.

Zachary Evershed: Thank you very much. I'll turn it over. Thank you. One moment for next.

Speaker Change: Thank you very much I'll turn it over.

Operator: Thank you. One moment for the next question. Our next question comes from the line of Trevor Reynolds of Acumen. Your line is now open.

Speaker Change: Great.

Speaker Change: Thank you gentlemen for next question.

Speaker Change: Our next question comes from the line of Trevor Reynaldo vacuum Ma'am. Your line is now open.

Trevor Reynolds: Hey guys, just a quick one on the common side of things. I think you're guiding to I think I saw like 10 and a half million common distributions this year. Do you guys have any clarity on the timing or where those are coming from? Any insight would be helpful.

Trevor Reynolds: Thank you.

Trevor Reynolds: Hey, guys just a quick one on the common side of things I think you're guiding to I think I saw like $10 million.

Trevor Reynolds: Common distributions this year.

Trevor Reynolds: Do you guys have any clarity on the timing.

Or.

Trevor Reynolds: Where those are coming from any insight would be.

Amanda Frazer: The majority of it is back-end weighted, usually Q3 we start to see a pickup, you know, Fleet has a June 30th year-end, so they generally will finish off their audit and, you know, finalize their numbers for the year before considering doing a common distribution, so we do expect that to fall probably within the October timeframe. The other common is sort of, I mean, primarily could fall into Q4.

Trevor Reynolds: Helpful.

Trevor Reynolds: Majority of it is back end weighted.

Trevor Reynolds: Usually Q3, we start to see a pick up.

Trevor Reynolds: <unk> has a June 30 year end, so they generally well finish off their audit and finalize their numbers for the year before considering doing a common distributions. So we do expect that to fall probably with in October.

Trevor Reynolds: Timeframe.

Trevor Reynolds: The other comment is sort of.

Trevor Reynolds: Primarily could fall into Q4.

Amanda Frazer: I would say Fleet will be the main contributor to our common dividend expectations for the year.

Trevor Reynolds: And I would say fleet would be.

Trevor Reynolds: The main.

Trevor Reynolds: The main contributor to our common dividend expectations for the year.

Trevor Reynolds: Okay, great. That's helpful. Thank you.

Yeah.

Speaker Change: Okay great.

Speaker Change: Thank you.

Speaker Change: Yes.

Operator: Thank you. I'm showing no further questions at this time. I would now like to turn it back to Steve King for closing remarks. Okay.

Speaker Change: Yes.

Speaker Change: Thank you I'm showing no further questions at this time I would now like to turn it back to Steve King for closing remarks.

Stephen Walter King: Okay. Thanks again, everybody. This quarter was kind of a noisy quarter from an accounting point of view, but a very quiet quarter from the actual operations front.

Stephen Walter King: Thanks again everybody.

Stephen Walter King: Kind of a noisy quarter from from an accounting point of view, a very quiet quarter from the actual operations front. So thank you very much for your questions.

Stephen Walter King: So, thank you very much for your questions. There will be a lot more questions from people as they go through our financials in detail. I would strongly encourage you to call Amanda, and not me, with any questions you have about that. But thank you very much. We'll talk to you next quarter.

Stephen Walter King: To be a lot more questions from people as they go through our financials in detail.

I would strongly encourage you to call Amanda.

Stephen Walter King: Hey.

Stephen Walter King: With any questions you have about that but thank you very much will talk to you next quarter.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Stephen Walter King: Okay.

Stephen Walter King: Yeah.