Q3 2024 Alaris Equity Partners Income Trust Earnings Call
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Speaker Change: Good day and thank you for standing by. Welcome to the Alara Staird Quarter 2024, earnings conference call.
At this time, I'll participate in a listen-only mode.
Speaker Change: After the speaker's presentation, there will be a question in answer session to ask a question during the session. You will need to press star 1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star one one 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.
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. This forward-looking information is based upon a number of important factors and assumptions and therefore actual results could differ materially.
Speaker Change: 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 our website.
Speaker Change: Non-IFRS data is also presented and may differ from the way other companies present such data. As with the forward-looking statements, please refer to last night's press release in our MD&A for more clarification regarding these non-IFRS measures.
Speaker Change: As a result of this prescribed change, Alaris is no longer consolidating its investment entities 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 that holds Alaris U.S. investments and senior
Speaker Change: as well as Aleris Equity, Inc.
Speaker Change: which holds Alaris' Canadian investments and senior credit facility.
Speaker Change: These entities are now reflected in the trust balance sheet as corporate investments and are held at fair value.
Speaker Change: has been crafted in a way that, to the extent possible, information is presented alongside its prior quarter comparatives.
Speaker Change: Accordingly, users of this interim reporting should exercise caution in reviewing, considering, and drawing conclusions from prior period comparisons and changes. Direct comparisons between dates or across periods may be inappropriate or not meaningful if not carefully considered in this context.
Speaker Change: Now to our Q3 results. Net book value increased by $0.78 per unit to $22.80, which continues to be a record for Alaris. This brings the nine-month increase in net book value to $1.68 per unit and is in addition to $1.02 of dividends paid for a year-to-date return on book value of $2.70.
Speaker Change: This increase was driven by both growth and revenues received from partners.
Speaker Change: as well as increases to the fair market value of Alaris' portfolio.
Speaker Change: Alaris' partner distribution and transaction fee revenue of $65.9 million was ahead of previous guidance of $38.7 million and Q3 2023's $47.2 million. This was driven by a higher than anticipated common dividends.
Speaker Change: Common distributions for Q3-24 were 27.5 million as compared to 8.8 million in the comparable quarter last year.
Speaker Change: with year-to-date dividends of $31.8 million as compared to $10.9 million in the nine months into 2023.
Speaker Change: This was driven by year-over-year increases in common distributions received from Edgewater, FMP, Emer, Ohana, and Fleet.
Speaker Change: Although note that Ohana's dividend is expected to be one-time in nature as they continue to focus on their growth strategy.
Speaker Change: Alaris' Net Distributable Cash Flow for Q3 2024
Speaker Change: increased by over 63% to $31.8 million, or $0.72 per unit, from $20.1 million at $0.44 per unit in the same period of 2023, resulting in an actual payout ratio for the quarter of 53%.
Speaker Change: Alleris' low payout ratio has facilitated the flexibility required to invest in more creative structures while still maintaining our disciplined and free cash flow.
Speaker Change: This flexibility has made our capital more attractive to potential partners and extended the life of some investments, while also helping to drive the higher returns we are seeing in 2024 across both distribution revenue and unrealized portfolio growth.
Speaker Change: During the quarter, Alaris invested an additional $35 million U.S. into convertible preferred equity into Ohana. These units are convertible into common equity of the company and accrue a 14% yield, which will be paid in kind.
Speaker Change: Subsequent to the quarter, ALERIS fulfilled its $10 million U.S. obligation to CRESA LLC, receiving additional preferred equity at 14% yield, with 10% paid in cash and 4% to be paid in kind.
Speaker Change: Year-to-date, Alaris has invested approximately $139 million, including $71.5 million U.S. on follow-on investments into D&M, Shipyard, F&P, and Ohana, and a total of $30 million U.S. into new partner Cressa.
Speaker Change: With regards to our portfolio,
Speaker Change: It continues to perform well and has maintained a weighted average ECR of approximately 1.5 times with 10 out of 19 partners continuing to be above this threshold.
Speaker Change: With regards to fair value movements, declining discount rates driven by risk-free rate movement resulted in increases throughout the portfolio, while partner results further amplified or offset these movements. Most notable in the quarter were Sonobello.
Speaker Change: Sonobello has been impacted by higher costs of advertising across the U.S. as a result of this election cycle and a declining conversion rate.
Speaker Change: the conversion rate of patient consultations as they expanded to new markets. While these costs have impacted their EBITDA in the immediate period, they are believed to be temporary in nature, and the longer-term forecast has been improved by the rule.
Speaker Change: improved by the rollout of their contour division as they move into delivering a new service offering with breast augmentation. Total impact to the fair value of Sonabello being including the discount range rate change was 8.6 million US or 5% of the initial investment.
Speaker Change: Immersed performance has been buoyed by strong consumer sentiment.
Speaker Change: which is expected to continue as the market realizes further interest rate cuts. Emerge's recent financial performance and continued growth outlook has resulted in an increase in the expected 2025 reset of the preferred distribution, as well as increased the common equity value.
Speaker Change: These impacts, in addition to discount rate changes, resulted in an increase of $8.3 million or 11% as compared to the capital invested.
Speaker Change: For Heritage, the company is taking longer to return to profitability with negative margin.
Speaker Change: projects having a worse return than projected.
Speaker Change: We now expect that Heritage will not be in a cash flow position to support preferred distributions until 2025 and have extended the expected deferral period. As a result, the fair value of Heritage was decreased by $7.4 million US.
Speaker Change: The increase to fleet's fare value was largely...
Speaker Change: was largely driven by an increase to common equity. This growth in both revenue and EBITDA, in addition to established long-term relationships with customers, alongside declining discount rates, led to an increase in fair value of $6.2 million US.
Speaker Change: SCR's revenue and EBITDA often swing greatly.
Speaker Change: As they perform larger summer shutdown project work, following the 2024 season and the resulting decline in revenue in EBITDA for the period, in addition to slower business development issues and a reduction in capital spending, we have updated our estimates to reflect these declining trends, resulting in the fair value of SCR decreasing by $5.5 million in the period.
Speaker Change: During the period, Ohana's common equity decreased by $6.7 million U.S., partially due to an increase in the preferred equity that sits ahead of common of $1.6 million U.S., and partially due to the payment of a common equity dividend, which was subsequently reinvested into convertible preferred.
Speaker Change: U.S. for both common and preferred units, resulting in a recovery of earlier quarter declines and a year-to-date increase of 1.7 million.
Speaker Change: Shipyard's year-over-year growth in the business, as well as the decrease in discount rates, resulted in an increase to fair value of $3 million U.S.
Speaker Change: Other less significant impacts to fair value in the quarter were driven by GWM, Axiant, D&T, LMS, FMP, 3E, Edgewater, Sycamore, Cresa, and Cary.
Speaker Change: Of our 19 partners, 11 either have no or less than one turn to debt as compared to EBITDA, and our current outlook calls for $38.9 million of revenue in Q4, as fleets distribution was received earlier than expected.
Speaker Change: And on that note, I'll turn it over to Steve for his comments. Great, thanks Amanda and thanks everybody for tuning in. Obviously a significant quarter for us in terms of our common equity portfolio. Fleet continues to be a huge contributor to our overall returns. It's been a real home run for us and really highlights the impact of our common equity strategy.
Speaker Change: The OHANA dividend, as Amanda pointed out, was part of a recapitalization that we funded with our $35 million deployment. So the $5 million...
Speaker Change: Dividend from Ohana was actually our pro-rata share of our own investment in in those convertible press
Speaker Change: So, as such, we shouldn't consider that to be a recurring dividend from Wahana, and as Amanda said, the focus continues to be on organic growth, and they've been doing a great job of that.
Speaker Change: So, all in all, just like owning Elaris Units, the investments we have in our portfolio partners have a base of steady, safe cash distributions, but offer optionality on the upside that makes it very unique and very desirable in its risk return profile.
Speaker Change: At a high level, the portfolio continues to be very healthy.
Speaker Change: Amanda's given a lengthy synopsis of most of them so I'm happy to answer any questions about the specific partners at the end of this call but the nice thing is
Speaker Change: some pressure from the election, as every large advertiser did in America. Their new offerings and the path that they're on in terms of new locations, new offerings, continues to increase the value that we foresee for a targeted 2027 exit.
Speaker Change: Ohana, the Planet Fitness System has instituted their first price increase on their base memberships from $10 to $15. We're seeing a really nice impact from that with extra revenue without a corresponding decrease in membership uptake.
Speaker Change: D&M, Fleet, Shipyard, all companies that are showing really really positive signs in their businesses so we have tremendous common equity optionality on all five of those large investments so very happy with where we sit today.
Speaker Change: From a deployment perspective, the increase in deal flow that was expected in the U.S. markets in the second half really has failed to materialize.
Speaker Change: But we have been efficient in the opportunities that have been shown to us and feel very good about our deployment opportunities to finish out this year, new partners, and funding growth capital for our current partners both. So we feel good about where we're sitting. We have plenty of wherewithal on our balance sheet to fund the opportunities at hand, so we feel very good about that. So, Dede, I'll turn it over to you and to anybody that has any specific questions.
Dede: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: And our first question today comes from Nick Preby of CIBC Capital Markets. Your line is open.
Nick Preby: Thanks. I want to start with a question on the healthy common distribution from Fleet. The company has a June 30th year-end. What would the distribution to common equity holders have represented in terms of a payout ratio on that company's prior year earnings?
Speaker Change: Um...
Speaker Change: Yeah It would it would it certainly didn't pay out all of their all of their earnings Nick We own 42% of the common equity of fleet. So You know, you can do the math on what the total Common equity dividends are because we got 15 million US for our 42% But that was not that was not all of their income
Speaker Change: That's correct. Last year they they could have paid out more but they actually used part of their earnings to to buy out a legacy shareholder so that's why it went up considerably this year is because we didn't have that use of capital compared to the last year.
Speaker Change: Got it.
Speaker Change: Okay, that's good. And then just on the Ohana Dividend Recap...
Speaker Change: Can you just share with us the fully picked feature of that investment, I guess what prompted that and just based on the ECR, your comfort level with distribution sustainability there.
Speaker Change: The Ohana recap was actually a part of a larger transaction that we're working on, so that's why it is a pick. We view that as a little bit of a temporary investment in them that needed to be funded.
Speaker Change: So, and in terms of their ECR, we're very comfortable there. Keep in mind that our ECR includes
Speaker Change: CapEx and so Ohana is always going to have a low ECR because they pump most of their money back into the business to fund new locations and equipment and whatnot so all of that is quite discretionary so it's almost a misleading number. And I'll just add the other thing that they are able to do for their bank but we don't do within our own ECR is for the new clubs that are opened to drag for that opening period before their cash flow positive which is a short period of time.
Speaker Change: They get to add that back for their bank covenants, but in our ECRs, we're showing that drag within their cash flow So once you take out that and given the amount of growth
Speaker Change: The ECR is much
Speaker Change: I'd point out it's the same equation for Sonobello. Sonobello looks artificially low but they know what their free cash flow is and they adjust their capex budget accordingly and again that is discretionary at the board's discretion. So yeah, the free cash flow of both of those companies is significantly higher than what the ECR would suggest.
Speaker Change: Got it. Okay, that's great, Keller. I'll pass the line. Thank you.
Keller: Thank you.
Keller: Thank you. Bye.
Speaker Change: Our next question comes from Zachary Evershed at National Bank Financial. Your line is open.
Zachary Evershed: Good morning everyone, congrats on the quarter.
Zachary Evershed: Exactly.
Zachary Evershed: So just wanted to follow up on that comment you made about the kind of temporary investment in Ohana. Are you able to elaborate more on what you're driving towards for the final deal structure?
Speaker Change: No, probably shouldn't until it closes, because no deal is certain, but as you know we've been working on
Zachary Evershed: you know, more transactions similar to Sonabello.
Speaker Change: And so we, you know, we're hoping to do something with Ohana, but no guarantees.
Speaker Change: Makes sense, thank you. And could you give us an update on what you're seeing in terms of deal flow split from new companies versus existing partners in the portfolio?
Speaker Change: Yeah, it's about it's about 50-50 we have there's actually four of our 19 partners that that are currently working on acquisitions that they would need
Speaker Change: are backing with.
Speaker Change: So that's a good level of activity and something that we really focus on when we're choosing new partners is having people that will...
Speaker Change: that will, you know, have growth opportunities for more capital, more deployment. So not only does that increase our deployment, it really can lead to outsized common equity gains.
Speaker Change: When you fund those acquisitions with preferred equity that's capped in its growth and exit, it really transfers a lot of the return profile to the common, which we now in almost every case own. So that's a real focus for us when we choose a new partner. We've done a good job of that, so we've got a fulsome.
Speaker Change: Slate of opportunities there, and then we've got a couple or three New partners that we're going through the process on right now
Speaker Change: Good color, thanks.
Speaker Change: On the flip side of that, anyone else thinking about redemption?
Speaker Change: We've got, as I mentioned earlier, like we've really had very few redemptions over the last five years because of first COVID and then rising interest rate environment. So I do expect a pretty healthy list of.
Speaker Change: Gotcha, thanks
Speaker Change: And then beyond the implications for the exchange rate, which benefits you, are there any impacts on your business to call out from the U.S. election results?
Speaker Change: Not really, no.
Speaker Change: Yeah, I mean, you never know until, uh, until...
Speaker Change: Until they really sink their teeth into it, but no none of our none of our partners have
Speaker Change: anything that would you know be impacted by potential tariffs or anything like that I guess LMS would be one on steel importation but that's more into Canada than the US.
Speaker Change: And they do have a new source coming up in the next couple of months with a mill that they actually partially funded in Arkansas that they'll get preferred supply from going forward so they won't have to import as much steel.
Speaker Change: So, no, other than that, there's nothing obvious in our portfolio that would be impacted.
Speaker Change: Great call, thanks. I'll turn it over.
Speaker Change: Thanks.
Speaker Change: Thank you. And as a reminder, if you have a question, please press star 11. One moment for our next question.
Speaker Change: Thank you. Bye.
Speaker Change: And our next question comes from Gary Ho of Desjardins Capital Markets. Your line is open.
Gary Ho: Thanks, good morning.
Gary Ho: Want to give it?
Gary Ho: Hi, Steve, how about we start with you, because maybe high level, you know, I followed the story a while and saw the evolution from Malera strictly prep investing to kind of commons a few years ago and managing third party capital with BCC.
Speaker Change: Just wondering, you know, when you look out three to five years from now, are there any other initiatives that you and the board might be looking at?
Steve: Well, I think eventually, and this really depends, you know, our shares have not reflected the value of our business for the last few years, so, you know, I think
Speaker Change: You know, you could have a private pool of capital to make new investments with that would work in conjunction with the public capital.
Speaker Change: and you would use each accordingly based on, you know, the cost of that capital and the flexibility of that capital. So that's something maybe longer term that we would look at. You know, we've had a lot of exposure from the Sunabello Brookfield transaction as well as the one we're working on now. So I think we're probably in a better position to do something like that if we wanted to, but again, I think that's...
Speaker Change: That's longer term.
Speaker Change: Okay, so that's that's kind of more swapping from balance sheet capital to earning a more of a management fee.
Speaker Change: Yeah.
Speaker Change: Okay. Yeah. Take care. And then...
Speaker Change: And then my next question is for Amanda. So of the $33 million of fair value right up this quarter, I know part of it was due to increase in, sorry, decrease in interest rates.
Speaker Change: impacting the DCF. Just wondering if you can parse out how much of that was related to rates and perhaps you know how much is driven by operations improving sequentially.
Amanda Frazer: The discount rate movement had a larger impact on Common than it did on PREF, and that may really just be a timing because at the third quarter we do start to go through all the resets for PREF, but it's about half to two-thirds of that 33 that is really driven by the discount rate movement.
Speaker Change: Okay, that's helpful. And then my last one, just on BCC, there's decent...
Speaker Change: share value gain on that one. Where are we in the store count growth journey for them today and just remind me the game plan and timing for monetization with Brookfield down the road.
Speaker Change: Yeah, there's a five-year put right that was put in as part of that deal with Brookfield.
Speaker Change: We've got about three and a half years left before that put rate comes into place, so you'd want to probably be in the market before then. So yeah, 27 is kind of the target there.
Speaker Change: And then in terms of the store count, and it sounds like they're kind of adding services there, too.
Speaker Change: Yeah, they are Yeah, so as Amanda mentioned, they've got a new division called contour which does breast augmentation They're also really moving into Things like skin reduction with all the people that are on ozempic
Speaker Change: They are finding that at the end of their Ozepic journey, they don't like the way they look because they've got a huge amount of skin.
Speaker Change: and some places on their body where you've got, you know, pockets of fat that they haven't been able to get rid of. So that really turns them into Sonobello patients, or they can do skin reduction.
Speaker Change: and some liposuction to smooth out their appearance and give them that win that they were dreaming of when they started down their journey.
Speaker Change: Okay, great. Those are all the questions. Thank you.
Speaker Change: Thank you. I'm not showing any further questions at this time. I'd like to turn it back to Steve King for closing remarks.
Steve King: Great. Thank you very much, DeeDee, and thanks everybody for your questions and for tuning in. As always, please call us directly if you have anything further, but we look forward to talking to you in the new year with our year-end results. Thanks very much.
Speaker Change: This concludes today's conference call. Thank you for participating and you may now disconnect.