Q3 2025 Alaris Equity Partners Income Trust Earnings Call
Speaker #2: Good day and thank you for standing by . Welcome to the Alaris Q3 2020 Earnings Release Conference . At this time , all participants are in a listen only mode .
Speaker #2: After the speakers presentation , there will be a question and answer session . To ask a question during the session , you will need to press star one one on your telephone .
Speaker #2: You will then hear an automated message advising that your hand is raised . To withdraw your question , please press star one one again .
Speaker #2: Please be advised that today's conference is being recorded . I would now like to hand the conference over to your speaker today , Amanda Frazer Chief Financial Officer .
Speaker #2: Please go ahead .
Speaker #3: Thank you . Tanya . Good morning , everyone , and thank you for joining us today to discuss our Q3 2025 results . I'm joined on the call by Steve King , our president and CEO .
Speaker #3: Before we begin , I'd like to remind everyone that all financial figures discussed are in Canadian dollars . Unless otherwise indicated . Please note that some comments made during this call may include forward looking statements .
Speaker #3: These statements are based on current assumptions and involve risks and uncertainties , so actual results may differ materially . For more detailed information on the factors , assumptions and risks involved , please refer to our press release issued last night and the management discussion and Analysis under the headings Forward Looking Statements and Risk Factors , available on Sedar at and on our website .
Speaker #3: We will also be referencing certain non-IFRS financial measures , which may be presented differently than similar measures by other companies . Additional information and reconciliations related to these measures can be found in the press release and the MDA .
Speaker #3: With that out of the way , let's turn to the highlights . Alaris delivered a record quarter in Q3 2025 , underscoring the consistency of our model and the strength of our partner portfolio .
Speaker #3: We achieved strong , fair value gains , solid recurring partner distributions , and expanded our long term revenue base through capital deployment . Net book value per unit increased 6% from last quarter to 2510 , a record high , reflecting a $1.90 per unit of earnings and comprehensive income .
Speaker #3: Another Alaris record , which included a 40 $0.01 per unit foreign exchange recovery , partially offset by the 34 cent quarterly distribution . Year to date , NCIB repurchases added approximately $0.06 per unit .
Speaker #3: As we were purchased and cancelled 465,000 units at an average price of 1887 , enhancing per unit value while maintaining balance sheet flexibility .
Speaker #3: Total revenue and operating income rose 7.8% compared to Q3 2024 , supported by a 47.9 million net unrealized fair value gain across nine investments , offset by a decline in two .
Speaker #3: These fair value adjustments are non-cash , but they reflect the underlying earnings growth and continued value creation within our partner base . Partner revenue exceeded guidance coming in at 58.1 million , which included 57.4 million in distributions and 700,000 in management .
Speaker #3: And transaction fees . The increase was driven by new investments . McCoy and follow on in Carrie , as well as higher than expected common distributions preferred distributions increased 7.3% in Q3 and 6% year to date , totaling 40.7 million and 120.8 million , respectively .
Speaker #3: While common distributions were , as expected , lower year over year . Notably , fleet's 10.3 million common dividend this quarter versus 14.7 million US last year .
Speaker #3: The annualized yield on preferred capital remains strong at approximately 12% , highlighting the portfolio's continued ability to generate steady cash flow . Total return on invested capital was 6.6% for the quarter , and 13.3% year to date , reflecting both strong reoccurring cash yields and improved valuations .
Speaker #3: Alaris net distributable cash flow decreased 26% in Q3 and 14% year-to-date, largely due to the notable variability of common distributions.
Speaker #3: The timing of cash tax payments and transaction costs , underlying portfolio . Cash generation remains solid and in line with expectations . Our payout ratio was 48% for the quarter and 50% year to date , both below our target range of 65 to 70% .
Speaker #3: This conservative level provides flexibility to fund reinvestment and debt repayment , while sustaining unitholder distributions . Alaris generated free cash flow after distributions of $21.9 million in Q3 and 38.9 million .
Speaker #3: Year to date , prior to the NCIB repurchases in the quarter , we deployed 32.2 million , including an initial 27 million US investment in McCoy and a 5.2 million US follow on investment in Carrie .
Speaker #3: Subsequent to the quarter end , we invested an additional 20.5 million US into supporting their strategic acquisition . These deployments bring total capital invested year to date to approximately 228 million , reflecting continued demand for Alaris Capital Solutions .
Speaker #3: Our portfolio fundamentals remain strong with the majority of partners continuing to deliver year over year revenue and EBITDA growth with a weighted average earnings coverage ratio of 1.5 and 13 of 21 partners maintaining either no debt or less than one times senior debt to EBITDA .
Speaker #3: Emphasizing strong balance sheets and stable earnings coverage . Looking forward , we expect Q4 partner revenue of approximately 43.5 million . This includes our previous estimate for FMP .
Speaker #3: Although we continue to evaluate the impact of the ongoing US government shutdown . FMP remains well positioned with a surplus of cash on the balance sheet and undrawn senior credit facility .
Speaker #3: The guidance also reflects lower expectations for GWM. While we continue to evaluate the longer-term impact on the 12-month cash flows and the navigation of banking covenants.
Speaker #3: And on that note , I'll turn it over to Steve for his comments .
Speaker #4: Great . Thanks , Amanda . Thanks , everybody , for tuning in . Obviously very pleased with our with our record quarter that we've just published .
Speaker #4: As you can see , our portfolio is larger , more diversified and performing better than it ever has in our 21 year history .
Speaker #4: We've added another $1.50 in book value . Our coverage ratio is near all time highs . Debt levels remain extremely low , and the nature of our businesses have been largely unaffected by tariffs or inflationary pressures .
Speaker #4: Having 19 out of our 21 partners performing at or above expectations is exceptional for any private equity portfolio . Our payout ratio , even with the announced dividend increase , remains below our target , leaving more upside for dividend increases in the coming year .
Speaker #4: Deployment outlook continues to be extremely vibrant. Alaris will shatter our previous record for deployment in this calendar year, and the outlook heading into 2026 remains very strong.
Speaker #4: Our unique structure , which delivers the majority of our return in low volatility cash payments , allows us to be more confident and successful in environments where traditional private equity , which relies on high debt levels and buoyant exit multiples , are retreating .
Speaker #4: 2026 also promises to be a year where some of our planned exits are scheduled to begin . Alaris investors are already seeing the outsized returns coming from our common equity positions .
Speaker #4: In our book , value increases , and we expect to display some crystallizations of some of these positions over the next 12 to 26 months .
Speaker #4: And those won't just further grow . Our book value , it will also be a huge part of funding our continued deployment into new quality companies .
Speaker #4: So , Tanya , I'll open it up to questions if you want to take take them right now .
Speaker #2: Certainly at this time we will conduct the question and answer session as a reminder to ask a question , please press star one one on your telephone and wait for your name to be announced .
Speaker #2: To withdraw your question , please press star one one again . Please stand by while we compile our Q&A roster and our first question will be coming from Gary Ho of Desjardins Capital Markets .
Speaker #2: Your line is open .
Speaker #5: Great . Good morning . Maybe just starting off with the Edgewater . News . Just pretty , pretty sizable US 18.5 million . Fair value gain .
Speaker #5: Maybe . Can you give us an update on kind of some of the contract wins . How does the rate reset ? Look , I know anything nuclear related trades at a pretty healthy multiples today .
Speaker #5: Just wondering how you're evaluating the equity piece of that business .
Speaker #3: Yeah . In the quarter , you know , the contract win definitely played into the the increase in value . was a decrease in the discount rate for that company .
Speaker #3: It's grown substantially since we initially invested . And with its you know , continued growth in this contract , the business is now triple what it was when we initially invested .
Speaker #3: So that played into the company's overall discount rate as well as this increased outlook with regards to the contract also reset expectations on the press were updated this quarter and that played some role in the go forward cash expectations and valuation on the preferred shares .
Speaker #3: I don't know if , Steve , you'd like to expand .
Speaker #4: Yeah , I mean , the contracts that they won was very much a transformational win for them . This is a been a very successful investment for us .
Speaker #4: But this this new contract has taken that to a much higher level . And there's another contract that they are bidding on that would be even larger than that , actually , with the same group .
Speaker #4: So you're right , Gary . I mean , the nuclear space is a great space to be in both from a defense and from an energy perspective .
Speaker #4: So it is a very hot space for private equity trading at very high multiples . And with the growth rate that that Edgewater is , is putting up here , this would be a very , very sought after asset .
Speaker #4: When it eventually does transact .
Speaker #5: Okay . Great . Thanks . And then on the flip side , I just wanted to hear some comments on the Gwm . Sounds like they're impacted by lower ad spending environment in the US .
Speaker #5: Can you provide some maybe outlook for when turnaround could be and any any debt in that business . Just just remind us .
Speaker #4: Yeah . So I actually spent spent a day with Gwm at their headquarters this week . So I'm pretty fresh on on what's what's happening there .
Speaker #4: And they remain a very confident group . They believe that they will pay us in full in 2026 . And there have been some , some pretty fundamental changes in that industry .
Speaker #4: So macro changes in addition to the the economic environment , which you noted just in the programmatic media space , there's been a few new entrants , including Amazon , that has disrupted the space and made people change their patterns .
Speaker #4: So Gwm is very confident that they can kind of adapt to the new environment . They've got a very good backlog of of new contracts , and it's really , you know , cementing those contracts , continuing to add , but they do have some debt on their balance sheet .
Speaker #4: Not a ton , but they do have some debt . So that always makes us more conservative when we're when we're dealing with these things and our in our book value and in our guidance .
Speaker #4: But certainly kind of the feeling from gwm management is that they'll be able to pull through this .
Speaker #5: Okay , great . Maybe I can sneak one more in . Steve . Good to see the recent capital deployment into a new partner and some follow ons as well .
Speaker #5: How's the pipeline looking as you as we sit here today , timing wise as well , how far along in some of these could you look to transact ?
Speaker #4: We're we're very far along in in more transactions before year end . So we do expect to be busy . That's why I made the comment about about shattering our previous records are those are very close by in terms of McCoy , a new partner .
Speaker #4: They are a roofing company out of Omaha , Nebraska . Obviously , Nebraska being in the in the storm belt in the US , you know , particularly hail .
Speaker #4: So being a roofer in that market is very lucrative . A normal a normal roof will last about 20 years in Nebraska . It lasts about seven .
Speaker #4: So great young management team that is that . is hungry and growing Those quickly . They've got the best reputation for ethics and how they treat their their customers in the market .
Speaker #4: So we're very proud to be partnered with them . And they're they're super excited to keep growing . I think this one will see not just organic growth , but acquisition growth as well .
Speaker #4: And once you get up to a critical mass size, that kind of a company is also going to trade at a very nice multiple.
Speaker #4: .
Speaker #5: Okay . And then just the dry powder at the quarter end , is it roughly us ? 150 . Do I have the math right .
Speaker #3: Yeah . I think we're at about 160 USD .
Speaker #5: Okay . Perfect . Okay . Those are my questions . Thank you .
Speaker #4: Thanks . Great .
Speaker #2: And our next question will be coming from David Pierce of Raymond James . Your line is open . Your line is .
Speaker #6: Open .
Speaker #7: Good morning guys .
Speaker #4: Good morning David .
Speaker #8: Just on Gwm is you including core run rate revenue in your 12 month outlook for them or is there some .
Speaker #3: So we've reflected a maybe there's .
Speaker #9: A really bad echo .
Speaker #3: We have reflected .
Speaker #9: A .
Speaker #3: Payments for the Q4 period and we continue to evaluate what the additional nine months will look like . Our expectation is there would be some level of payment over the 12 month period , especially in that later nine month , you know , first nine months of 2026 .
Speaker #3: But we continue to work with the company and the lenders to evaluate what that looks like long term .
Speaker #4: Yeah , my sense from talking to them is that they may need some short term flexibility in terms of kind of paying in kind for partial amounts for for a couple of months .
Speaker #4: But , you know , we'll see how it plays out . But as I mentioned , they they do expect to pay in full for for the year .
Speaker #7: Okay .
Speaker #8: That's helpful . And then you increase the distribution press release last month . Just curious what's the change in rationale behind the in capital allocation .
Speaker #8: Obviously that's the first distribution increase we've seen in a few years . So just your thoughts on that .
Speaker #4: Yeah , we're we're not ruling out more more share buybacks . I , I think you know , as as I mentioned we're we're going to likely see some some exits in the in the coming months .
Speaker #4: And that'll put us in a position to buy back more shares . But you know we're growing quickly . Our cost of equity is not keeping up with the the lowering cost of debt and not keeping up , quite frankly , with the fundamentals of our business .
Speaker #4: So we thought it would be prudent to to increase the dividend at this point . And and if you look back at our trading history as a public company , we've always traded above book value until post Covid and pre-COVID , we had , you know , a very , you know , a very set , you know , dividend growth strategy .
Speaker #4: And so we're going to get back to that . And see if that can can help the cost of our of our equity .
Speaker #4: Because with our growing deployment , you know , you look out , down the road , you know , there may be a situation in the next year or two where we might have to raise some equity and , you know , I think having a higher share price and , you know , a growth multiple attached to us , like we've had in our past , is is prudent for for our investors .
Speaker #4: If , if we can if we can keep on growing as we as we can . And that's absolutely my expectation .
Speaker #3: We've always been committed .
Speaker #9: To .
Speaker #3: You know , increasing the dividend with our growth proportionate to our . Cash flows . And , you know , with even with the NCIB , we remain , you know , below that 65 to 70% target .
Speaker #3: You know , having our payout ratio dip below , I think , you know , we're at 40 some percent for the quarter .
Speaker #3: Even lower as we continue to grow . Just , you know , was not in line with our . Overall business strategy .
Speaker #8: Okay . And then maybe if I could ask one more , I think stop this quarter . It looks like cash flow has improved .
Speaker #8: What's driving that . Is that a better expense management or demand starting to recover a bit .
Speaker #3: Sorry . Could you just repeat that ? It's .
Speaker #9: Sorry .
Speaker #8: Just on flow I think they stopped paying in kind this quarter . Cash flow has improved . Just what's driving that ? Is it better expense management coming back ?
Speaker #8: Just your thoughts there , please .
Speaker #4: Yeah . Is is doing extremely well there . Well above budget in the last six months . And setting records there . Their new contour division , which is the breast augmentation that is added on to the liposuction and skin tightening and , and tummy tucks , is now doing better than expected .
Speaker #4: So , so yes , very good tailwinds . There was some and we expect that to to continue .
Speaker #7: Great . That's all I had . Thanks guys .
Speaker #4: Thanks , David .
Speaker #2: And our next question will come from Zachary Evershed of National Bank Capital Markets . Your line is open .
Speaker #10: Good morning everyone . Thanks for taking my questions .
Speaker #4: Is that .
Speaker #10: As we get close to the end of 2025 , you're looking at shattering the all time record for deployments . How are you thinking about deployment guidance for next year , though ?
Speaker #4: Yeah , I'm impossible to say . I mean , all I can tell you is that the environment right now has probably never been better .
Speaker #4: There's a few factors for that . As I mentioned , traditional private equity is is in a very kind of tempered place right now , I guess would be saying it nicely .
Speaker #4: They're they're not aggressive . A lot of them are having a lot of difficulty raising capital . So we're seeing them having retreated a little bit .
Speaker #4: Multiples are a little are a little more sane and the other factor is you'll see us do some Canadian deals here for the first time in , in 6 or 7 years .
Speaker #4: And I would also say that the political environment has led to some very good Canadian companies preferring to deal with other Canadians . And we're quite proud to be some some Canadian partners .
Speaker #4: We're proud Canadians . And and obviously that that hit home with us . So a few different , different things . But you know , in terms of next year , we only have about three months of visibility on our deployment .
Speaker #4: So I can tell you the next three months are are extremely good . Probably the best in our history . But after that it really will depend on on what kind of opportunities we we decide to pursue after that .
Speaker #4: But you know, I'll add on to that because our portfolio is growing. We're just going to have more follow-on deployment as well.
Speaker #4: In 26 , we do have several companies that are acquisitive . So I believe that part of our business will continue to grow as well .
Speaker #10: Happy to hear it . And then for FMP , you guys had previously made reference to about 1.2 million in distributions in the run rate .
Speaker #10: What's the plan for them these days ?
Speaker #3: The 1.2 million of distributions remains in the run rate . You know , we collected a small amount of distributions in the quarter from FMP with the government shutdown .
Speaker #3: We , you know , both concluded that it would be prudent for them to just hold on to that capital until , you know , the government opens back up and contracts are back up and running .
Speaker #3: So we don't expect , you know , a change to that expectation at this point . But we continue to to evaluate how long and the impacts of the government shutdown on both FMP and and broader .
Speaker #10: Fair enough . Thanks then , for Ohana , how's the membership churn trending so far in Q4 ? Is that more of a Q3 story or ongoing .
Speaker #4: In terms of the the one click ? Yeah , it's it seems to be stable . You know , they're they're really trying to find the the happy ground there to to have more new people join because it's easier to cancel versus some people , you know , hitting the easy button and canceling .
Speaker #4: So you know, it was expected that that would be a short-term phenomenon that people that, you know, had a chance.
Speaker #4: Now to just click to cancel that . Maybe we're too lazy to do it . And and I think that's , that's coming through in general .
Speaker #4: We're , we're super happy with with Ohana , the fundamentals of that business are , are very strong . I think , you know , we're going to be looking at likely a price increase on the black card membership , which is about two thirds of our members , which will also cycle through over the next couple of years .
Speaker #4: The acquisition that we did in Michigan is super strong , good synergies there . It's a higher , higher margin . Clubs than than what we had in the past .
Speaker #4: And we are seeing some good acquisition . Some other acquisition opportunities there as well . So really strong investment for us .
Speaker #10: Good color . Thanks . And then I think you guys mostly addressed this , but I'll just ask it head on again . How are you thinking about balancing new deployments versus buying back shares under book value ?
Speaker #10: You guys looking at that through an IRR lens , a cost capital lens ?
Speaker #4: Yeah , it's it's an IRR lens . The the deals that we're that we're doing and the deals that we have are extremely high RR opportunities .
Speaker #4: So that's where our focus is . We have excess capital from from exits . I think you'll you'll see , you know , a two pronged approach .
Speaker #4: But yeah , we're we're we're adding some , some very high expected IRR situations into our portfolio . So that's that's by far the best use of our capital right now .
Speaker #10: Could you comment on how recent deal IRS compared to your historical average .
Speaker #4: Well it's tough to compare because you know , our historical average , we didn't have common equity in the structures . So on our typical prep IRR expectations , they would be kind of high teens to 20 .
Speaker #4: Now with the structures that we have , we're looking at mid 20s in terms of blended IRR . So 20% on the prefs and typically around 30% on the common .
Speaker #4: So if not higher . So so yeah our return profile has gone up considerably . We don't think our risk profile has . We're still protected by the exact same rights and remedies through our prefs that we always have been .
Speaker #4: These are, you know, low to no leverage companies with a long track record. And they're choosing us because they want to keep more upside and keep control.
Speaker #4: So the alignment is much better than any other any other kind of structure out there . So . So yeah , it's it's a it's a very good time for us .
Speaker #10: Thank you so much . I'll turn it over .
Speaker #4: Great . Thanks , ash .
Speaker #2: And our next question will be coming from Bart Zdziarski of Research Analyst . Your line is open .
Speaker #11: Hi . Good morning . It's RBC Capital Markets . A question around fleet . So a two parter here . The distributions were down 30% over year .
Speaker #11: And then there was a quarter on quarter 11% fair value increase . So can you just maybe help us understand those two . What drove those two dynamics .
Speaker #3: Yeah . The the common distribution is always going to be variable . The the distribution was within our expectations from basically the forecast from last year .
Speaker #3: So there was no surprise in that decrease . The previous year fleet had a , you know , a significant amount of cash flow on the balance sheet .
Speaker #3: And a fantastic year overall . The increase in fleets valuation is driven by just the outlook and growth in the business overall , as well as there .
Speaker #3: Sorry , I'm just lost my train of thought .
Speaker #4: The one thing I'd say about fleet is and the difference between our profit distributions and are common , is that , you know , the profit is very structured and and known , whereas the common is completely up to the board of directors of , of each individual company .
Speaker #4: So fleet , even though , you know , their performance is very strong , had other needs for their capital to fund their growth .
Speaker #4: So , you know the , the distribution was was down year over year , even though their performance was not .
Speaker #3: And sorry , I just came back to me in addition to the , you know , growth in the business and the forecast driving that fair value increase during the quarter .
Speaker #3: There was also a small redemption by the company of the final amount of shares outstanding to a the founder . We completed a transaction a few years ago which , you know , transferred that business into the hands of of management .
Speaker #3: And as part of that transaction , there was a small redemption right in the agreement that was exercised in the company , repurchased and canceled those shares , which led to a small increase in our overall ownership .
Speaker #3: And that's also reflected in the fair value .
Speaker #11: Okay . Very helpful . And so it was a lower discount rate as well , or no , that didn't .
Speaker #3: Just driven by market factors . So just market movement with overall interest rate and risk free rate declines . Nothing specific to the company spread .
Speaker #11: Okay , okay . Got it . And then just to follow up question around kind of capital allocation . So you're sounding pretty bullish around exits for call it the next 12 ish months .
Speaker #11: And funding NCIB . So should we be thinking that the NCIB can also ramp up here or or is that not the case ?
Speaker #4: So the NCB being wrapped up.
Speaker #11: , the the share buybacks .
Speaker #4: Yeah . So no , I , I , I think , you know , for the time being anyways , on the short term , the focus is really going to be on , on funding new investments .
Speaker #4: You know , but yeah , I think there's I think there's there's lots of room here for , for a good mix of , of funding deployment .
Speaker #4: Seb's or sibs and also further dividend increases .
Speaker #11: All right . Thanks , Amanda . And Steven for me .
Speaker #4: Yeah . Thanks , Mark .
Speaker #2: As a reminder to ask a question , please press star one one on your telephone and wait for your name to be announced .
Speaker #2: Our next question will be coming from Trevor Reynolds of Acumen Capital . Your line is open .
Speaker #7: Hey guys , most of the questions have been answered , but just in terms of the deployment opportunities that you're seeing here with these primarily be new opportunities or add ons .
Speaker #4: Yeah , we've got some new opportunities in the short term , but as I mentioned , we're you can expect some some add ons over the next 12 months as well .
Speaker #4: We've probably got 5 or 6 companies in our portfolio that that continue to be quite acquisitive and have opportunities for us . So it's a great way to grow very low risk deployment for us .
Speaker #4: But yeah , in the in the very short term , you can probably expect some new partners .
Speaker #7: Okay . And then it sounds as though the exit timing has maybe moved forward a little bit on on a few names here , just based on the commentary quarter over quarter .
Speaker #7: Is that is that accurate and would this be the same names that were kind of previously expected to undergo exits ?
Speaker #4: Yeah , same names , I think , you know , ramping things up for , you know , for , for the first half of , of next year in terms of a couple of exits , is , is the game plan obviously no guarantees on that .
Speaker #4: It'll it'll depend on , on the market environment and the process . But that's that's the plan . So you know we're we're excited about that because we've got some , some situations that I think will will surprise the market .
Speaker #4: On the upside , in terms of what kind of returns we're we're getting .
Speaker #7: Okay . Great . And then SMP , you mentioned returning to payments potentially next year . Like would that include catch up payments for for those missed .
Speaker #7: Or is this just kind of starting off at a base level ?
Speaker #3: No . We had 1.2 million in the outlook for SMP . That amount remains in there . They will return to payments gradually .
Speaker #3: And as you know , they recover . We can evaluate any catch up payments . I think they'll be some like we did with SCR .
Speaker #3: Just renegotiation of how that catch up and how those partial payments are are scheduled to play out over , over a few year period .
Speaker #7: Okay , great . And last one , is there any update on on heritage .
Speaker #4: Sorry .
Speaker #9: On what .
Speaker #4: Heritage on .
Speaker #7: Heritage . Heritage .
Speaker #4: No not nothing . Nothing substantial . Their they're cash flow positive . There . Performing well . We've got our our our consultant our former partner that's consulting for us in there .
Speaker #4: Very active almost on a daily basis . Management team is doing everything asked of them . They've just had a nice a nice new contract win , which was super positive .
Speaker #4: So yeah happy there . But nothing nothing dramatic .
Speaker #7: Okay . Great . Thanks .
Speaker #4: Thanks , Robert .
Speaker #6: Okay .
Speaker #2: I'm showing no further questions at this time . I would like to turn the call back to Steve King , president and CEO , for closing remarks .
Speaker #4: Great . Thanks , Tanya . Thanks , everybody , for your questions and for tuning in . As always , if you have anything further , please contact Amanda and I directly and we look forward to new news in the in the near term .
Speaker #4: And and another great quarter for year end . Thanks very much .