Alaris Equity Partners Income Trust

Good day and thank you for standing by. Welcome to the Alaris Q4 2022 earnings release. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that this conference is being recorded. I would like to hand the conference over to your speaker today, Amanda Fraser, Chief Financial Officer. Please go ahead.

Thank you, Kevin. We appreciate everyone taking the time to join us this morning. We are excited to present our Q4 results. I'm joined on this call by Steve King, President and Chief Executive Officer of Alaris. After a short presentation from Steve and I, there will be a question and answer session. Before we begin, I would like to remind our listeners that all amounts given are in Canadian dollars unless otherwise noted. Listeners are cautioned that comments made today may contain forward-looking information. This forward-looking information is based upon a number of important factors and assumptions, and therefore actual results could differ materially. Additional information concerning the underlying factors, assumptions, and risks is available in last night's press release and our MD&A under the headings Forward-Looking Statements and Risk Factors, copies of which are available on CDAR at cdar.com, as well as our website. 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 and our MD&A for more clarification regarding non-IFRS measures. Some of the Q4 highlights include Q4 revenue of $51.1 million with an increase of 36% over the prior period and exceeded previous guidance. due mainly to the receipt of 5.2 million U.S. in distributions owed by FNC upon redemption. As part of all of our investments, we have a three-year make-hold provision, and distributions up to the third anniversary are owing in the event of the transaction. Also, the catch-up payment of 3 million U.S. received in late 2022 from Planet Fitness in regards to amounts deferred during the COVID pandemic. During the year, Planet Fitness made a total of 5.4 million U.S. in cash-out payments and 4.2 million remains outstanding. For the year, revenue of 190 million was an increase of 28.7 over the prior period and driven by the redemption of Kimco and FMC during the year, each of which resulted in the collection of deferred and out-of-period distributions. Also, after the consideration of these out-of-period amounts, revenue of $165.7 million was 12.2% higher than in 2021, driven by the follow-on investments in BCC fleet and Axiant, as well as $13.1 million received in common distributions, an approximate 10% yield on our common equity portfolio, and a three-times increase over the prior year. Cash generated from operations prior to changes in working capital of $47.2 million for the quarter and $171 million for the year was an increase of 13% and 22% respectively over the prior period. During the year, Alaris generated basic earnings per unit of $2.89 and paid out $1.33 per unit in distributions, resulting in a $1.56 increase in book value. The actual payout ratio was 39%, thereby generating $93 million of excess cash flow from operations, which was used to pay down debt and for investing purposes. Earnings for both the quarter and year-end were impacted by the decrease in fair value gains as compared to the prior period, as net realized and unrealized fair value of investments was $20 million lower for the quarter and $55.2 million lower for the year. In the prior year, the portfolio was benefiting from the recovery of COVID declines and resulted in significant gains. In comparison, the portfolio in 2022 was impacted by the increasing interest rates effect on discount rates and multiples. Despite these factors, we saw an overall increase in fair value for Q4 of $4.4 million. FLEET's revenue and EBITDA have both improved as compared to the prior year, primarily due to an increase in syndication of new units. Also in Q4 2022, FLEET's backlog of syndication work for 2023 and into 2024 increased substantially with new contract wins. As a result of this growth in backlog and its impact to FLEET's outlook, coupled with the strong results during 2022, the fair value of FLEET's investment increased by $15.2 million in the quarter. As a result of the contemplated BCC transaction, as of year end, the fair value of the investment was increased by $67 million U.S. to bring the total up to the value realized in Q1. As discussed in previous quarters, GWM has not realized the growth expected at the time of our investment and a slowdown in early 2023 results has further impacted their growth expectations for the year. This shift in expectations coupled with continued discount rate increases and declining multiples have resulted in a decrease in fair value during the quarter of US$9.5 million. LMS's revenue has increased year-over-year. However, as a result of the increase in steel prices, LMS's margins have been compressed and gross profit has declined. Although LMS has worked to include steel price escalation features in new contracts, they still have to work through current lower rate contracts and on-hand higher priced steel in inventory, which is expected to occur during the first half of 2023, with the latter half of the year expected to bring improvements to gross margins. Based on the expected negative 25% reset for 2023, there was a decrease to the fair value of LMS during the quarter of $4.3 million. Based on the MERS unaudited financial results for the year, the reset in 2023 is expected to be a positive 6%. However, due to rising interest rates in late 2022 and the expected impact this will have on new loan origination demand, there was a net decrease to fair value of this investment of $7.2 million in the quarter. In FY22, redemptions during the year had a cost base of $130 million and attracted annual distributions of $17.2 million. The proceeds from these redemptions included $32 million in realized premiums for total proceeds of $162 million. This is a 25% premium over the investment cost base. Deployment in the year totaled approximately $156 million, which included initial annual contracted distributions of $19 million. As a result of this turnover in the portfolio, we generated increased book value, $0.71 per unit of realized gain, and increased our annual revenue by 10%. Subsequent to the quarter, we completed a strategic transaction involving BCC and co-sponsor Brookfield. We exchanged $145 million of our preferred equity for convertible preferred units and redeemed the remaining equity which resulted in a realized premium of $9.7 million US. The new convertible preferred units provide a minimum 8.5% yield, $12.3 million US annually on the convertible preferred paid quarterly. with the ability to participate in any common distributions in excess of 8.5%, as well as an annual $1.5 million transaction fee. As a result of the BCC redemption of $20 million US, as well as the smaller partial redemptions for Fleet and Unify received on December 30th, subsequent to the quarter we decreased our senior debt outstanding. We currently have $104 million US and an additional $10 million Canadian outstanding and have $300 million of available capacity on the facility. This is approximately a 1.4 times senior leverage ratio. Our portfolio has a weighted average ECR over 1.6 times. The only reason for the decline below 1.7 times was the revision to BCC based on the new transaction. 13 of our 18 partners continue to have an ECR over 1.5 with LMS the only partner below one, and as mentioned earlier, we expect them to be back above one in the later half of the year. Our anticipated aggregate partners resets totaled 1.2% in 2023, an increase of approximately $1.4 million, or $0.03 per unit. This estimate is reduced due to the redemption and subsequent conversion of BCC's preferred equity into convertible preferred Top of the collar resets are expected from 10 of our partners. Our current outlook calls for $47 million of revenue in Q1 and a 12-month run rate of $151 million. Our G&A expectations have increased from $17 million to $17.5 million to reflect the impact of higher FX rates on U.S. denominated expenses and continued elevated legal spending. I'll turn it over to Steve now for his further comments.

Great. Thanks, Amanda, and thanks, everybody, for calling in. The last 12 months have brought a great deal of change for Alaris, both in terms of our own business as well as the world around us. Starting with our own portfolio, we continue to operate at near record levels of portfolio health despite challenging labour, supplies and borrowing conditions that have had large negative impacts on other companies. Having a portfolio of required service companies as opposed to manufacturing and companies with little or no debt was a huge contributor to this continued strength. 2022 brought us our 14th consecutive year of positive overall portfolio resets, something I'm extremely proud of as the manager of this company. Our track record shows a remarkable level of consistency of cash flow for our shareholders over our 19 year history. The steep increase in interest rates that we've seen over the last year has been a double-edged sword for us. On the negative side, the impact that higher rates and a tighter debt market has had on the private equity and the entire capital markets industry has reduced the number of quality assets that have come to market. We've seen a recent pickup in deal flow, which we hope continues and grows throughout the year. On the positive side, our structured equity model now looks far more attractive to most companies as compared to traditional private equity that relies on high debt levels or straight debt options that are now extremely expensive compared to where we were just months ago. This will allow us to win a higher percentage of transactions that we're bidding on, and it also means that we'll see a significant decrease in redemptions compared to the norm. As a result, I'm quite confident in a strong net deployment outcome for 2023. The other very exciting change during this past year was the introduction of our first asset management initiative. I believe that the recently announced transaction with BCC, ourselves, and Brookfield is a significant complementary piece to our business. Not only did the transaction allow us to keep US $145 million deployed in a world-class company, it allowed us to increase our upside participation dramatically by not only having an increased return profile on our own investments, but also an economic interest on the full US $400 million that Brookfield put in. The partnership not only underlines the quality of our portfolio, but also the value seen by Brookfield and Alaris on our team. Creating a return on third-party capital is something that we feel will have a very positive impact on our return on equity, while also improving our net deployment outlook. Future asset management initiatives are being considered down the road, but the focus remains on deploying capital into more great companies, like the ones that allowed us to post another record year of results, like we just announced. Kevin, I'm happy to open it up to questions from the crowd.