Alaris Equity Partners Income Trust

Good day, and thank you for standing by, and welcome to the LARS Q2 2023 earnings release 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'll 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 today's conference is being recorded. I would now like to introduce your host for today's call, Amanda Frazier, CFO. Please go ahead.

Thank you, Justin. We appreciate everyone taking the time to join us this morning as we present our Q2 results. I'm joined on this call by Steve King, President and Chief Executive Officer of Alaris. 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+, 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 in MD&A for more clarification regarding non-IFRS measures. Now for the Q2 highlights. Q2 revenue of $36.9 million was down 35% over the prior period, driven largely by $17.2 million of deferred Kimco distributions received upon their redemption in 2022. The remaining Q2 2022 revenue of $39.3 million as compared to the Q2 2023 represents a 6.2% decrease over the prior period. Drivers of this decrease include the deferral of the Q2 LMS distributions, which will be resuming in Q3, and a reduction in BCC distributions as a result of the strategic transaction announced last quarter. Cash generated from operations prior to changes in working capital of $28.3 million, with a decrease of 36% over the $44.4 million in the prior period, again mainly as a result of the deferred distributions received from Kimco's redemption last year. After adjusting the Q2 2022 results for Kimco's distributions, the adjusted change in cash from operations prior to changes in working capital is an increase of 4.2%. Also contributing to the adjusted increase in cash generated from operations prior to changes in working capital for Q2 was a 26% decrease in G&A, and after adjusting for the settlement of the sandbox litigation, which was resolved in the quarter, although accrued in Q1, to six months, 2023 G&A amount is down 19%. With ongoing legal and accounting fees returning to historical levels, With the wrap-up of the sandbox matter and salaries and wages based on more normalized operations as compared to an unusually profitable 2022, we expect G&A to maintain these lower levels and have updated our outlook to reflect an anticipated $15.5 million in go-forward 12-month G&A. Quite a few fair value changes in Q2 on a net basis, including the common units, an increase of $9.9 million. as net changes in market rates had a positive impact on discount rates and strong performance in a number of our partners resulted in increases in fair value. We saw increasing fair values for BCC of 8.5 million U.S., Fleet of 4.9 million U.S., and Ohana Growth Partners, formerly Planet Fitness Growth Partners, of 3.6 million U.S. All of these companies continue to see record highs in their respective businesses with significant growth over prior periods. BCC continues to see impressive year-over-year growth with record high activity the past number of months as they execute on their development plan. Fleet has been able to continue to generate increases in syndications through both new customers and growth in current relationships. With a large backlog, their outlook for the remainder of 2023 and 2024 continues to be very positive. Ohana Partners saw a rebound in fair value after a number of quarters with adjustments related to increasing discount rates as a result of movement in the equity risk premium. This coupled with increasing year-over-year memberships and the expectation of a positive reset on the preferred distributions for 2024 gave growth increase in fair value. Offsetting these increases were declines in Axient of $7.7 million US and SCR of $3.5 million. Axient While the business continues to maintain high levels of revenue, pressure on margins and an investment in corporate supports and structure has impacted EBITDA. While they expect month-over-month improvements in results, these pressures are expected to continue throughout 2023. As a result, the common and preferred equity value decreased further in the quarter. As a result of an adjustment to the timing of SDR's project-based revenue, the cash sweep anticipated for 2022 was decreased. SCR's business can be impacted by the timing of project-related work throughout the year. SCR's distributions were previously adjusted to include a monthly fixed distribution and a cash sweep that varies with the profitability of the business. Expectations for future cash sweep distributions have also been revised to reflect current market conditions and resulted in the fair value decline. Results for the first five months are up compared to last year and we expect the last half of the year to remain consistent. Other less significant movements included DNM, Edgewater, and GWM. As previously announced, during the quarter we invested $36.5 US into a new partner, FMP, a professional services firm that provides workforce and organizational management solutions to the public sector. The investment includes $30.5 million US of preferred equity and $6 million US of common equity. This brings our year-to-date deployment to $49.5 million. Subsequent to the quarter, proceeds from excess cash flow were used to repay debt, bringing the outstanding amount to approximately $184 million, resulting in $266 million of available capacity. Our portfolio continues to perform well and has maintained a weighted average ECR of approximately 1.6. Our current outlook calls for $37.6 million of revenue in Q3 and a 12-month run rate of $157.3 million. I'll turn it over to Steve now for his comments.

Great. Thanks, Amanda. A quarter of very stable results for our portfolio. And as indicated from the fair value adjustments, the value of our portfolio has increased quarter of a quarter. It's around 21 cents a share of net increase in our book value per share from the fair value rate ups. Specifically, we're pleased to see the recovery from LMS, who have worked very hard through their way of short-term inventory issues and then the port strike in the West Coast over the last couple of months. and expect full distributions to return this month. GWM is another company that's come through some underperformance in the past and is now on a very solid trajectory. Our largest partners, BCC and Planet Fitness, Ohana, continue to be among our strongest performers. And I would point out that the decision that we made as management to trade in our traditional preferred shares with a capped growth rate option for preferred shares that are convertible into common shares without any cap has really started to show its benefits with the large rate up this quarter, which we expect more of. On the negative side, as Amanda said, Axient and SCR have been under pressure for very different reasons, so Alaris Management is digging in and helping those companies as much as we can. Overall, we've seen the portfolio wide earnings coverage remain very stable and I would say the bell curve for our 19 company portfolio is a little higher than what you would expect. With half the year already reported in by our partners, we're starting to get a good sense for what our distribution resets are going to be for 2024 and it's looking like another strong year. Looking forward, we've seen a very productive increase in the deployment opportunities from our advisory community after a relatively slow 18-month period, largely attributable to the private equity markets finding its footing amid rapidly rising interest rates. Activity appears to be higher in Q3, and indications from the M&A advisors in the US is that Q4 will be a very busy quarter. Alaris has several transactions in process that we believe will allow us to meet or exceed our deployment targets that we've set for the year. And along with good opportunities, the other part of our growth is access to appropriately priced capital. While our current share price doesn't make equity offerings economic, we are in a very strong position on our balance sheet by using the $266 million on our credit facility as well as our free cash flow that we generate every month. So, Justin, we'll open it up to questions, if you would, please.