Alaris Equity Partners Income Trust

Good day, and thank you for standing by. Welcome to the first quarter of 2024, a large earnings conference call. At this time, all participants are on 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 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 hand the conference over to your first speaker today, Amanda Fraser, Chief Financial Officer, please go ahead.

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 are for 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 cdarplus.com, as well as 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 the non-IFRS measures. As discussed last quarter with the evolution of ALERIS investment model over the last few years, beginning with the introduction of common equity and continuing to evolve with the expansion of SPV investments, in Q1, ALERIS determined it had met the requirements of an investment entity under IFRS 10. 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. While this method of accounting has had a pervasive effect on the financial statements, on the face of the statements, an IFRS requires that this change in accounting is made prospectively, and as a result, prior periods are not restated. So no disclosures surrounding corporate investments have been located in Note 3, have been updated to contain as many details as possible with regards to the acquisition entity's results. And the MD&A has been crafted in a way that to the extent possible, information is presented alongside its prior quarter comparatives. Accordingly, users of the interim reporting should exercise caution in reviewing, considering, and drawing conclusions from period-to-period comparison and changes. Direct comparisons between dates or across periods may be inappropriate or not meaningful if they're not considered carefully and in context. Aside from this accounting change, Q1 was a fairly standard quarter for Alaris. Net book value increased by 54 cents per unit in the quarter to 21.66, which continues to be a record for Alaris, driven by earnings less the 34 cents 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, deferring distributions for 2024, and revenue was ahead of Q1 2023's result of $36.7 million. Adjusted EBITDA, which adjusts 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 the legal costs related to sandbox in 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. The actual payout ratio for the quarter was 66% in Q1, driven by Alaris' net distributable cash flow of 51 cents per unit. Subsequent to the quarter, Brown & Settle redeemed Alaris' investment for gross proceeds of 71.5 million U.S., resulting in total return on the Brown & Settle investment of 30.8 million U.S., representing an unlevered IRR of 15% and a multiple of capital invested of 1.5 times. Alaris expects to use the incremental borrowing capacity under its credit facility as a result of the redemption of Brown and Settle to repay Alaris' convertible debentures 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. Portfolio updates include continued weighted average of approximately one and a half times with 11 out of 20 partners continuing to be above this threshold. With regards 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 add five locations for a total of 103 centers. Their fair value increased by 2.8 million US in the quarter. Edgewater's results in 2023 and sustained growth expectations for 2024 have impacted future reset expectations with positive impacts to future cash flow expected, and fair value has increased by 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 to begin 2024 have been a significant improvement over the prior year, resulting in the rebound in ECR to above two times. 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 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. 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 pricing increase for the system, increasing pricing from $10 to $15 per month. This change will drive an increase in earnings over time as incremental members at this new pricing build in 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. 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. Other less significant impacts to fair value in the quarter were driven by GWM, Shipyard, Axiant, and Carey. Of our 20 partners, 11 have either no debt or less than one times debt as compared to EBITDA in the business. 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 G&A expectations from year end of $16.5 million. And on that note, I'll turn it over to Steve for his comments.

Great, thanks Amanda. 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 so 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. 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. 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. 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 under default and we need to step in and take control, we can now do so without fearing the complexities of consolidation. So actual practical value for us. as well as coming into line with what other companies in our industry do. Subsequent to quarter end, Alaris added our 20th current partner to our portfolio in Cressa LLC. Cressa is one of the top commercial real estate advisory firms in the world with offices in 35 different markets. Cressa has really created a wonderful niche in advising only tenants and retaining impartiality in their advice to their clients. Our $20 million U.S. investment, 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. On that topic, we have two more follow-on investments that will be made in the very near term that put us right on track to deploy more capital than we did in the previous year, which was our target. 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, hundreds of private equity firms all getting 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. Laws 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. 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 line pool funds to increase the speed of our growth and increase our return on equity. So Marvin, happy to throw it open to questions from the floor now.