Alaris Equity Partners Income Trust

which continues to be a record for Alaris. This brings the six-month increase in net book value to 90 cents per unit. Alaris' partner distribution and transaction fee revenue of 42.1 million was ahead of previous guidance of 33.9 and Q2 of 2023's 36.9. This was driven by the follow-on investments in the quarter, a higher than expected FX rate, and higher than anticipated common dividends. Common distributions in Q2 24 were $3.7 million as compared to $1.2 million in the comparable quarter last year, with year-to-date dividends of $4.3 million as compared to $2.1 million in six months ended 2023. This was driven most notably by Edgewater's common distribution of $2.8 million. Alaris's net distributable cash flow to date in 2024 has increased by 14% to $55.2 million, or $1.21 per unit, from $48.5 million and $1.07 per unit in the same period of 2023, after adjusting the comparable period for non-recurring settlement and litigation costs to curb. The actual payout ratio for the quarter was 56%, driven lower in part by the common dividends received. Subsequent to the quarter, Stride redeemed Alaris' investment for gross proceeds of $4.1 million U.S., bringing the total number of partner investments exited by Alaris to 22 and an overall total return from exited investments of 65% and a median IRR of 19%. Year-to-date, Alaris has invested $77.5 million, including an additional $27.5 million U.S. of preferred equity into Shipyard, 20 million US in new partner Cressa and 35 million US into FNP just this quarter. With regards to partners, our portfolio continues to perform well and has maintained its weighted average ECR of approximately 1.5 times with 10 out of 19 partners continuing to be above this threshold. With regards to partner performance, it was a quiet quarter for fair value as we were essentially flat. Shipyard used proceeds of our follow-on investment in the quarter for an acquisition, and as a result of both this and increases in the base business's forecasted EBITDA, the fair value of the common increased by 1.4 million U.S. During the quarter, Edgewater paid a significant dividend, resulting in receipt of US$2.1 million by Alaris. The payment of this dividend impacted the net debt position of Edgewater, and in turn the fair value. As a result of this realization, the fair value of Alaris' interest decreased in the quarter by US$1.4 million, although year-to-date Edgewater's fair value continues to be up US$900,000. With relief to U.S. interest rates pushed back from expectations at the start of the year, DNM is seeing a slower recovery to lease volumes than originally forecast. As a result of the updated reset metrics and anticipated EBITDA, there was a decrease in fair value of $800,000 U.S. for both the common and preferred units. Other less significant impacts to fair value in the corridor were driven by OHANA and Cary Electric. Of our 19 partners, 11 have either no or less than one turn of debt as compared to EBITDA. Our current outlook calls for $38.7 million of revenue in Q3, as this period sees generally lower common distributions. That said, the 12-month run rate of $163 million is up from $158 million last quarter, partially due to higher annual common expectations. Our G&A outlook remains at $16.5 million. And on that note, I'll turn it over to Steve.

Great. Thanks, Amanda. As she just said, our second quarter came in slightly ahead of where we had expected, but generally on plan. The last few months saw the addition of a great new partner in Cressa, a commercial real estate broker with offices around the world. And we expect them to be very active with acquisitions over the coming years. We also saw the redemption of Stride, our smallest investment, at just $4 million. Of our 19 partners, I would highlight Cressa, The Shipyard, Ohana, 3E, Sagamore, DNM, and Edgewater as partners that we expect to have opportunities for growth investments in over the coming months. And obviously, seven out of the 19, it has become a bigger and bigger focus for us in our investment criteria to find partners that have ongoing acquisition and growth opportunities, especially now that we have common equity in those partners. Stride is a great example actually of the power of our structure and how it reduces the risk in our investment returns. During our years of Stride, the company enjoyed some success but over the last few years has seen a contraction in their business. Despite their revenue and earnings being well below where they were when we invested, we were able to record a reasonable 15% IRR over the course of our investment. While that's below the roughly 20% IRR that we target for new investments, it was a positive result overall. and no other redemptions are imminent, but we do expect to see two or three over the next 12 months. As for new partner deployment, we do expect an active second half of the year. With more than 75 million deployed in the first six months, we hope to beat that number in the second half based on current partner opportunities as well as potential new partner ads. With two rate cuts in Canada already, where we procure our debt and our equity capital, we're in a really good position given that we generate almost all of our investment opportunities in the U.S. who have not cut their rates yet. The U.S. investment environment is highlighted by higher growth and higher returns on structured capital like ours. So, Amy, with that, I'll turn it over to any questions that the field has.

Thank you. And as a reminder, to ask a question, you will need to press star 1-1 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. And our first question comes from the line of Jeffrey Kwan with RBC Capital Markets. Your line is open. Hello, Jeffrey. Your line is open. If you're on mute, please unmute your line. Please stand by for our next question. Our next question comes from Nick Preby with CIBC Capital Markets. Your line is open.

Yeah, thanks. I was wondering if you could provide us with an update on how the search process is progressing to identify a replacement CEO at Heritage?

Greg is working on that quite extensively. So, just for people that are listening, we've had the the senior management of heritage have a health issue and has had to step away so we have a group that we used actually on Kimco years ago that ended up getting a great return for us on Kimco. They are in managing heritage on a day-to-day basis. And we are, as you pointed out, Nick, looking for a permanent manager. We're not in a big hurry because of the people that we have in there managing it, who we trust, but the search is ongoing. So I don't have a timeline on that yet, but that's very much a focus for us.

Understood. And I just wanted to ask a clarification question on that as well. I think last quarter... you'd mentioned that you own about 40% of the common equity in heritage, and the CEO that has departed owns the other 60%. And then I think you suggested you have that 60% to play with in terms of bringing someone in new and offering them equity. I didn't fully understand that comment. Were you suggesting that there could be the prospect of the issuance of additional equity that might dilute down your stake a little bit?

No, it would be buying the 60% from the CEO, and I think that could be done very inexpensively at this stage. And so we would be able to incent a new manager with that 60%.

Oh, I see. Okay, that makes sense. And just last question for me. The outlook for Fleet's common equity distribution, given the June 30th year end, is What's the expectation for timing there? It kind of seems based on the guidance like it could be in Q4, but I think last year it was in Q3. So what's your view on that?

Yeah, they generally wait until they finish the audit, so the timeline is always quite tight. So just to be conservative, we have pushed that to Q4. That payment usually is made in October. And then from accounting purposes, it really comes down to what is the date of declaration.

I got it. Okay. That makes perfect sense. Okay. That's it for me. Thank you. Thanks, Ben.

Our next question comes from the line of Gary Ho with Desjardins Capital Markets. Your line is open.

Thanks. Good morning. Maybe just follow on on Nick's last question there. So you've raised your outlook for common distribution equity investment, I think $10.5 to $12.5 million. a chunk of that related to fleet that you just mentioned. So how confident are you in that 12 and a half as a run rate when you look out to 25? And also maybe give a bit of a kind of commentary on how fleet is doing on a year-to-date basis.

Yeah, fleet continues to do very well. I don't see, as it relates to them, I don't see a downturn in their business. I think they'll remain a big chunk of our common dividends going forward So, yeah, I think there's probably even some upside there.

And just with regards to the outlook, that is looking 12 months forward, so it does include the first half of 2025 in that 12.5 number. And I think as we've been adding new investments, you know, we've brought on Cressa and, you know, Sagamore, FMP are paying dividends. taking out companies like Brown & Settle, who were deemed as earlier in the year stride, small, but neither of those companies paid common dividends, nor did we have any common in stride. So we're just starting to replace more and more portfolio with companies that have common and pay dividends. So we're just sort of seeing that evolution flow into the outlook of what our common expectations are.

Okay, that makes sense. And then my second question, saw this small redemption in stride this quarter and then Brown settled earlier this year. I think you mentioned there's no imminent redemption currently, which is good to hear. Steve, you sounded more bullish on the deployment side. You've highlighted a bunch of partners in M&A mode. Are you able to kind of highlight some of the chunkier opportunities in the near-term horizon?

I think Ohana is probably one that we'll we'll have a chance to invest more capital into, which is great. Anybody that follows the Planet Fitness story knows that the basic membership was just moved from $10 to $15. So that move, while it takes time because people that are current members get grandfathered in at their $10, but it has a really interesting impact in that it really stops people from cancelling their memberships so they can stay grandfathered at $10. and it has shown over the last year through testing and through its early release that it has not stopped new membership growth at all. So we expect some nice gains on our Ohana returns and putting more money into them would be a great thing for us. And as I mentioned, kind of those seven partners that I highlighted earlier, those are all companies that are very active and our business development team here at Alaris has really been tasked with finding opportunities for those seven partners. Those are all seven over the next 12 months. I'd be surprised if we didn't put more money into at least five or six of them.

Okay, that's helpful. Thanks, Steve. And then just the last one, maybe for Steve as well, just over the past few years, you've restarted increasing your dividends at a pretty steady pace. While the stocks offer a pretty attractive 8% yield today, how do you think about distribution increase in the back half this year?

Yeah, it's a tough one. I mean, at an 8.5% yield, actually more than that now with today's market decline, it's really not providing incentive for us to increase the dividend. I think a two-pronged approach of increasing our growth rate by conserving capital, because we certainly don't want to raise any capital in this kind of a market. And if anything, we would look more at share buybacks than dividend increases, I would suggest.

Okay, that makes a lot of sense. Those are my questions. Thank you. Thanks, Greg.

Thank you. And as a reminder, to ask a question, please press star 1-1 on your touchtone phone. Again, that's star 1-1. Our next question comes from the line of Thomas Boland with NBS. Your line is open.

Good morning, guys. It's actually Thomas calling in for Zach. Just a quick one here. Is there significant risk to heritage restarting distributions in the first half of 2025? What would be those risks or is that assumption rock solid at this point?

We continue to monitor the business at this point. Our assumption is that we would resume in 2025. But we continue, I mean, we have a long-term view on the business, obviously. Amplified by the fact that we also have common invested into it. So we want to make sure that the businesses in the best position Paula possible before we resume distributions, just to make sure that You know what, once we do start distributions that that is a permanent restart and it's not just sort of fits and starts.

Yeah, I agree. It's a very good, steady business, has been so for decades. So the market has not changed for them, their place in the competitive landscape has not changed. So I'm still quite bullish on that company long term.

Great. I'll turn it over.

Great. Thanks, Thomas.

Our next question comes from the line of, One moment. Our next question comes from the line of... Please stand by for our next question. Our next question comes from the line of Jeff Fenwick with Coremark Securities, Inc. Your line is open.

Hi, guys. Good morning. Sorry, I joined the call a bit late, so I apologize. If this is a repeat question, please, I can follow up with you afterwards. But I wanted to ask about the CRESA... new investment there and the pick option that you elected to include in that agreement. Can you speak to why you would do that? You give them a fair bit of runway on that option before they have to cover it. Is that something you're looking to add as something that's just indicative of a more flexible deal structure that you can offer out to your partners?

We actually have that in several of our investments, Jeff, and it almost never gets used, but you hit the nail on the head. It is really just to provide companies with flexibility, but it compounds that 14% yield. So if they use it, then obviously it doesn't impact our returns. In fact, It might help out a little bit, but give them flexibility. In the case of Cressa, they do have acquisition opportunities that they want to funnel their free cash flow into. As an investor in them, that's great for us too. It's something that I like doing. More flexibility is better. The focus for us should be on total return, not just cash return. and having healthy partners. So it's something I actually quite like using.

Okay, so this is about growth for them rather than seasonality or something that might impact it. And I guess in that context, you also look at it as possibly if they're successful, that could be a good candidate for a follow-on investment.

Yeah, exactly. So Cressa has... Gosh, the number of worldwide offices eludes me, but it's quite a bit. Most of them are corporate owned. There's also some that are kind of licensees, affiliates they're called, and there's a lot of opportunity over the next couple of years to bring in-house those affiliate offices and acquire them. that's where all their money is being used. This isn't being taken out or anything like that, or, you know, buttressing earnings or anything. It's purely for growth, so it's a good story. Okay.

And then maybe one just on capital and investment. I mean, you mentioned it's not really an environment you want to be raising equity in, obviously, right now, but when I look at that payout ratio, it looks like the cost of funds here are going to start falling on credit facilities. I mean, would you... How do you think about leverage going forward? I know you've upsized your facility periodically here, but do you think you'd be comfortable running with a little higher level of leverage as we go forward?

Well, yeah, as we grow, you know, I'd probably keep it as a ratio to our EBITDA. I'd probably keep it fairly similar to what we have today. But we did take out $100 million of convertible ventures through cash on our balance sheet last month. And so that's something that I think we have in our back pocket if redemptions happen. outstrip, sorry, if deployment outstrips redemptions over the next six to 12 months, we would likely probably use that convert market before we would ever use equity.

Yeah, fair enough. Okay, thanks for that. That's all I had. Yeah, thanks, Jeff.

And I'm showing no further questions at this time. I would now like to turn it back to Steve King, President, CEO, for closing remarks.

Thanks, Amy, and thanks, everybody, for tuning in. I have to say I'm impressed for a Friday of a long weekend in August that so many of you came and so many asked questions. Looking forward to another good, solid quarter coming up in Q3. And as always, if you have any questions, please reach out to myself or Amanda. Enjoy the rest of your summer.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.