Alaris Equity Partners Income Trust

Good day and thank you for standing by. Welcome to the Alaris third quarter 2024 earnings conference call. At this time, all participants are in 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 will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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, DeeDee. We appreciate everyone taking the time to join us this morning. I am joined on this call by Steve King, President and Chief Executive Officer. 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. 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 cdarplus.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 in our MD&A for more clarification regarding these non-IFRS measures. as discussed for the last two quarters, with the evolution of Alaris' investment model. Over the last few years, beginning with the introduction of common equity and continuing to evolve with the expansion of SBB investments, such as Sonobello, Alaris determined it met the requirements of an investment entity under IFRS 10, and as such, as a result of this prescribed change, Alaris is no longer consolidating its investment entities 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 that holds Alaris U.S. investments and senior debt, as well as Alaris Equity Inc., which holds Alaris' Canadian investments and senior credit facility. These entities are now reflected in the trust balance sheet as corporate investments and are held at fair value. This method of accounting has had a pervasive effect on the financial information on the face of the statements and IFRS requires that this change in accounting is made prospectively, and as such, prior periods have not been restated. Disclosure surrounding corporate investments located in Note 3 of the financial statements provides details of the acquisition entity results and the MD&A has been crafted in a way that, to the extent possible, information is presented alongside its prior quarter comparative. Accordingly, users of this interim reporting should exercise caution in reviewing, considering, and drawing conclusions from prior period comparisons and changes. Direct comparisons between dates or across periods may be inappropriate or not meaningful if not carefully considered in this context. Now to our Q3 results. Net book value increased by $0.78 per unit to $22.80, which continues to be a record for LARIS. This brings the nine-month increase in net book value to $1.68 per unit and is in addition to $1.02 of dividends paid for a year-to-date return on book value of $2.70. This increase was driven by both growth in revenues received from partners, including common distributions, as well as increases to the fair market value of Alaris' portfolio. Alaris' partner distribution and transaction fee revenue of $65.9 million was ahead of previous guidance of $38.7 million and Q3 2023's $47.2 million. This was driven by higher than anticipated common dividends. Common distributions for Q3 2024 were $27.5 million as compared to $8.8 million in the comparable quarter last year. with year-to-date dividends of $31.8 million as compared to $10.9 million in the nine months ended 2023. This was driven by year-over-year increases in common distributions received from Edgewater, FMP, Amer, Ohana, and Fleet. Although note that Ohana's dividend is expected to be one time in nature as they continue to focus on their growth strategy. Alaris' net distributable cash flow for Q3 2024 increased by over 63% to $31.8 million or $0.72 per unit from $20.1 million and $0.44 per unit in the same period of 2023, resulting in an actual payout ratio for the quarter of 53%. Alaris' low payout ratio has facilitated the flexibility required to invest in more creative structures while still maintaining our disciplined and free cash flow focused approach. In the last few years, these structures have included the addition of common equity, convertible prep, the ability to pay in kind portions of the preferred distribution, and to enter SPV arrangements with third parties. This flexibility has made our capital more attractive to potential partners and extended the life of some investments, while also helping to drive the higher returns we are seeing in 2024 across both distribution revenue and unrealized portfolio growth. During the quarter, Alaris invested an additional $35 million U.S. into convertible preferred equity into Ohana. These units are convertible into common equity of the company and accrue a 14% yield, which will be paid in kind. Subsequent to the quarter, Alaris fulfilled its $10 million U.S. obligation to Cressa LLC, receiving additional preferred equity at 14% yield with 10% paid in cash and 4% to be paid in kind. Year-to-date, Alaris has invested approximately $139 million, including $71.5 million U.S. on follow-on investments into DNM, Shipyard, FMP, and Ohana, and a total of $30 million U.S. into new partner Cressa. With regards to our portfolio, it continues to perform well and has maintained a weighted average ECR of approximately 1.5 times, with 10 out of 19 partners continuing to be above this threshold. With regards to fair value movements, declining discount rates driven by risk-free rate movement resulted in increases throughout the portfolio, while partner results further amplified or offset these movements. Most notable in the quarter were Sonobello. Sonobello has been impacted by higher costs of advertising across the U.S. as a result of this election cycle and a decline in conversion rate, the conversion rate of patient consultations as they expanded to new markets. While these costs have impacted their EBITDA in the immediate period, they are believed to be temporary in nature and the longer-term forecast has been improved by the rollout of their contour division as they move into delivering a new service offering with breast augmentation. Total impact to the fair value of Sonobello, including the discount rate change, was $8.6 million U.S. or 5% of the initial investment. Amer's performance has been buoyed by strong consumer sentiment, which is expected to continue as the market realizes further interest rate cuts. Amer's recent financial performance and continued growth outlook has resulted in an increase in the expected 2025 reset of the preferred distribution, as well as increased the common equity value. These impacts, in addition to discount rate changes, resulted in an increase of $8.3 million, or 11%, as compared to the capital invested. For Heritage, the company is taking longer to return to profitability, with negative margin projects having a worse return than projected. We now expect that Heritage will not be in a cash flow position to support preferred distributions until 2025, and have extended the expected deferral period. As a result, the fair value of Heritage was decreased by 7.4 million US. The increase to Fleet's fair value was largely was largely driven by an increase to common equity. Fleece growth in both revenue and EBITDA, in addition to established long-term relationships with customers, alongside declining discount rates, led to an increase in fair value of $6.2 million U.S. SCR's revenue and EBITDA often swing greatly as they perform larger summer shutdown project work. Following the 2024 season and the resulting decline in revenue and EBITDA for the period, In addition to slower business development issues and a reduction in capital spending, we have updated our estimates to reflect these declining trends, resulting in the fair value of SCR decreasing by $5.5 million in the period. During the period, Ohana's common equity decreased by $6.7 million U.S., partially due to an increase in the preferred equity that sits ahead of common of $1.6 million U.S., and partially due to the payment of a common equity dividend, which was subsequently reinvested into convertible preferred. With relief to U.S. interest rates realized in the quarter, D&M is starting to see the anticipated recovery to lease volumes. This, coupled with the decline to discount rates, resulted in an increase to fair value of $3.3 million U.S. for both common and preferred units, resulting in a recovery of earlier quarter declines and a year-to-date increase of $1.7 million. Shipyards' year-over-year growth in the business, as well as the decrease in discount rates, resulted in an increase to fair value of $3 million US. Other less significant impacts to fair value in the quarter were driven by GWM, Axient, D&T, LMS, FMP, 3E, Edgewater, Sycamore, Cressa, and Cary. Of our 19 partners, 11 either have no or less than one turn to debt as compared to EBITDA, And our current outlook calls for $38.9 million of revenue in Q4, as fleet's distribution was received earlier than expected. Our 12-month run rate revenue of $171 million is up from last quarter's $163 million and Q1's $158 million, primarily due to higher common expectations. Our G&A outlook increased slightly to $17 million. And on that note, I'll turn it over to Steve for his comments.

Great, thanks Amanda and thanks everybody for tuning in. Obviously a significant quarter for us in terms of our common equity portfolio. Fleet continues to be a huge contributor to our overall returns. It's been a real home run for us and really highlights the impact of our common equity strategy. The OHANA dividend, as Amanda pointed out, was part of a recapitalization that we funded with our $35 million deployment. So the $5 million dividend from OHANA was actually our pro rata share of our own investment in those convertible prefs. So as such, we shouldn't consider that to be a recurring dividend from Wahana. And as Amanda said, the focus continues to be on organic growth, and they've been doing a great job of that. So all in all, just like owning Alaris units, the investments we have in our portfolio partners have a base of steady, safe cash distributions that offer optionality on the upside that makes it very unique and very desirable in its risk-return profile. At a high level, the portfolio continues to be very healthy. Amanda has given a lengthy synopsis of most of them, so I'm happy to answer any questions about the specific partners at the end of this call. But the nice thing is that our largest investments continue to be some of our best performers. I do highlight Sonobello, even though they did have some pressure from the election, as every large advertiser did in America. Their new offerings and the path that they're on in terms of new locations, new offerings continues to increase the value that we foresee for a targeted 2027 exit. Ohana, the Planet Fitness System has instituted their first price increase on their base memberships from $10 to $15. We're seeing a really nice impact from that. with extra revenue without a corresponding decrease in membership uptake. DNM, Fleet, Shipyard, all companies that are showing really, really positive signs in their businesses. So we have tremendous common equity optionality on all five of those large investments. So very happy with where we sit today. From a deployment perspective, the increase in deal flow that was expected in the US markets in the second half really has failed to materialize. But we have been efficient in the opportunities that have been shown to us. and feel very good about our deployment opportunities to finish out this year, new partners and funding growth capital for our current partners both. So, we feel good about where we're sitting. We have plenty of wherewithal on our balance sheet to fund the opportunities at hand. So, we feel very good about that. So, Didi, I'll turn it over to you and to anybody that has any specific questions.