Alaris Equity Partners Income Trust

Welcome to the Alaris Q4 2024 Earnings Release 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 speaker today, Amanda Frazier, Chief Financial Officer. Please go ahead.

Thanks, Deedee. We appreciate everyone taking the time this morning to join us. And I'm joined on this call with Vice Chief King, President and Chief Executive Officer of Alaris. Before we begin, I'd like to remind our listeners that all emails given are in Canadian dollars, unless otherwise noted, and our caution that comments 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 in MV&A under the heading 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 and MD&A for clarification regarding non-IFRS measures. Also, as discussed the last few 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 SPV investments, such as Sonobello and now Ohana, Alaris determined it met the requirements of an investment entity under IFRS 10, and as a result, no longer consolidates its investment entity subsidiaries into its financial results. This method of accounting has had a pervasive effect on the financial information on the phase of the statement. Accordingly, users should exercise caution in reviewing, considering, and drawing conclusions from period-to-period comparisons and changes. Direct comparisons between dates or across periods may be inappropriate or not meaningful if not carefully considered. With regards to the Q4 highlights, net book value increased $1.42 per unit to $24.22, which brings the 12-month increase in net book value to $3.10 per unit, and is in addition to $1.36 of dividends for a total return on book value in the year of $4.46, or 21%. This increase was driven by both growth in revenues received from partners, including common distribution. as well as increases to the fair market value of ALERIS's portfolio and rising foreign exchange rates. ALERIS's partner distribution and transaction fee revenue for the quarter of $46.9 million was ahead of previous guidance of $38.9 million and Q4 2023's $41.9 million. This was driven by a collection of LMS's deferred distributions from 2023 and the pick amounts from OHANA's convertible preferred units, which we acquired in Q3 of 2024. Partner distribution and transaction fee revenue for the year of $194.2 million was ahead of prior year revenue of $162.6 million primarily as a result of new and follow-on investments as well as higher common distributions. Common distributions in 2024 were 170% higher than 2023 and represent a 20% cash yield on the common portfolio. Alaris's acquisition entities realized gains on partner investments of $40.1 million or $0.88 per unit in 2024 as compared to $13.5 million or $0.30 per unit in 2023. These gains were realized on the redemption of Brown and Settle, Unify and Stride, as well as the exchange of units in the Ohana during the AUM transactions. Due to their non-recurring nature, these gains are not included in Alaris' net distributable cash flow and would further decrease the payout ratio if included. Alaris' net distributable cash flow for 2024 increased by 42% to $130.4 million, or $2.87 per unit, from $91.6 million, or $2.02 per unit, in the same period of 2023, after normalizing for the prior year's one-time litigation costs. resulting in an actual payout ratio for the year of 48%. Since converting to the trust in 2020, Alaris' tax profile and distribution changed from being 100% eligible dividends to a combination of return of capital, eligible dividends, capital gains, and interest income. Consistent with the prior year, the effective tax rate on Alaris' distribution for Alberta individuals in the top tax bracket of 2024 was 22.5% as compared to 34.3% for a dividend received from a corporation, providing both a tax deferral as well as an overall savings as compared to a corporate dividend. With regards to the portfolio, our portfolio continues to perform well and has maintained We averaged VCR approximately one and a half times, with 10 of our 20 partners continuing to be above this threshold. Of our 20 partners, 13 have either no or less than one turn of debt as compared to EBITDA. With regards to fair value movements, increasing discount rates driven by risk-free rate movements resulted in decreases throughout the portfolio, while partner results further amplified or offset these movements. Most notable in the quarter, Sonobello has been impacted by the higher cost of advertising across the U.S. as a result of the election cycle and a decline of the conversion rate of patient consultations. As they expand in new markets, while these costs have impacted 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 new service offerings with breast augmentations. The total impact to the fair value of Sonobello, including the discount rate change, was a decrease of 7.3 million US. But for the year, Sonobello's fair value increased by 4.1 million US. Heritage is taking longer to return to profitability, and we now expect that Heritage will not be in a cash flow position to support preferred distributions until 2026, and have extended the expected deferral period. As a result of the fair value of Heritage, As a result, the fair value of heritage was decreased by $2.8 million U.S. in the quarter. The increase to fleet's fair value was largely driven by an increase to common equity. While fleet's revenue and EBITDA were down year over year, they are forecast to pick back up in 2025. This, along with reductions in debt from cash generated by the business, led to an increase in the fair value of $2 million U.S. And for the year, fleet's fair value has increased by $10.5 million U.S. During the period, Alaris closed its second AUM transaction, exchanging 127.8 million US of existing investment in Ohana for 59.7 million US of convertible preferred equity and 70.3 million US of common. Growth in the business, as well as increases in EBITDA from the time the transaction was negotiated until the time of closing, drove an increase of 12.2 million US to fair value in the quarter. Our anticipated aggregate partner resets are expected to be an increase of 4.9 million or approximately 5 million in 2025. Positive resets are expected from 10 of our partners with negative resets from two partners and seven partners who will not reset this year. Our current outlook calls for 42.5 million of revenue in Q1 as a result of consistently higher than expected common distributions during the year. as well as positive resets on the preferred portfolio. Our 12-month outlook for revenue has increased to $187 million, up from last year's $171 million, and includes $19.4 million in expected common distribution. G&A outlook increased to $18.5 million from $17 million previously, in part due to increasing FX rates, but remains at 10% of revenue, consistent with prior periods. On that note, I'll turn it over to Steve.

Great thanks Amanda and thanks everybody for tuning in. Obviously an excellent ending to our record year for our company. In Canadian dollars we now manage almost $1.6 billion of investments of which more than a third have full common equity upside. We also get a portion of the eventual profits of another $750 million Canadian of third party capital that we manage. So this gives our shareholders significant option value on future investment gains in addition to the lower risk structured preferred equity that forms the basis of every deal we do. Adding that optionality over the last five years hasn't come at the expense of keeping our well-covered dividend for our shareholders, as shown by our distributable cash payout ratio being below 50% for the year just ended. In previous communication, I had indicated that our target for payout ratio would be roughly 65%. Given where we are now, it's a fair question to ask if we'll be increasing our dividend. In analyzing our business over the coming years, we believe that we'll be in a great position to use future exit returns to buy back significant amounts of our stock with the proceeds. As such, it makes sense to have a consistent excess cash strategy and also use our monthly free cash flow to buy back stock as well. We have been active buyers to start this year and have budgeted to spend a monthly amount on buybacks that will put us roughly at the 65% payout ratio for the year and then use exit proceeds to buy back extra amounts when they happen. The impact on our book value per share when we can drive net asset value growth as we have been showing for many years while also reducing the shares outstanding is significant. Obviously, this strategy changes if we end up trading above book value, which is $24.22, but we'll evaluate that when it happens. Another topic that should be discussed is the impact of potential tariffs, U.S. government spending cuts, and a possible recession that could come from those actions. As is the case with the Great Recession of 2008, COVID crisis of 2020, and all the economic turbulence in between, Alaris has built an investment model that is uniquely insulated from any of these factors. Specifically with tariffs, Alaris is 90% invested in U.S. companies doing business strictly in the U.S. They are all service-based businesses and they do not rely on goods and materials that are imported or exported. On the doge reforms that are being enacted, we do have one of our 20 partners that could experience a business disruption from that FMP. that's a human resources consulting company with long-standing government contracts. This is an extremely well-run company with no debt that's been operating in Washington for 35 years, and while we do think that there is some short-term risk to some of their contracts, we have no concerns for them in the medium and long term. From a recessionary standpoint, we're still well-positioned with required service businesses that have little debt and long track records. Operators that own the majority of the businesses are always the best partners to have, and especially when times get tough. On the positive side, we get 90% of our revenue in US dollars, so an environment where Canada suffers due to tariffs would sadly but actually be a tailwind for Ilaris financially as we're seeing today. Finally, on the outlook for 2025, we currently have one of the best pipelines of potential transactions that we've ever had. In addition to just seeing some good opportunities to start the year, the relationships that we've formed with large asset management companies that would like to partner with us going forward has allowed us to look at larger deals and deals that need more common equity than what we've historically been able to do with just our public capital. Having these funds as co-investment partners in the future will be important to grow the business even faster and will give our shareholders more optionality as they get returns on other people's capital. So Didi will throw the phone lines open to questions if they have any.