Alaris Equity Partners Income Trust

Good day, and thank you for standing by. Welcome to the second quarter 2020 Earnings Release Conference call. At this time, all participants are in 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. 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, Livia. Good morning and thank you for joining us today to discuss our second quarter 2026 financial results. I'm joined on the call by Steve King, President and CEO. Before we begin, I'd like to remind everyone that all financial figures discussed are in Canadian dollars unless otherwise indicated. Please note that some comments made during this call may include forward-looking statements. These statements are based on current assumptions and involve risks and uncertainties, so actual results may differ materially. For more detailed information on the factors, assumptions, and risks involved, please refer to our press release issued last night and the management discussion and analysis under the headings Forward Looking Statements and Risks and Uncertainties, available on CDAR at cdarplus.ca and on our website. We will also be referencing certain non-IFRS financial measures, which may be presented differently than similar measures by other companies. Additional information and reconciliations related to these measures can be found in the press release and MD&A. Overall, Q2 was another strong quarter for Alaris. Reflecting the ongoing benefit of the capital we deployed over the past 18 months, we delivered partner revenue ahead of guidance, record net book value, strong growth in revenue, and Distributable Cash Flow, expanded the portfolio to a record 25 partners, and continued deploying capital into attractive new investment opportunities. There are four main takeaways this quarter. The first, portfolio income continued to grow. Total partner revenue of $50.6 million came in 5.6% ahead of guidance, including $49.9 million of partner distributions and $700,000 of third-party fees. Total revenue and operating income increased 25% compared to the second quarter of last year, while partner distribution revenue increased nearly 20%. On a year-to-date basis, total revenue and operating income are up 13%, with partner distribution revenue up 15% over the first half of last year. Preferred distributions increased 24%, reflecting contributions from investments completed throughout 2025, our investment in cubic during the quarter, and annual contractual distribution recess. preferred distributions are up 17% year to date, and the annualized yield on our preferred capital rose to 12.8% from 12.2% a year ago. Common distributions were below the prior year, largely a timing matter, as the second quarter is typically our lightest quarter for common distributions. Subsequent to quarter end, we received 14.8 million US of common distributions, which included a 13.8 million US distribution from fleet. Second, distributable cash flow continued to accelerate. Net distributable cash flow increased 42% compared to Q2 of last year, driven by higher preferred partner distributions, together with lower taxes paid by the acquisition entities. For the six months, net distributable cash flow was up 21%, even after absorbing the higher interest costs from our 2025 convertible to venture financing. Our payout ratio for the sixth first six months of the year was 58% compared to the 65% in the prior year period. Even after the recent distribution increase, our pro forma payout ratio remains approximately 59%, comfortably below our long-term target range of 65% to 70%. That continues to provide meaningful flexibility to fund future investments while supporting distribution growth. Third, the underlying value of the portfolio continued to increase. Net book value per unit increased another 52 cents during the quarter to a record 25.83 per unit. That brings the year-to-date increase to $1.04 per unit. For the quarter, the 52 cents was driven by 92 cents per unit of earnings and comprehensive income, including roughly 46 cents of unrealized foreign exchange gains, net of our 38 cents quarterly distribution. During the quarter, we recorded net unrealized fair value gains of 10.8 million, Fleet continued to perform well, contributing a $8.1 million US increase in fair value during the quarter, bringing the year-to-date increase to more than $18 million US. Cubic also contributed a fair value increase following its strong operating performance and backlog conversion during the first half of the year. These gains were partially offset by a modest fair value decrease at McCoy, reflecting a quieter storm season in the first half of the year. lesser movements across six other partners, rounded out the quarter. Year to date, we also realized a $4.9 million gains through partial redemptions, including 3E, which we covered last quarter, and redeployed that capital into the new investments. Earnings and comprehensive income also increased year over year, largely on that foreign exchange swing, a non-cash item that, as we've discussed previously, moves reported earnings without affecting the underlying operating performance of the business. And finally, we continue to execute on our growth strategy. During the quarter, we completed our $75 million investment in Cubic, and subsequent to the quarter end, we completed our $35 million U.S. investment in Tesco, together with other activity that brings total capital deployed in 2026 to $126 million, expanding the portfolio to a record 25 partners. The portfolio continues to perform well. Our weighted average earnings coverage ratio remains approximately 1.5 times, and 84% of our contractual preferred distributions come from partners with coverage ratios above 1.2 times. In addition, 16 of our 25 partners maintain senior debt at or below 1x EBITDA, highlighting the conservative financial profile of the portfolio. Looking ahead, we expect third quarter partner revenue of approximately $69 million, reflecting the seasonal concentration of common distributions in the third quarter. Our estimate run rate revenue for the next 12 months has increased to approximately $208 million, reflecting recent investments in contractual distribution resets. That marks a third consecutive increase from $200 million at the end of last year to $203 million at the end of the first quarter, and puts us approximately 14% above the $183 million estimate a year ago. We ended the quarter with $127 million of undrawn capacity on our credit facility, and our forward run rate pay ratio sits at 60 to 65%, both consistent with continued investment and distribution growth. And with that, I'll turn it over to Steve.

Great, thanks Amanda. Our second quarter showed gains in almost every meaningful category as record levels of investments that we've made over the last 12 months have started to contribute to our results. Amanda's already detailed the numbers, so I'll focus more on the deployment, both past and future. Our investment in Cubic during the quarter is really a perfect example of what makes Alaris so unique in the marketplace. A wonderful company that's been succeeding for 40 years had a large capital need to take out one of the founders who retired from the business years ago. In this case, it was the founder's younger brother along with the professional management team that were the buyers. With Alaris' preferred equity along with a small amount of common, the buyers were actually able to increase the percentage of the business that they own going forward and enjoy more of the upside, all while preserving the culture that they've built over the last 40 years. Because the buyout was negotiated between the two brothers, we were able to get in at a very attractive multiple. Between that valuation and the growth that the company has already displayed since closing, we're already sitting on a nice unrealized gain on our common equity portion of the investment. We are also proud to have added our 25th partner just after the quarter ended. $35 million US investment into Tesco, who's in the electrical metering industry throughout the US. Obviously, the entire electrical industry is a rapidly growing and popular place to invest with the massive growth in demand for electricity with electric vehicles and AI. So we're very pleased to add such a sought-after asset. I should say that almost all of these assets that we're adding are in extremely competitive situations. Tesco had actually dozens of bidders trying to get that deal. Looking forward, our deployment pipeline continues to gain momentum. Our team is busy working on several new partnerships as well as multiple follow-on acquisitions for our current partners. We expect the last five months of this year to be quite active in terms of both deployment and also potentially some exit opportunities that would crystallize some very good gains within our portfolio. I would be remiss if I didn't mention the continued success of our partner in Florida, Fleet Advantage. The management team there has done an incredible job of diversifying their customer base, winning incremental contracts. A common dividend paid out in July of $13.8 million U.S., bringing our total common dividends paid by fleet to over $50 million on an investment of $8 million is obviously a phenomenal story. While that kind of result is unusual, the combination of partnering with entrepreneurs who don't want to sell their business along with the capped nature of our preferred equity magnifying the returns on the common puts us in a very good position to experience these kinds of wins. With a common equity portfolio now of over $800 million providing significant upside, a base of over $200 million a year of low volatility revenue that stood the test of time over 22 years, a payout ratio that's below our 65% target, and access to both debt and equity markets, we're in a really excellent position to capitalize on our opportunities going forward. So, Olivia, I'll open it up to questions if there are any.

Thank you. Ladies and gentlemen, if you have a question at this time, as a reminder, please press star 1-1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A rosters. Our first question coming from the line of Matthew Lee with Canaccord. Your line is now open.

Hi, good morning. Thanks for taking my questions. Maybe just start with Tesco. The company does enter the portfolio at like a 1.0 to 1.2 ECR. Just give us some color as to what gives you comfort around underwriting at that level and maybe what's embedded in your expectations to the coverage to improve from here?

Yeah I think with Tesco and several companies in our portfolio where you're using historical data to report the ECRs, it also includes CapEx so you can have some is a great tool for kind of broadly gauging the health of a portfolio company, but it's, you know, some of those things can be discretionary and so it can be more comfortable than what it appears.

Okay, that's fair enough. So kind of growing into its investment. Maybe on divestitures then, you've had a couple of partial realizations now. Just talk about the current environment you're seeing for partner exits and what makes you confident that we'll be seeing activity in the back half of this year?

Yeah, it's a good market, particularly for kind of the older economy, more steady required service businesses that we specialize in. As I think I mentioned last quarter, we've seen a real shift in the private equity marketplace away from SaaS companies and things that could be negatively impacted by AI and kind of a greater interest in our types of companies. We think it is a good market. Obviously, any sale process is a lengthy one. Typically, you're looking at about six to nine months from start to close. So we do see some companies in process and seem to be doing well. So that's what gives me the confidence. All right.

Thanks for the call. I'll pass the line.

No problem. Thanks, Matt.

Thank you. Our next question coming from the line of Gary Howitt, Desjardins Capital Market. Your line is now open.

Thanks. Good morning. Maybe first question. Yeah, Steve, just on the deployment side, so I mentioned 126 million deployed so far this year, and you handed a very robust second half pipeline. So at what point do you need redemption proceeds or other capital to sustain that historical annual pace?

As mentioned by Amanda, we've got 126 available, so anything over that will require either redemption proceeds, equity, or expanding our debt. As I mentioned, I think we have all three of those options available to us in the short, medium, and long term, so we're very comfortable with where we're sitting. In our 22 years, we've never... We've never said no to a deal because of not being able to raise the money, and I'm probably more confident about that now than I ever have been.

Okay, great. And then I think you mentioned for Tesco there were a bunch of other competitive bids. Maybe go back and kind of chat about what makes your bid successful, kind of what you offer and bring to the table in this one, or is it pretty much the same versus kind of historicals?

It's a recurring theme. For 22 years, the entrepreneurs that choose us are ones that don't want to sell their business. They want to keep more of the upside because they believe in their business and believe that the returns of their business is better than anything else they can do with capital. So when we... When we get a package from an investment bank, it always has a fancy five-year forecast to it, just like everything that you guys see in the public markets too. We'll do a side-by-side model that shows if they hit their numbers over that five-year period, here's what their equity is worth today versus what they could do by selling the company today. You know, typically those models show a pretty massive win for the entrepreneur if they choose us because most of the capital we're putting in is in the form of the preferred shares, which are capped in their annual growth, capped on the exit. So if someone believes in their business, they will choose us. If someone would rather maximize proceeds right at, you know, this transaction, then they'll choose somebody else. And that's what keeps us out of trouble. If someone doesn't believe in their numbers, they're going to choose somebody else If they do believe, they choose us, and I want to be invested in people that believe. So it's been the same for 22 years.

Okay, great. If I can sneak one more in, just on the ECR, I did see a handful of ECRs kind of take down in the quarter. Maybe you can just talk about the two larger ones, DNT and Ohana, and when do you expect them to revert higher?

Do you want to talk about DNT?

Yeah. I would be surprised that D&T ticked down.

Both companies are doing well, Gary. D&T continues to excel. They've come up a record year. Ohana, we've talked in the past about that click-to-cancel situation with their head office. did kind of have an impact on memberships in the short term, but we're seeing no issues there. Neither of those companies are in even close to any form of jeopardy.

Okay, great. Okay, those are my questions. Thank you.

Thanks, Greg.

Thank you. Our next question is coming from Delaina. Jeff Fenwick with ATB Cormac Capital Markets. Your line is now open.

Good morning, everyone. And I think Gary kind of took a bit of my question there because we did see the ECRs tick down on a number of them, which is sort of the first time we've seen that, I think, in a few quarters. So it sounds like things are still generally good. But are you seeing any change just in the overall market in the U.S. or anything there that might be accounting for that? Or are these just maybe things at the margin in terms of some of the movements within these individual businesses that would account for that difference?

Yeah, we were going through this with the board yesterday and really what we're seeing is pretty broad strength in the U.S. economy, but there are some regions within the U.S. that are doing better and worse than others. We've got a couple of our portfolio companies in the Boston region. and that region seems to be soft. There's a few things that have happened politically within Massachusetts that have led to kind of softer demand, especially on kind of construction related activities within the Boston area. So we've seen some kind of geographic things like that and in a portfolio that's diversified as well as ours is, you are gonna have different pockets here and there. Geographically and industry related that'll be going up and down at various times. That's all we're seeing, Jeff. I'd say as a whole, there's pretty broad strength in the U.S. market from what we see in the numbers from our companies.

Okay. And you had a couple of partners that have been deferring payments. Maybe just any update there. I think about GWM, actually both GWM and FMP, there was some something at your end that you might see some recommencement of payments over the course of the back half of this year? Where does it stand?

GWM paid us in July but they are kind of right on that edge with their bank covenants so we expect kind of off and on payments from GWM throughout the rest of this year and hopefully full in 27 and catching up on the amounts that they've deferred as well. They are current in July but we do expect some hiccups there from month to month with GWM. FMP is growing so they are paying us what we what we set them out to pay in this year. They're paying that in full. And then as they kind of build back their business, which definitely is happening, that number will get bigger and bigger until they get to their full amount. So we're kind of easing our way back to full payments with FMP as they recover from the hit they took from the DOGE process. And yeah, as I mentioned, there's several of their contracts that were completely cut under DOGE that have now come back. And so we're seeing some good progress there.

And maybe one last one here. I know it was quite small, but there was a redemption from Ohana. Sounds like maybe it was some sort of side vehicle or something that wasn't part of the core shareholder group. Any color there and thoughts on that?

Yeah, so our group... Victor and Lynn Brick, who are the founders of Ohana, one of the best-known entrepreneurs in the fitness industry, and they were one of the first Planet Fitness franchisees, they were approached to be a part of a group that would start up Planet Fitness Australia. So we became a part of that with them, and that business grew nicely over the years and It was just sold, so our interest in Planet Fitness Australia was sold, and I think we more than tripled our money on that one, but it was obviously a very small, kind of immaterial investment, but still a nice little win for us.

Okay, that's great. That's all I had. Thank you.

Thanks, Jeff.

Thank you. Our next question, coming from the line of our director with RBC Capital Markets, Yolanda Salvin.

Great, thanks, and good morning, everyone. I wanted to ask around the partner revenue, strong numbers, strong momentum. You're tracking 6% ahead of guidance, and it sounds like your outlook is pretty constructive. So I'm wondering what's holding you back from increasing the guidance on that? Thanks.

Sorry, can you just say that one more time? I missed it. the partner revenue is tracking 6% up ahead of guidance and it sounds like you know you're feeling pretty constructive about the outlook and so I'm just wanted to confirm like what's holding you back from increasing the guidance well we did increase our guidance this quarter some of the beat and guidance was driven by the foreign exchange rate so you know as that moves from quarter to quarter there's some Delta that's created there yeah what will also

Always be conservative on common equity dividends because they are discretionary for each company, whereas the PREF distributions are structured. It's a pretty common trend. I think we've beat our guidance most quarters.

Okay, that's helpful. And then on the fleet distribution, nice to see that coming in post-quarter. Is that the run rate we should think about over the next couple of years? And then maybe just unpack a bit more detail around the fleet fair value write-up and how you're thinking about that portfolio company longer term in terms of potentially monetizing it. Thanks.

Yeah, so fleet, you know, it is quite a stable business. As I mentioned, they've done a really good job of adding new customers and contracts. So we do see that ongoing. Income Trust But if something like that did happen and the board decided not to pay out the same percentage of their earnings as they currently are, then that could change it. But yeah, I think that level is sustainable. As for the long-term outlook, we do have an entrepreneur that is in his late 60s. So I think that one is one that we do see changing hands over the next little while. but obviously with the amount that they're paying us each year, we're not in any big hurry and neither is Brian. But yeah, certainly within the next couple of years, I would definitely see Fleet selling if the right option came around.

Great, thanks. And if I could sneak in one more, just on Cubic, nice fair value right up there. It's a recent investment, so maybe a bit earlier than expected, but could you unpack what drove that fair value increase? I apologize if I missed it earlier. Thanks.

Yeah, I did cover that earlier where we got in at probably a below market valuation on cubic. And so that combined with pretty significant growth actually from the time we We first signed that deal to this current quarter is what spurred on that increase.

And then that growth has sustained their current forecast and backlog supports an ongoing business at that level. So, you know, that did factor into the DCF on that one.

Great. Very helpful. Thanks for taking my questions.

Thanks, Bart.

Thank you. And again, as a reminder, to ask a question, please press star 1-1. Our next question in queue coming from the lineup, Nathan Poe with National Bank of Canada. Your line is now open.

Morning, guys. Thank you for taking my question. My first one is going to be on the run rate payout ratio. You guys are pretty comfortably below the 65 to 70%. What are your thoughts right now on a dividend hike?

I think for us, we do want to stay conservative. As I mentioned, GWM is kind of off and on, so we take a very conservative view on that in our internal analysis of where we should be. Throughout our history, we've done dividend increases on Income Trust Income Trust

We do discount the common portfolio just because it isn't contracted and the repeatability of it year to year. We do want to leave some room for flex there. The other thing that's weighing into the payout ratio, especially this quarter, is just the higher exchange rate on our U.S. income. So when we're looking at that payout ratio, we're really looking at it with a long-term view of sort of where that FX rate we think is well set.

Okay, thank you. That's very helpful. And could I just get some more color on the Tesco transaction? What was the specific catalyst for that?

With Tesco, it was a partial liquidity event for the shareholders that had been in for a long time. And that's fairly common. You see across the US so many good private companies that have been around 20 to 40 years where the entrepreneur has literally 100% of their net worth in a private entity. and they're looking to diversify a little bit. But the ability to do that on a personal level but still keep control of the business when they have a lot of runway ahead of them is just a super attractive option for an entrepreneur that really before us didn't exist. You're either going to sell or you're going to stay. And this is kind of that in-between option where you can diversify your estate and keep your business. So that's what spurred that one on.

All right, thank you for the color. And moving back to your hot deployment pipeline, would you be able to kind of characterize and break that down into deployments into new partners and deployments into existing partners that may need incremental financing for growth or acquisitions?

Yeah, the vast majority of it is in new partners. We have four or five of our current partners working on acquisitions, but most of them can do those acquisitions on their own without additional capital from us. There's probably two out of those five where we'd be putting in some amount of prefs. The rest would be able to do it off their own balance sheet and with equity rolling from the sellers. So, yeah, the vast majority of our pipeline is in new partners, which is great for diversification.

All right, that's great to hear. And just one last one on the shipyard. What's the status on that and the recouping of business after the customer loss?

Yeah, shipyard is doing well. This is a very experienced management team. And so you are going to have in that business from time to time someone shifts advertising agencies. Excuse me. So, yeah, they're used to that. They've got a long track record of adding customers. They're doing so. They're actually one of the companies looking at an acquisition right now that would be very accretive for them. So, yeah, Shipyard continues to be a very solid investment for us.

All right. Thank you. I'll turn it over. Thanks, man.

Thank you. Our next question coming from the line of Trevor Reynolds with Acumen Capital. Your line is now open.

Hey guys, most of my questions have been answered, but just on the Tesco, are you expecting common distributions on that one?

On Tesco, yeah, we are actually. So it seems the vast majority of the deals we've just done and are looking at will have a common equity dividend attached to them right away. Obviously, not structured or anything like that, but companies that will just have excess free cash flow that have a track record of paying out common dividends and You know, given that the owners, you know, that's still, you know, a big part of their income every year is dividends. They want that to continue on post-close, and we obviously get our pro rata share of that. So, yeah, I would say Tesco and others will have common to them. We don't include that in our run rate, though.

Got it. And then just on the pipeline issue, Your historical five-year average is just over $300 million. Do you still think that's an achievable level for this year?

I do. Yeah, I do. I think we'll beat that.

Great. That's all for me. Thanks. Thank you.

Thank you. Our next question coming from the line of Stephen Bullen with Raymond James. Your line is now open.

Thanks. I'm a little late to the party, but I did hear your comments, Steve, on leverage that you still have $127 million left on your line, but you're at 2.4 times, the maximum is 3. So how close do you want to get to that 3 if an attractive deal comes in? I presume you don't want to be at 2.9 and get into those discussions with your lenders.

Yeah, we have a lot of flexibility within the syndicate, especially, you know, as we're maneuvering bridging to redemption. So I don't expect that, you know, with line of sight to future redemptions in the quarter that we would have any trouble, you know, negotiating, you know, accessing the accordion feature within that facility or negotiating, you know, a short-term extension if the right opportunity comes along.

Given the quality of our cash flow, our debt syndicate is obviously very keen on funding us. If we needed a bridge from time to time, they've expressed a desire to do that. It's just a matter of balancing it, as Amanda said, based on what we see out there for exits and redemption. So I think we're in a good spot.

And I should say we don't forecast going offside of that 3% covenant with anything that we're looking at doing. Yeah.

Okay. That's great. That's all I have. Thanks, Dave.

Thank you. Nancy, we have a follow-up question from Nathan with National Bank of Canada. Your line is now open.

Hey guys, thank you.

Sorry, just one last housekeeping one.

How much common dividends are included in your run rate revenue estimate, if you don't mind, other than the $20.4 million that you're expecting in Q3?

Well, for the total year?

Yeah, next four months.

It should be around $25 million. If you're looking... 12 months out, it probably drops down a bit to about 16, 17 million, just a more conservative, you know, fleet distribution for the year 2027 in that TTM forward. But to finish the year, we would expect to be 2026, sort of around that 25 million.

Thank you. A number we always plan to beat for sure.

Thank you. And there have been no further questions in the Q&A queue at this time. I will now turn the call back over to Mr. Steve King, President and CEO, for any closing comments.

Great. Thanks, Livia, and thanks, everybody, for tuning in. Obviously, we're excited about our record quarter. We expect more to come, and it's really gratifying to see the momentum pick up really throughout our business from from deployment to exits to the performance of our portfolio. So we're excited to report back for Q3 next, and as always, please feel free to reach out to Amanda and I if you have any further questions. Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.