Alaris Equity Partners Income Trust (ADUN) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Alaris Q3 2025 Earnings Release Conference. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Amanda Frazer, Chief Financial Officer. Please go ahead.

Thank you, Tanya. Good morning, everyone, and thank you for joining us today to discuss our Q3, 2025 results. I'm joined on the call by Steve King, our 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 risk factors available on SEDAR @sedarplus.com 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 the MD&A. With that out of the way, let's turn to the highlight. Alaris delivered a record quarter in Q3 2025, underscoring the consistency of our model and the strength of our partner portfolio, we achieved strong fair value gains, solid recurring partner distributions and expanded our long-term revenue base through capital deployment. Net book value per unit increased 6% from last quarter to $25.10, a record high reflecting $1.90 per unit of earnings and comprehensive income, another Alaris record, which included a $0.41 per unit foreign exchange recovery, partially offset by the $0.34 quarterly distribution. Year-to-date, NCIB repurchases added approximately $0.06 per unit as we repurchased and canceled 465,000 units at an average price of $18.87, enhancing per unit value while maintaining balance sheet flexibility. Total revenue and operating income rose 7.8% compared to Q3 2024 supported by a $47.9 million net unrealized fair value gain across 9 investments, offset by a decline in 2. These fair value adjustments are noncash, but they reflect the underlying earnings growth and continued value creation within our partner base. Partner revenue exceeded guidance coming in at $58.1 million, which included $57.4 million in distributions and $700,000 in management and transaction fees. Fee increase was driven by new investments McCoy and follow-on in Carey, as well as higher-than-expected common distributions. Preferred distributions increased 7.3% in Q3 and 6% year-to-date, totaling $40.7 million and $120.8 million, respectively. While common distributions were, as expected, lower year-over-year. Notably, fleet's $10.3 million common dividend this quarter versus USD 14.7 million last year. The annualized yield on preferred capital remained strong at approximately 12%, highlighting the portfolio's continued ability to generate steady cash flow. Total return on invested capital was 6.6% for the quarter and 13.3% year-to-date, reflecting both strong reoccurring cash yields and improved valuation. Alaris' net distributable cash flow decreased 26% in Q3 and 14% year-to-date, largely due to the notable variability of common distributions, the timing of cash tax payments and transaction costs. Underlying portfolio cash generation remains solid and in line with expectations. Our payout ratio was 48% for the quarter and 50% year-to-date, both below our target range of 65% to 70%. Since conservative level provides flexibility to fund reinvestment and debt repayment, while sustaining unitholder distributions. Alaris generated free cash flow after distributions of $21.9 million in Q3 and $38.9 million year-to-date prior to the NCIB repurchases. In the quarter, we deployed $32.2 million including an initial USD 27 million investment in McCoy and a USD 5.2 million follow-on investment in Carey. Subsequent to the quarter end, we invested an additional USD 20.5 million into Cresa supporting their strategic acquisition. These deployments bring total capital invested year-to-date to approximately $228 million, reflecting continued demand for Alaris' Capital Solutions. Our portfolio fundamentals remain strong, with the majority of partners continuing to deliver year-over-year revenue and EBITDA growth. With a weighted average earnings coverage ratio of 1.5x and 13 of 21 partners maintaining either no debt or less than 1x senior debt to EBITDA, emphasizing strong balance sheets and stable earnings coverage. Looking forward, we expect Q4 partner revenue of approximately $43.5 million. This includes our previous estimate for FMP, although we continue to evaluate the impact of the ongoing U.S. government shutdown. FMP remains well positioned with a surplus of cash on the balance sheet and undrawn senior credit facility. The guidance also reflects lower expectations for GWM, while we continue to evaluate the longer-term impact to the 12-month cash flows and the navigation of GWM's banking covenants. And on that note, I'll turn it over to Steve for his comments.

Great. Thanks, Amanda, and thanks, everybody, for tuning in. Obviously, very pleased with our record quarter that we've just published. As you can see, our portfolio is larger, more diversified and performing better than it ever has in our 21-year history. We've added another $1.50 in book value. Our coverage ratios remain near all-time highs. Debt levels remain extremely low and the nature of our businesses have been largely unaffected by tariffs or inflationary pressures. Having 19 out of our 21 partners performing at or above the expectations is exceptional for any private equity portfolio. Our payout ratio, even with the announced dividend increase remains below our target, leaving more upside for dividend increases in the coming year. Deployment outlook continues to be extremely vibrant. Alaris will shatter our previous record for deployment in this calendar year, and the outlook heading into 2026 remains very strong. Our unique structure, which delivers the majority of our return and low volatility cash payments allows us to be more confident and successful in environments, where traditional private equity, which relies on high debt levels and buoyant exit multiples are retreating. 2026 also promises to be a year, where some of our planned exits are scheduled to begin Alaris investors are already seeing the outsized returns coming from our common equity positions in our book value increases, and we expect to display some crystallization of some of these positions over the next 12 to 26 months and those won't just further grow our book value, but it will also be a huge part of funding our continued deployment into new quality companies. So Tanya, I'll open it up to questions, if you want to take them right now.

[Operator Instructions] And our first question will be coming from Gary Ho of Desjardins Capital Markets.

Maybe just starting off with the Edgewater. It's just pretty sizable USD 18.5 million fair value gain. Maybe can you give us an update on kind of some of the contract wins? How does the rate reset look? I know anything nuclear-related trades at a pretty healthy multiples today? Just wondering how you're evaluating the equity piece of that business.

Yes. In the quarter, the contract win definitely played into the increase in value. Also, there was a decrease in the discount rate for that company. It's grown substantially since we initially invested. And with its continued growth in this contract, the business is now triple what it was when we initially invested. So that played into the company's overall discount rate as well as this increased outlook with regards to the contract. Also reset expectations on the press were updated this quarter and that played some role in the go-forward cash expectations and valuation on the preferred shares. I don't know, Steve, you'd like to expand?

Yes. I mean the contract that they won was very much a transformational win for them. This has already been a very successful investment for us, but this new contract has taken that to a much higher level. And there's another contract that they are getting on that would be even larger than that, actually with the same group. So you're right, Gary. I mean, the nuclear space is a great space to be in, both from a defense and from an energy perspective. So it is a very hot space for private equity trading at very high multiples. And with the growth rate that Edgewater is putting up here, and this would be a very, very sought after asset when it eventually does transact.

Okay. Great. And then on the flip side, I just wanted to hear some comments on the GWM. It sounds like they're impacted by lower ad spending environment in the U.S. Can you provide some maybe outlook for when the turnaround could be? And any debt in that business? Just remind us.

Yes. So I actually spent a day with GWM at their headquarters this week. So I'm pretty fresh on what's happening there, and they remain a very confident group -- they believe that they will pay us in full in 2026. And there have been some -- some pretty fundamental changes in that industry. So macro changes in addition to the economic environment, which you noted, just in the programmatic media space, there's been a few new entrants, including Amazon that has disrupted the space and made people change their patterns. So GWM is very confident that they can kind of adapt to the new environment. They've got a very good backlog of new contracts. And it's really cementing those contracts and continuing to add, but they do have some debt on their balance sheet, not a ton, but they do have some debt. So that always makes us more conservative, when we're dealing with these things in our book value and in our guidance. But certainly, kind of the feeling from GWM management is that they'll be able to pull through this.

Okay. Great. Maybe I can sneak 1 more in. Steve, it's good to see the recent capital deployment into a new partner and some follow-ons as well. How is the pipeline looking as we kind of sit here today, timing-wise as well, how far along in some of these could you look to transact?

We're very far along in more transactions before year-end. So we do expect to be busy. That's why I made the comment about shattering our previous records. Those are very close by. In terms of McCoy, a new partner, they are a roofing company out of Omaha, Nebraska. Obviously, Nebraska being in the storm belt in the U.S., particularly Hail. So being a roofer in that market is very lucrative a normal roof will last about 20 years in Nebraska. It lasts about 7. So great young management team that is hungry and growing quickly. We've got the best reputation for ethics and how they treat their customers in the market. So we're very proud to be partnered with them, and they're super excited to keep growing. I think this 1 will see not just organic growth, but acquisition growth as well. And once you get up to a critical mass of size, that kind of a company is also going to trade at a very nice multiple.

Okay. And then just the dry powder at the quarter end, is it roughly USD 150 million out of McCoy?

Yes, I think, we're at about USD 160 million.

Okay. And our next question will be coming from David Pierse of Raymond James.

Just on GWM, is your increase on core run rate revenue in your 12-month outlook for them? Or is there some...

So we've reflected that there's -- we have our expectations in the payment or in Q4 we continue to evaluate what the additional 9 months will look like. Our expectation is there would be some level of payment over the 12-month period, especially in that later 9 months, first 9 months of 2026, but we continue to work with the company and the lenders to evaluate what that looks like.

Yes. My sense from talking to them is that they may need some short-term flexibility in terms of kind of paying in -- kind for partial amounts for a couple of months. But we'll see how it plays out. But as I mentioned, they do expect to pay in full for the year.

Okay. That's helpful. And then -- to increase the distribution -- last one. I'm curious, what's the change in rationale behind the capital allocation? Obviously, that's the first distribution increase we've seen a few years. So just your thoughts on that.

Yes. We're not ruling out more share buybacks. I think, as I mentioned, we're going to likely see some exits in the coming months, and that will put us in a position to buy back more shares. But we're growing quickly. Our cost of equity is not keeping up with the lowering cost of debt and not keeping up, quite frankly, with the fundamentals of our business. So we thought it would be prudent to increase the dividend at this point. And if you look back at our trading history as a public company, we've always traded above book value until post COVID and pre-COVID we had a very, very set dividend growth strategy. And so, we're going to get back to that and see if that can help the cost of our equity because with our growing deployment. You look out down the road, there may be a situation in the next year or 2, where we might have to raise some equity. And I think having a higher share price and a growth multiple attached to us like we've had in our past is prudent for our investors, if we can -- we can keep on growing as we can, and that's absolutely my expectation.

We've always been committed to increasing the dividend with our growth proportionate to our cash flows. And with -- even with the NCIB, we would remain below that 65% to 70% target. Having our payout ratio dip below, I think we're at 40-some-percent for the quarter, even lower as we continue to grow, just was not in line with our overall business strategy.

Helpful. And then maybe if I can 1 more. Sono Bello, I think stopped paying in time this quarter. It looks like cash flow has improved. What's driving that? Is that better expense management or demand starting to recover a bit?

Sorry, could you just repeat that?

Just on Sono Bello, I think they stopped paying in time this quarter. Cash flow has improved. Just what's driving that? Is it better [indiscernible] coming back? Just your thoughts there, please?

Yes. Sono Bello is doing extremely well. They're well above budget in the last 6 months and setting records. There are new Contour division, which is the breast augmentation that is added on to liposuction and skin tightening and tummy tuck is now doing better than expected. So yes, very good tailwinds there with Sono Bello, and we expect that to continue.

And our next question will come from Zachary Evershed of National Bank Capital Markets.

Is that -- as we get close to the end of 2025, you're looking at shattering the all-time record for deployments, how are you thinking about deployment guidance for next year, though?

Yes, almost impossible to say. I mean, all I can tell you is that the environment right now has probably never been better. There's a few factors for that. As I mentioned, traditional private equity is in a very kind of tempered place right now, I guess, we'll be saying it nicely. They're not aggressive. A lot of them are having a lot of difficulty raising capital. So we're seeing them having retreated a little bit multiples are a little more same. And the other factor is you'll see us do some Canadian deals here for the first time in 6 or 7 years. And I would also say that the political environment has led to some very good Canadian companies referring to deal with other Canadians. And we're quite proud to be adding some Canadian partners we're proud Canadians. And obviously, that hit home with us. So a few different different things. But in terms of next year, we only have about 3 months of visibility on our deployment. So I can tell you the next 3 months are extremely good, probably the best in our history. But after that, it really will depend on what kind of opportunities we decide to pursue after that. But I'll add on to that because our portfolio is growing. We're just going to have more follow-on deployment as well in '26. We do have several companies that are acquisitive. So I believe that part of our business will continue to grow as well.

Happy to hear it. And then for FMP, you guys previously made reference to about $1.2 million in distributions in the run rate. What's the plan for them these days?

The $1.2 million of distributions remains in the run rate. We collected a small amount of distributions in the quarter from FMP. With the government shutdown, we both concluded that it would be prudent for them to just hold on to that capital until the government opens back up and contracts are back up and running. So we don't expect a change to expectation at this point, but we continue to evaluate how long and the impacts of the government shutdown on both FMP and broader.