Alaris Equity Partners Income 6 25 Senior Unsecured Debentures T.AD.DB.A

National Bank Maintain $23.50 target and Outperform rating

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Firing on all cylinders
Revenues were $34.9 million, slightly above guidance, our forecast ($33.8 million) and consensus ($33.1 million). Adj. EBITDA came to $32.2 million on 92.1% margins, well ahead of our $29.5 million estimate (87.4%) and the Street's $29.3 million call (88.7%). The EPU print of $0.65 beat both our $0.40 estimate and consensus of $0.48 due primarily to the $16.2 million increase in investments at fair value, partially offset by $4.5 million in unrealized foreign exchange loss.

Potential redemptions to fuel next leg of growth
Both Kimco and FED continue to explore a full or partial redemption of Alaris' investments. A redemption from Kimco would likely net Alaris US$60-70 million (on top of US$8 million in promissory notes and accounts receivable repaid in Q2/21), while FED's could yield ~US$80 million, freeing up dry powder for reinvestment and complementing the $28.7 million available on the senior debt facility today.

Q3/21 guidance calls for $37.5 million in revenues
Following Q2, PFGP resumed full contracted distributions as it is now on side of its senior lenders' covenants, and is expected to remain compliant going forward given strong trends in LTM results. As previously indicated, PFGP will begin catching up on deferred distributions in January 2022 at the latest. Alaris also outlines run rate revenue of $150.2 million over the next 12 months, factoring in an estimated $2.8 million in common dividends, resulting in a payout ratio of 60-65%. We calculate a payout ratio of 61% in 2021e and 60% in 2022e.

Maintain $23.50 target and Outperform rating
Following a record setting $400+ million deployed to partners LTM, Alaris has developed a diversified portfolio of 20 partners with earnings coverage ratios all above 1.2x, and no partner accounting for more than 10% of AD's revenue. Despite a 6.5% distribution increase to $1.32/unit annually, the company's payout ratio remains sub-65%, supporting an attractive 7.5% distribution yield. With the business firing on all cylinders, we reiterate our Outperform rating and $23.50 target based on a long-term DCF valuation using an unchanged 12.6% discount rate. W