Alaris Equity Partners Income 5 50 convertible unsecured subordinated Debentures T.AD.DB

RBC Raise Target

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Alaris Equity Partners Income Trust (TSX: AD.UN)

Rating: Sector Perform $17/unit (was $16)

Our thoughts heading into 2024

While Alaris’ overall portfolio health unsurprisingly weakened during 2023 given the softer economic environment, we think Alaris’ larger and more diversified portfolio should help it perform better than before in a more challenging economic environment, but still recognizing it is not immune should economic conditions worsen. We think greater clarity regarding the macro environment is likely to be the key driver of Alaris’ unit price in 2024. Things we are focusing on for 2024:

•  Investment portfolio health: Alaris’ weighted-average earnings coverage ratio (ECR) declined significantly in 2023, but is still in line with its 10-year average. To the extent economic conditions weaken further, in addition to a further decline in the ECR, it could also result in negative fair value marks; possible distribution deferrals from investee companies; and/or lower distribution re-set rates from investee companies for 2025 (and vice versa).

•  Capital deployment: Alaris was active in 2023 deploying capital, even despite a significantly higher interest rate environment and weaker economic conditions. Given the continued higher cost of debt funding, this could make Alaris’ investment solution relatively more attractive for companies and allow the Company to remain active deploying capital.

•  Further progress on its 3rd party asset management strategy: Alaris’ transaction with Brookfield regarding Body Contour Centers announced in February 2023 was the first development regarding Alaris’ 3rd party asset management strategy. We don’t think upside from asset management is included in Alaris’ unit price, so any positive development could provide incremental valuation upside, although we think valuation upside may not be realized until there is more tangible evidence of the impact on earnings.

  Potential Catalysts

•  Significant improvements in overall portfolio health.

•  Significant deployment of capital into attractive new investments.

•  Distribution increases to unitholders.

•  Further progress on growing its 3rd party asset management business.

  Potential Risks

•  New/prolonged financial challenges for investment partners.

•  Slow/negative net capital deployment.

•  Key personnel departures.