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retiredcfon Mar 14, 2022 8:27am
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CIBC Upgrade
CIBC UpgradeEQUITY RESEARCH
March 11, 2022 Earnings Update
ALARIS EQUITY PARTNERS INCOME
TRUST
Capital Deployment Drives Down The Payout Ratio
Our Conclusion
The follow-on investment in BCC reflects a sizeable cheque that pushes the payout ratio down towards the low 60% range (closer to where we believe the company would consider an increase to the unitholder distribution). It also lowers the reinvestment risk associated with a potential redemption event from Kimco. We have increased our earnings estimates accordingly and are raising our price target to $23.50 (from $22.00) to reflect greater potential of a catalyst materializing in the form of a distribution increase and lower reinvestment risk. We continue to rate Alaris Outperformer.
Key Points
Follow-on transaction announced: Alaris Equity Partners announced a
follow-on investment of US$65 million in BCC, one of its better-performing
partners. As we have stated previously, we view follow-on investments as
lower risk in nature than new partner investments. They typically require less diligence and effort given that management is already familiar with the
company’s existing operations and has an established relationship with the management team. The yield of 13.1% was towards the low end of the
historical transaction range, but likely reflects the recent performance of the business and healthy earnings coverage ratio.
BCC represents Alaris’ largest investment: The follow-on investment
brings total invested capital in BCC to US$156 million. BCC is now the
largest investment, representing ~17% of total run-rate distributions. The
second-largest investment is Planet Fitness Group Partners at ~10%. The
Earnings Coverage Ratio (ECR) of BCC remains very healthy, in excess of
2.0x. The company continues to perform well and recently experienced a
top-of-the-collar +6% reset for 2022. Proceeds from the investment will be
used by BCC to fund an acquisition.
Increasing potential for future distribution increase? We estimate that
this investment lowers Alaris’ payout ratio to ~61%, which is closer to the
range where we believe the company would consider another distribution
increase. The only caveat is that Alaris continues to expect a potential
redemption from Kimco, which would provide proceeds of US$65 million to
US$70 million.
Updating our estimates: Our forward estimates increase to reflect the
impact of the BCC investment. Our 2022 EPS estimate increases $0.09 and our 2023 EPS estimate increases $0.14.