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

CIBC Raises Target

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EQUITY RESEARCH
November 6, 2024 Earnings Update
ALARIS EQUITY PARTNERS INCOME
TRUST

Outsized Common Equity Distributions Drive A Significant Beat

Our Conclusion
Alaris reported a sizeable earnings beat, of a magnitude larger than we can
remember in our time covering the name. Third quarter revenue came in
significantly above prior guidance driven by some unexpectedly large
common equity distributions. The size of the common distribution from Fleet
was nearly 3x the distribution from the prior year. Guidance for the run-rate
payout ratio also improved ~5%. Alaris’ strategy of investing in the common
equity of its partners is bearing fruit, and the company may start to get more
recognition for this activity in the value of its stock. Accordingly, we are
raising our price target to $24 (from $22).

Key Points
Sizeable beat on large and unexpected common distributions. Alaris
reported revenue of $66 million, which significantly exceeded prior guidance
of $39 million. The beat was driven by some chunky common distributions,
including an outsized US$15 million payment from Fleet and an unexpected
(albeit one-time in nature) US$5 million distribution from Ohana. Alaris had
previously expected the timing of the Fleet distribution to occur in Q4, and
did not factor it into Q3 guidance. However, the scale of the distribution
surprised us considering that it nearly tripled from last year’s distribution of
US$6 million. The payout from Ohana was related to a dividend
recapitalization, which is perhaps a bit less encouraging or repeatable.

Additional capital deployment. Alaris indicated that it has invested US$35
million into Ohana as a dividend recap in exchange for convertible preferred
equity with a 14% yield fully paid-in-kind. Considering Ohana’s low ECR
range (1.0x-1.2x), we would like to learn more about this investment on the
conference call and the fully paid-in-kind feature. The company also
deployed US$10 million as a follow-on investment into Cresa subsequent to
quarter-end.

Guidance was updated favourably. Management increased its run-rate
cash flow estimate by 8% to reflect recent capital deployment as well as
higher expected annual common dividends from Partners. The implied run-
rate payout ratio declines from 69% to 64%.

No immediate cure on the Heritage situation. The only negative takeaway
from Q3 results was the fact that the company now expects the deferral of
distributions from Heritage to extend past year-end and into 2025. The
company also contributed an additional US$1.0 million in promissory notes
during Q3 (to help support working capital), making the total contribution to
Heritage in promissory notes US$3.0 million during the year. Alaris has taken
a fairly sizeable allowance of US$1.7 million against these notes.

Raising our price target. Our revised price target of $24 is based on a 1.0x
P/B multiple applied to our one-year forward BVPS estimate.