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

RBC

[retiredcf]

February 14, 2023

Alaris Equity Partners Income Trust
Announces strategic investment in Body Contour Centers with Brookfield

TSX: AD-U | CAD 18.33 | Sector Perform | Price Target CAD 19.00

Sentiment: Positive

Summary: Alaris announced Brookfield, through a fund managed by Brookfield Special Investments, has made a US$400MM strategic investment in Body Contour Centers ("BCC") in exchange for convertible preferred units in BCC. The convertible preferred units carry an 8.5% distribution yield, payable quarterly, and can be converted at the option of the holder into BCC common equity at a predetermined valuation for up to 5 years. The convertible preferred units are also subject to a 1.0% per annum escalator after the fifth anniversary of the transaction.

In connection to the investment by Brookfield, Alaris:

1. Exchanged US$145MM of its existing preferred units in BCC into the newly created convertible preferred units, which Alaris estimates should generate US$12.4MM of annual distributions;

2. Redeemed US$20.3MM of its existing preferred units in BCC;

3. Realized US$9.3MM of gains in its investment in BCC preferred units;

4. Indicated it would participate in profits from other convertible preferred units not held by Alaris if certain return thresholds

   are met; and

5. Indicated it would receive a US$1.5MM transaction fee annually, payable quarterly.

Further, certain Alaris employees are entitled to receive up to 50% of the profits Alaris is entitled to receive from other convertible preferred units if performance thresholds are met, which will be paid out over 3 tranches. Certain Alaris employees also co-invested US$1MM into BCC for convertible preferred units under similar terms as Alaris.

The convertible preferred units also include a put right in favour of investors after 5 years or following an uncured default event and a call right in favour of BCC after 5 years.

We note Alaris initially invested US$156.3MM into BCC in exchange for preferred units that generated US$21.2MM in annual distributions.

Our view: The ~US$400MM investment by Brookfield is the first transaction involving a third-party and could provide a framework into future structures in which 3rd party capital can be integrated into Alaris' investments. Alaris previously indicated plans to launch an asset management business and today's announcement is the first step on this journey. We think this transaction is positive as it demonstrates Alaris can attract 3rd party capital (in this case, a prominent investor) to help grow its 3rd party asset management business, proving an additional source of earnings and also diversifying Alaris' earnings mix.