Alaris Equity Partners Income Trust (ADUN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. And welcome to the Alaris Royalty Corp. Annual Shareholder Meeting. At this time, the meeting will begin, and it is my pleasure to turn the floor over to your host, Steve King, President and CEO of Alaris. Sir, the floor is yours.

Thank you very much. And thank you, everybody, for attending in this very unusual AGM. Welcome to our annual general and special meeting of common shareholders of Alaris Royalty Corp. The meeting will now come to order. My name is Steve King, and I'm the President, CEO and Director of Alaris. Given the unprecedented impact of the ongoing COVID-19 pandemic and out of concern for the safety and well-being of our shareholders, employees and other stakeholders and the community as a whole, this meeting is being held as a virtual meeting via the web portal and the 1-800 number that we provided. As is our custom, we will conduct the formal business portion of the meeting first. And following the adjournment of the business portion, management will make a short presentation and hold the question-and-answer session. Only validated shareholders are permitted to answer -- sorry, to enter the shareholder portal for the meeting. Such validated shareholders may ask questions in the designated questions section of the portal. [Operator Instructions] We posted a code of conduct for the meeting in the web portal that will address certain -- sorry, additional procedural matters, and ask that everyone please review this document. With your approval, I will ask Mike Ervin, Chief Legal Officer and Corporate Secretary of the Corporation, to act as Secretary of the meeting; and Rita Gutierrez-Fernandez and Jeri Trotter of Broadridge Financial Services to act as scrutineer of this meeting. In order that the meeting covers all of the business for which it was convened, within a reasonable period of time, we have prearranged with a number of persons attending this afternoon to move and second the motions to be put before the meeting. This procedure is not an attempt to discourage participation, but merely a way to expedite proceedings. There will be ample opportunity during the other business portion of the meeting to raise any questions, concerns or comments you may have or during the question-and-answer session following the formal portion of the meeting. We have received the declaration of Broadridge as the due mailing -- as to the due mailing of the meeting materials to the registered and such other shareholders entitled to receive the same. I direct that copies of the document mailed to the shareholders be kept by the Secretary with the minutes of this meeting. If there is no objection, the reading of the notice of meeting will be dispensed with. Okay. Pursuant to the bylaws of the corporation, business may be transacted at this meeting, if not less than 2 persons are present in person, including attending on the web portal, holding or representing by proxy at least 5% of the shares entitled to be voted at the meeting. The scrutineer's report has been received, and I am advised that the total representation at the meeting by shareholders present, in person or represented by a proxy, is 4,168 shareholders, holding 13,376,193 common shares or 36.43% of the shares entitled to be voted at this meeting. I declare there is a quorum of shareholders present at the meeting. I now declare that the meeting is regularly called and properly constituted for the transaction of business. If you're a registered shareholder or a duly appointed proxy holder and you have already voted by proxy, your vote has been counted, and there will be no need to vote during this meeting, unless you wish to revoke or change your vote at this time. For those registered shareholders that have not previously submitted their votes or wish to change or revoke their votes, they can vote through the voting field available on the shareholder portal. And following the presentation of the matters to be voted on at the meeting, there will be a time allotment to permit such voting. The first item of business is the presentation to shareholders of the financial statements of the corporation for the fiscal year ended December 31, 2019, and auditor's report thereon. A copy of the financial statements have been mailed to each registered shareholder that requested a copy. There are copies of the financial statements available to shareholders on the corporation's website under the Investors section at www.alarisroyalty.com. I would now like to present the matters to be voted on at this meeting. Matter 1 is to fix the number of Directors of the corporation to be elected at the meeting at 6. Matter 2 is the election of each of John Ripley, E. Mitchell Shier, Mary Ritchie, Stephen King, Robert Bertram and Peter Grosskopf, as Directors of the corporation to hold office until the next annual election of Directors or until their successors are duly elected or appointed subject to the provisions of the Canada Business Corporations Act and the bylaws of the corporation. Matter 3 is the appointment of KPMG LLP as the auditors of the corporation. Matter 4 is the approval of the unallocated restricted share units and the issuance of the underlying shares pursuant to Alaris' current restricted share unit plan, as more particularly described in the corporation's information circular and proxy statement dated March 20, 2020. I believe Mr. Driscoll has a motion with regard to the follow -- foregoing matters.

I move that the foregoing proposals be put before the meeting for approval.

I second that motion.

Okay. It is now 2:36 p.m. Mountain standard time, and the voting function is now open on the web portal. As previously mentioned, any registered shareholder who has not yet -- voted yet or wishes to change their vote may do so now by clicking on the Voting button on the web portal and following the instructions there. Shareholders who have already sent in their proxies or voted via the Internet or telephone and do not want to change their votes do not need to take any further actions. [Voting]

Now that every shareholder has had the opportunity to vote, I now declare the polls closed for the meeting. I have now received the scrutineer's report on the voting with respect to the matters to be voted on at the meeting. I'm advised by the scrutineers that each of the matters before the meeting have been approved. And as such, the number of Directors for the corporation has been fixed at 6. Each of the nominees for election to the Board have been duly elected to serve as Directors until the next annual election of Directors, or until their successor has been duly elected or appointed. KPMG LLP has been appointed as the auditor of the corporation, and the unallocated restricted share units and the issuance of underlying common shares have been approved. I direct that a copy of the scrutineers' report, in respect of the meeting, be kept by the Secretary with the minutes of this meeting. Particulars of the meeting may be obtained from the Secretary of the meeting. Unless there are any questions from the floor, the Chair would entertain a motion that this meeting be terminated.

I move this meeting be terminated.

I second the motion.

The motion is approved, and I now declare this meeting terminated. Myself and Darren Driscoll, the Chief Financial Officer of the corporation, will now make a brief presentation regarding the corporation's operations, after which, we will be happy to take any questions you may have.

Participants are advised that the presentation and responses to questions may contain forward-looking statements. As defined under the applicable securities laws, such statements are being made subject to the disclaimers contained in Alaris' quarterly MD&A and other disclosure documents, and you are advised to review such disclaimers in conjunction with such statements.

Okay. Now that the fun stuff is over, we'll make a brief presentation. Some of you may have been on our first quarter earnings call earlier today. So because of the unique nature of the period that we're in, usually, we'd be going over our results from the year 2019 in the past, and we're happy to do so. If people have questions about that, it was a very successful year for us. But given the situation that we're in with the COVID-19 lockdowns and the impact that it is having on our portfolio and the markets, in general, we thought our time would probably be better spent just by going through our current portfolio, talk about the impacts from COVID-19 on each of those companies, and then maybe an outlook for the future. So I'll turn it over to Darren, and we'll go through each company.

Thanks, Steve. And I would encourage people to look at our MD&A this quarter. More of the other quarters, we did add a specific section on our COVID-19 impact on each partner, what we've seen to date and what we expect to see based on our best guesses. So please do refer to that. But -- so we'll go through each of the businesses here at a very high level from largest the smallest. Starting with DNT, an infrastructure construction company out of Austin and San Antonio, Texas. This is a company that provides about 16 million a year in distributions to Alaris. They have seen a limited impact to their business, mostly on the backlog end of things, where municipalities and new projects are not being approved maybe as quickly as normal. But this is a tremendous management team with a very fluid and cost structure, so they are able to adapt. And this is a very low level of debt in the business and a big earnings coverage cash flow buffer. And so, at this point, we don't expect any interruption in distributions for DNT. But as -- when we set our dividend policy, we certainly are allowing for a deferral here and there as we go through. But at this point, we do expect distributions from DNT. Our second company is Federal Resources, out of Annapolis, Maryland. This is our -- really our shining star at the moment. They are a distributor of products to first responders in the U.S., and have had an exceptional tick-up in their business in providing personal protection equipment to the U.S. Army and nursing homes across the U.S. And this is one business that has capitalized on their current relationships to certainly increase, and have seen a serious uptick in their business during this pandemic.

Just a little anecdote on Federal Resources. They were actually mentioned by name in one of Donald Trump's press briefings last week at the White House. So that was thrilling for them and for us. The next company on the list is Planet Fitness Growth Partners. And as many of you will know, gyms have been shut down across North America, and fitness is no exception. So we've got about 65 locations across the U.S. They are all shut. And so a company that has had a tremendous impact on it from COVID, it's interesting. The master franchisor, the parent company, Planet fitness, is a public company listed in the states. They were impacted considerably. The stock went down hugely after the shutdown, but has made a really remarkable comeback since. I think it's generally recognized that people want to get back to the gyms once the shutdown is over. People have been too sedentary and eating too much on lockdown. And certainly anecdotally within Planet Fitness, their online cancellations have been far less than what even they had expected. Their -- the pickup on online workouts, daily workouts amongst their membership base has been huge, and they expect to start opening some gyms over the next 2 weeks in certain states. So we're hopeful for a speedy recovery on Planet Fitness. But obviously, with a gym, you're going to have some restrictions on capacity and different hygiene practices, which they are fully prepared for. So right now, Planet Fitness is not giving us any dividends. And we don't expect them to for a few months here, but we do expect a full recovery in that business. And they have the financial wherewithal on their balance sheet to withstand this, absolutely. Second -- the next company that has also had a very big impact from COVID is Body Contour Centers. Body Contour operates plastic surgery clinics across the U.S., under the banner Sono Bello. And as they are a nonessential surgery, they were also shut down so that health care workers and their PPE could be dedicated to COVID fighting. And that has now started to turn. Nonessential surgeries will be, in the first things, turned on in every state. And they, in fact, have reopened 1 of their clinics last week and more this week. So they will be, again, a company that is extremely well suited to a full recovery. And the early statistics that we can tell you is that the vast majority of the people that have their surgeries canceled before the shutdown have all stayed with it, and we'll have just to reschedule their surgeries that have not canceled. And the early results from their reopening has been very encouraging. People are going back and buying procedures. So global -- sorry, Body Contour is not currently paying us. And just like Planet Fitness, we do expect a full recovery in our distributions from them. Next company is GWM Holdings. This is a company out of Los Angeles that is in the digital advertising space, and a company that has had significant growth. And has continued to do well through this pandemic. So they've had some of their kind of end users, the advertisers cut back, casinos, hospitality industry, and things like that, as you would expect. And then they've had other customers ramp up their spending. And we've also seen some of the ones that cut back early are now starting to ramp up and trying to get a jump on everybody else and gain market share. So no impact on GWM on our dividends from them. No impact expected. And a company that is still very, very profitable and lots of room to pay us into the future.

And Darren, before you go on, I just want to remind shareholders that you can ask a question in the web portal of the meeting, and this will be answered at the end of the presentation. I just want to remind people of that.

Thanks, Curtis. Next company is Accscient, a business consulting business out of Atlanta. A number of different businesses put together, specializing in IT and staffing consulting. Obviously, very simple for them to convert to more of a work-from-home environment in these unique times. They have seen some softening on the staffing end of things, obviously, but nothing material or significant that will affect their ability to pay the distributions going forward. So that's -- Accscient is about CAD 7.5 million of distributions to Alaris. Next is our longest-standing partner, LMS, a rebar manufacturer -- fabricator out of Vancouver, British Columbia, that a partner of ours for 14 years, and a business that operates in B.C., Alberta and California. They have continued to operate throughout their services that aren't an essential service. They haven't seen any softening yet. They've actually seen a bit of an uptick in business in April -- March and into April. But again, similar to DNT, there are longer-term concerns that we're watching as far as backlog and new projects and things like that. But at this point, again, the only debt they have is an inventory revolver and a nice earnings coverage ratio buffer and the expectation of continued pass distributions on a monthly basis.

Next company is the Amur Financial, also based out of Vancouver. And Amur is a fee business. They get fees for generating home equity loans for mortgage investment companies. They also get fees for managing the portfolio of those mortgage investment companies. So we have seen some people pull out of some of those mortgage investment companies, their capital from them. So they're -- they get paid as a percentage of assets under management. So that has gone down slightly. And so their -- and also their generation of new loans has slowed slightly, but nothing material. Certainly, very much an ability to pay our full distribution. They don't have any debt on their balance sheet. So this is a company that is strong. And one thing to consider with Amur is that is a company that's been around for 51 years. And coming out of '09 is certainly a very good analogy to this in terms of the impact on the economy. And they saw about a 3-month lag. And 3 months after the kind of the trough of the '09 crisis, that's when their volumes really started to pick up. And people were needing more home equity loans because they've had turbulence in their own lives. So we do expect a nice pickup in Amur, but probably starting in about 3 months from now. Unify is an IT consulting company with operations throughout the western U.S., headquartered in Seattle. And as a consulting company, a company that is very well used to working from home, working remotely, so they have not seen really much of an impact at all in their business. We don't see any risk in their distributions to us.

Next company is SCR, a mining service business out of Sudbury, Ontario. And SCR is one of our get comeback stories. I think if you look to the slide deck a couple of years ago, SCR was at the bottom and not paying us a current distribution because of a massive drop-off in the mining business. This is a company with no debt, terrific management team that has busted their tails to get the company back to where it should be. And we have gradually been increasing our distributions with just a very recent increase in January from 250 a month to 350 a month, resulting in that $4.2 million annual distribution. As far as COVID impact, they have not seen much yet. To date, their mines are all essential services and operating throughout, and continue to put out a good monthly -- again, monthly results. And again, no senior debt and lots of free cash flow coverage, and certainly a company that's going to continue to pay us going forward. Heritage is a construction-related business, restoring old buildings mostly in the Boston area in Massachusetts. And they were affected fairly significantly by the fact Boston was one of the first cities to go on a lockdown. But this is a company that has an earnings coverage ratio, one of the highest ones in our portfolio. No senior debt. And as the owner put it to us, this is just a longer Christmas season than normal, so without the presence, I suppose. But Heritage is one we do expect to continue to feel -- to continue to get distributions and certainly, as we'll be watching closely as that area gets back to work. But again, that large cash flow buffer and no debt gives us lots of confidence in Heritage.

And the next 2 companies, Fleet and Stride, are small partners of ours. But Fleet is in the transportation logistics industry. They've had some of their customers that have large trucking fleets, have a reduction in business. And as you can imagine, with the amount of e-commerce going on over the last 2 months, they've had some of their customers have an increase in business as well. So no disruption in those distributions. And Stride, as similar to Unify, that I talked about before, but based out of New York City. They're a consulting business that are fully able to work the full amount from home and remotely. So they've had no impact -- meaningful impact to their business either. So we're extremely fortunate to have the vast majority of our portfolio succeeding through this and able to pay us our full distributions.

And the last 3 companies that aren't currently paying us, and 2 of them, ccComm and Providence, were having some operating challenges before the pandemic. So obviously, this is -- has not helped things a whole lot. So we were quite aggressive with our fair value write-downs here at quarter end with both ccComm, which is a group of Sprint retail-facing dealerships; and Providence, who is a textile manufacturer and provider of products to the retail clothing industry. And so we were -- again, we were very aggressive with our write-downs, and don't have any expectations for any distributions in the near term. Kimco has been completely the opposite. This is a business that hasn't paid us a distribution in a couple of years. They're in the janitorial services business, which, of late, has become far more important. I saw people rolling through our office today, wiping down all the handles and touch points. And I think people are going to see more of that when they start getting back to work. They have seen a ton of extra jobs coming in from some flat out, COVID-related. Somebody was sick at an office, and they cleaned the entire office top to bottom. And others are just businesses that maybe clean 3 or 4 days a week, then they're now cleaning 6 or 7 or more than once a day and things like that. So that has more than offset the loss of some business flat because some offices just clearly aren't open. So they've also won some recent projects heading in early in January and February. So Kimco is one, I think, we will see moving up the ladder as far as the distribution. So nothing imminent, but it's one that certainly has seen an uptick in business through the pandemic. So that's our 16 partners when everybody's -- when all of those first 13 people are paying us, that's about $100 million of revenue for us. And again, the only impact we've experienced so far is for Q2, and that is the deferral of distributions from Body Contour and Planet Fitness, as Steve mentioned, and the suspension of distributions from Providence. So when we set our new dividend rate of $1.16 in our announcement yesterday, we stress test our entire portfolio, and we wanted to make sure that we've got enough runway that beyond Q2, if some of our partners need some flexibility, we are long-term partners, and we're going to be there to support our partners. We don't expect anything else at the moment, but we certainly want to plan for that, and have made sure our dividend policy can afford to do that. Our bank covenants can afford to do that and felt that, that $1.16 rate, 30% reduction of where we were, was the right number that will end -- will leave us in early 2021, once everybody is back up and paying us, as is our expectation, with a payout ratio in our long-term goal range of under 70%.

So one impact that you may have seen in our earnings release yesterday was a write-down of our book value, our carrying value of our assets. And that is mostly related to Providence and ccComm, which we took a very conservative approach and wrote down to almost 0. We still think there is a good chance of those companies recovering. But I think in a period like this, being more conservative is better. The other thing that changed our value of these assets is the fact that we expect that in 2021, for the first time in 10 years, we likely will have kind of negative resets on our companies because of this interruption in business. So since 2010, we've had nothing but positive kind of growth resets. And so the fact that we do -- that we did build in declines for our businesses into our discounted cash flow model, which determines that the valuation of our assets, that did result in a 10% decline in our book value, I think if there's any investor out there that has done better than negative 10% over the last 3 months, they're a really good investor. So to put it into context, the 10% decline in our book value, where our stock is down more than 50%, obviously, we feel that the market has dramatically overreacted to the impact on this, and those numbers show that out. So we will expect our first decline in 10 years, but really the impact has been not as material as a lot of people would have thought.

And I think I'd add too. In Q1, we had a couple of reductions in sales in SBI and Sandbox, and that provided us with over $150 million of capital to reduce debt as late as -- as recent as late February. And so a very, very well time to receive the proceeds that leaves our balance sheet in very good shape. And we've got $180 million of dry powder to take advantage of opportunities that we certainly think we're going to see coming out of this.

Yes, I think that's the perfect segue to where I'll end it is that the greatest period of wealth creation for Alaris and our shareholders was coming out of the ashes of 2009. And the next 4 years was really an amazing period for us where coming out of a trough, entrepreneurs did not want to sell common equity. It's just far too expensive when you're going through a big recovery or a big growth period. And we expect that to happen again. We're very excited to have such a strong balance sheet and an access to capital. And we think that the opportunities over the next couple of years will be very, very good for us and have a chance, especially with a low payout ratio, we'll be able to fund some growth internally from excess cash flow. And to start getting back to the way it was coming out of 2009, where we don't need to reduce our payout ratio anymore, we can start a track record of dividend growth again by adding accretive deals. And we've had a really good track record over the last 5 years of consistent growth from new deployment. We don't see that stopping. And as I mentioned, our less dilutive preferred shares are even more valuable to entrepreneurs in times like this than they were before the pandemic. So we're excited about where we're going, and we think it's a great time to be an Alaris shareholder. Obviously, we've had a lot of pain as everybody else has over the last 3 months, but we're excited about where we're going, and we've got the team to carry this out. So I will -- oh, the last thing I will say in our formal part of the meeting, there were 6 Directors that got nominated and voted in. It's one less than what we've typically had, and that is because yesterday was the last Board meeting for our long-time Chairman, Jack Lee. So Jack and I have known each other since the early 90s. And he is a good friend and a real mentor to me and I think a lot of the people in this office. And we were joking yesterday that we went public in October of -- or November of 2008, walking right into the biggest economic recession in many generations. And now he leaves in the greatest economic shutdown of all time because of COVID-19. So we had a lot of really, really good times in between. It's unfortunate that he started and ended in such difficult times. But it's what makes having somebody like Jack around even more valuable is every business has ups and downs. And having such a steady, calm and smart mind like Jack Lee, as the Chairman of our Board, has been a godsend to our company. So we wish Jack all the best in his retirement, and we will likely be adding another person to our Board at some point during the year once we have a candidate identified. So thank you, Jack. So I will open it up to any questions. Do we have?

No. It doesn't appear we have any questions at this time. We'll give a few minutes or a minute here. If anybody has a question, they can type in to the portal.

Okay. We don't have any actions coming in from the portal. So I'd like to thank everybody again for joining under these unusual circumstances. If you do have any questions, feel free to reach out any time to myself, Darren or Curtis. And they're happy to answer them off-line. So thank you again.

Thank you, ladies and gentlemen. This does conclude today's shareholder meeting. Thank you for participating. And have a wonderful day.