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

Good morning, ladies and gentlemen, and welcome to the Alaris Equity Partners Income Trust Fourth Quarter 2020 Earnings Call. [Operator Instructions] Also note that the call is being recorded on Wednesday, March 10, 2021. And I would like to turn the conference over to Mr. Darren Driscoll, CFO. Please go ahead.

Thank you, Sylvie, and good morning, ladies and gentlemen, and welcome to Alaris Equity Partners conference call and webcast to discuss financial results for the 3 and 12 months ended December 31, 2020, as well as a brief corporate update. I'm Darren Driscoll, Chief Financial Officer of Alaris. I'm joined on this call by Steve King, President and CEO. After a short presentation from Steve and I, there will be a question-and-answer session. [Operator Instructions] Before we begin, I'd like to remind our listeners that all amounts given are in Canadian dollars, unless otherwise noted. Listeners are cautioned that comments made today may contain forward-looking information. This forward-looking information is based upon a number of important factors and assumptions. And as a result, actual results could differ materially. Additional information concerning the underlying factors, assumptions and risks is available in last night's press release and our MD&A for the period under the headings forward-looking statements and risk factors, copies of which are available on SEDAR at www.sedar.com as well as our website. Non-IFRS data is also presented, and may differ from the way other companies present such data. And as with forward-looking statements, please refer to last night's press release and our MD&A for the period for more clarification regarding non-IFRS measures. All right. After that very important notice, after an extraordinarily busy last number of months, we were really quite anxious to get our results out. So I'll share you with some highlights and before passing it off to Steve. So Q4 revenue of $32 million, and $27 million of normalized EBITDA was boosted by the Kimco catch up, which resulted in 100% of their contracted distributions in 2020. Body Contours paid their Q2 deferred distributions in Q4. So now they were 100% caught up by year-end. And we received common dividends from Amur and Carey Electric, obviously caused the bump from our recent guidance. 2020 revenue for the year of $109.6 million and normalized EBITDA of $85.7 million, marginally off prior year results due to the impact of COVID, mostly on Planet Fitness. But also a large redemption, first thing in January, SBI with, obviously, the deployment for 2020, certainly back year-end loaded. From our outlook a year ago, we only missed 4% of revenue for the entire pandemic year, which was -- which consists of 9 months of Planet Fitness distributions, a small amount of Providence, partially offset by a big recovery from Kimco. Record deployment in the last 12 months of $350 million. That includes 5 new partners, 3 follow-on investments. Run rate revenue today -- that translates into run rate revenue today of $136 million, just over $3 a share. And that's compared to $108 million and $2.70 per share for the prior year. Run rate EBITDA of $124 million or $2.77 per share compared to $90.8 million and $2.40 per share a year ago. Our payout ratio today is at its lowest historical level between 65% and 70%. In the statement, you'll see a significant increase in fair value at December 31, just over $23 million or $0.52 a share. The biggest one for Kimco, up USD 6.5 million. Amur was up CAD 5 million on their prefs and common, basically restoring what was written down in Q1 as that business came charging back. Planet Fitness, up USD 2.8 million with the restart of parcel distributions in January. And I would include that the fair value for Planet Fitness is still not accounting for full distributions that we do expect to start in July, and starting to catch up unpaid distributions from January 2022. So we'll reflect that when it happens. Actually, it was also up a couple of million in U.S. and other smaller increases were LMS, federal resources and fleet and I'd add that there were no fair value decreases in Q4. A reclass from unrealized loss to realized loss in the quarter due to Providence occurred. We wrote-off Providence to nil in March. And their bank foreclosed late in 2020. So there's no impact to earnings or EBITDA in the quarter or annually, but it's just a nuance from an accounting standpoint. Big changes on the borrowing front to match our growth. In 1 year, our EBITDA has gone from $90 million to almost $125 million. Our banking syndicate has been extremely supportive and responsive. From right around the uncertain times around March, April and May to just recently to support significant new deployment. Since year-end, we've increased the facility from $330 million to $400 million, while adding a seventh bank to our syndicate. Also, we have the covenant flexibility over the next 6 months to navigate around deployment and potential redemptions of Kimco and Federal Resources. We added common shares on our recent deployment in FNC, Edgewater and Brown & Settle since year-end. An added disclosure in our MD&A as our expectations are very different in each case. But from other than Planet Fitness, we do expect cash yield on those shares over the long term. We assume a small amount of the common distributions at our run rate, but since they're discretionary, it's hard to build that in until we see a regular pattern. From a partner update standpoint, we are extremely proud of our portfolio, generating only a few percent less revenue than forecast a year ago. And the revenue generated has a weighted average ECR of now over 1.7x at its highest ever point. That's up from about 1.5x a year ago. Our ECR staff. We now have 15 of our 20 companies at 75% with an ECR of over 1.5 and 6 over 2x. And that's compared to a year ago, 9 out of 16 over 1.5 and only 3 over 2x. So a massive improvement in the overall portfolio. Another year of weighted average increase in the performance metric of around 1%, and I certainly would not have expected that back in April. Based on unaudited information, more companies with positive resets and negative, which this year is quite an accomplishment. Planet Fitness restarted partial distributions in January. They're paying 40% of contracted amounts and, as I mentioned, on track to restart full distributions in July. Nothing assured at this point, but if they continue with their current pace, that would knock about 5% off our payout ratio. Overall, I couldn't be happier with the performance of our partners in 2020 throughout the pandemic. A couple of unique items worth expanding on. Kimco has continued its successful run. Revenue and EBITDA at all-time high levels. They're paying us full distribution, inclusive of a 6% max reset. With our support, they're actively looking for sources to take us out, it could be CAD 80 million to CAD 100 million. Keep in mind, this is a company that a year ago was not paying current distributions, and hadn't been for a lengthy period of time of several years of uncertainty. And after some significant write-ups in 2020, still sits at only just over USD 40 million on our books. I'll expand on that, in U.S. dollars, we have prefs, preferred shares on our books at $26 million. Prom notes of $14 million and AR of $2 million. With the redemption price of the prefs is $35 million over that $26 million book value, plus the face stock of loans and AR of $18 million, and that's the minimum USD 53 million in our press release. There are also $20 million of unpaid distributions that are contractually owed on a redemption, but not on our books as well as an equity kicker we negotiated a few years back. Nothing assured [indiscernible] transpires, we will certainly collect our contracted and growing yield and unpaid distributions over time rather than in a redemption event. I should note that a Kimco redemption would have almost no impact on our payout ratio because of all the unlocked value I just described. It wouldn't have any impact immediately based on -- but based on our typical deal terms, we'd be able to redeploy that $100 million and receive $14 million of revenue compared to the CAD 6 million we currently receive from Kimco. An incredible story and full credit to the Kimco management for getting this business ready for what has turned out to be a transformational period for the company. Federal Resources is another company that's exploring redemption alternatives, nothing evident nor assured, but a redemption would be at over USD 10 million above our book value and well over CAD 100 million and result in an above-average IRR over the term of the investment. Both of these would be tremendously successful results and provide over CAD 200 million of proceeds that would reduce our debt levels and more importantly, provide additional capital for reinvestment in 2021 and 2022. I know this year was the conversion to an income trust and a name change to Alaris Equity Partners on September 1, which resulted in a number of very interesting accounting impacts that are explained in detail in the notes of our financial statements. The trust conversion has also allowed us to retain more capital internally by reducing admin expenses related to operating subsidiaries in the Netherlands, and more importantly, reducing our effective tax rate on U.S. revenue, returning us to an overall tax rate comparable to where we were pre-2019, and therefore, lowering our payout ratio. A couple of improvements to our disclosure worth mentioning. Started in Q3, we condensed the partner fair value table in Note 4 to show the base currency to try to take some of the FX noise away. Made a significant change again in Q3 to our partner section of the MD&A where we now summarize key points at a single table and then provide commentary on those partners where additional explanation is warranted. And finally, in the MD&A, we have added additional disclosure around our use of common shares, why we've added that to investment strategy and our expectations around each company. Hope you find all these changes useful. And our press release contains our first official commentary on our ESG plan. We've engaged external advisers to assist us in developing the ESG policy over the next 12 months. We've taken great pride in paying close attention to all these issues throughout our company history and look forward to formalizing our thoughts in the next 12 months or so. Our outlook for 2021, based on all that recent deployment, some of it late in Q1, obviously, it calls for revenue of $32.5 million. Our G&A did spike in 2020 due to the trust conversion and some additional legal bills. We do expect a more normal G&A expense run rate in 2021 of around $12.5 million. So that's all I had from a financial update standpoint. I'll now toss it over to Steve King before we go to question and answer.

Great. Thanks, Darren. Obviously, huge changes in our company since the last time we spoke in November after our Q3, without a doubt the busiest period of time in our 17-year history at Alaris. So $350 million of deployment, as Darren mentioned, over the last 12 months. That's at least 50% higher than any previous 12-month period in our history. There's a few different reasons for that growth. I'll go through them all so that people can understand, and also kind of figure out kind of where we're going and the opportunities ahead for us. One of the things that we saw, I guess, in the short term during the pandemic was banks, especially in the U.S., which is our primary market, being much tighter in terms of their lending capabilities. And so that made it much more difficult on the private equity investors that we compete against as they use high levels of debt in their typical proposals. Also safe to say that the entrepreneurs that we market to and that we want to partner with, were more debt averse than they typically would be during a time like that. So that made our structure very kind of well-suited for that kind of a market where we don't use debt in a typical transaction. The next factor is something that we also saw coming out of the Great Recession in 2009, which is coming out of difficult times, entrepreneurs -- and this is the way any good entrepreneur is wired. They see more opportunity coming out of tough times. And so the most expensive security that you can issue as a company, whether you're public or private, is common shares. They participate in all growth. And so for an entrepreneur coming out of a trough, they don't want to issue as many common shares. If they can limit the number of common shares they issue, they're going to do that. So our structure of preferred shares for the majority of our investment, certainly favored that kind of environment and still does. The final reason, though, for our success, which I think is by far the biggest one is the tweaks that we've made in our offering to entrepreneurs over the last couple of years, in particular. And that is ironically enough, given my last paragraph is adding some common equity along with our preferred shares. And that has had a number of different impacts on us, for our shareholders and also for the entrepreneurs that we market to. So the first thing that it does for us and our shareholders is it really balances the risk profile of our investments. Even though we've been doing this for 17 years, we've got a really good book on our kind of risk profile and our return profile. And it's been good. We've had an IRR compounding at 17% a year over those 17 years. But we can think of many situations over that period where a company has had large swings one way or the other, and sometimes in both ways in a single partnership. Providence would be a good example of that where they had just absolutely enormous growth for a period of time. They had EBITDA of over $200 million a year. And if we would have had common equity along with our prefs, we probably could have taken out as much money in common dividends during that time as our entire cost base, if not quite a bit more. And so now Providence was unable to sustain that kind of level. They lost their business eventually because of COVID. And so our downside is 100%. So we would have had some securities that would have given us more upside to match the risk that would have made the risk balance much better. And we can think of several opportunities that we've had over the last 17 years where things like that happen, not to the same extent as Providence, but the same kind of thing where we could have reduced our risk, increased our return by having a blend of prefs and common. The second thing with adding some common shares is that they will typically pay a cash yield, as Darren mentioned. The only 1 in our portfolio of 6 common equity investments that we have that we don't expect near-term dividends is Planet Fitness. They have -- I'm not going to say unlimited growth opportunities, but they have a lot of growth opportunities to open new clubs. They need all of the capital that they can get to do that. With that being said, the multiples being paid for these kind of companies just continues to go up and up and up. So we do expect a very nice overall return on the Planet Fitness common equity on exit, whenever that happens. But for the most part, these common shares will pay dividends. An incredible example of this is Carey Electric, a 97-year old family-owned business. They would not give up control, but they would give up a small minority amount. In fact, they really like that we were going to own the same class of shares that they owned even in a minority way. And so we invested $17 million in Carey, $16.1 million in pref shares, $900,000 in common shares. And in year 1, we got a $340,000 cash dividend on the $900,000 cost base common. So a 38% yield in year 1. And obviously, that's an extraordinary outcome. But with that being said, based on Carey's projections for this year, that number is expected to be significantly higher for 2021. So we believe that the cash yield as well as the potential gains on exit will significantly increase our overall returns over the course of time. And the final advantage and probably the biggest one to be quite honest, is the impact that it's had on our ability to deploy capital, and this is something that we've seen over the last 9 months in Technicolor. So many deals, I would say, the majority of deals that we see out there from the advisory network in the U.S. require more of the capital structure to be replaced than what just straight preferred shares would be prudent for. So in order to compete on those deals, we need to go further into the capital structure and the inclusion of some common equity along with our prefs allows us to do that. We have been eliminated from kind of deal processes on dozens and dozens of occasions just because of our inability to write a big enough check because we couldn't go far enough with just prefs. The other part of it is -- and this, I think, has been kind of a secret to our success here is it's also just eliminated a misconception, a stigma, if you will, amongst entrepreneurs and their advisers that our preferred shares are debt and not equity. And because they have a yield attached to them, a lot of entrepreneurs who maybe don't have a background in finance, they would just view it as debt. And that would hurt us in our proposals. Now that we're coming in with a blend of common and prefs, they are clearly seeing us as the equity partner that we are. But 2 classes of shares, 1 being significantly cheaper, that being the prefs than the common. So in order to get to our prefs, they're happy to give us a minority stake of their company in the common. And our win rate on proposals has gone through the roof over the last year. So that one, I think, is probably one of the biggest reasons for our success. So all in all, a tweak in our business has been a large factor in our success over the last 12 months. Amazing to think that even if we don't deploy another dollar for the rest of this year that our EBITDA per share will have grown by around 20%, '21 over '20, not even including any expected increases from our partners like Planet Fitness. So even with doing 2 equity offerings, the capital deployment has been nicely accretive for our shareholders. And one of the great things for me, we've been doing this for a long time. I've always had the long-term goal of having no partner more than 10% of our revenue stream, and we're almost there. Our biggest is just around 12% now. And lots to come on the future as well. We've got an expanded credit line. We're generating now more than $25 million of excess free cash flow per year that we can compound into growth going forward. And as Darren mentioned, we're extremely anxious and excited about potentially crystallizing 2 very large gains in our portfolio, and Kimco and Federal Resources that we'll use to fund more growth as well. I can't end this talk without thanking our incredible team here at Alaris. To close, 5 new partnerships, 2 follow-ons, corporate reorg into a trust, 2 equity offerings. And manage their relationships with 20 different partners through a pandemic. It's by far the biggest achievement that I've witnessed in our 17 years. Our staff have worked around the clock, subjected themselves to mandatory quarantines after traveling to the U.S., all in order to achieve these results for our shareholders. So I couldn't be more thankful. So Sylvie, we'll turn it over to the questions at this time.

[Operator Instructions] And your first question will be from Scott Robinson (sic) [ Scott Robertson ] at RBC.

My first question is regarding the potential redemption of Federal Resources. Given the size of that investment, do you think there's less of a need to try and sell Kimco now or maybe potentially wait to get more credit for the EBITDA that is generated over the past year before selling it? How should we think about that?

Well, just to be clear, Scott, the company isn't for sale. So this would be a situation unlike we've ever seen in our 17 years to be quite honest, where the company has grown so much and paid off all of their debt. They've just got a huge amount of cash flow. So they could fund this redemption out of cash and fairly modest amount of senior debt on their company. So obviously, that's a much lower cost of capital. Typically, we're being -- we're just selling along with the founder. But in this case, they can get rid of us with just cheap senior debt. So very easy for them. So this isn't something that we're in control of, but something that I am happy to do because this would be a very, very large return for us. We have more than enough opportunities out there, as we've seen over the last 9 months to replace it. So we're here to make money for our shareholders. I think that's going to be very good for our balance sheet and funding our future growth. So we don't have to come back to the market again.

And I'd say, on Kimco, there's just so much unlocked value that, that's why we are pushing those redemption options. That $20 million of unpaid distributions, the untapped value -- difference in the fair value. We don't get that except on a redemption value. That would take a number of years to collect over time. And so by far, it's in our best interest. Everybody's best interest to get that, and again, pay down debt and provide more capital.

Got it. And I guess my second question is on capital deployment. And perhaps if you could try and quantify the impact that this common equity option has given you guys. Like if I think about how you've described the business before. If maybe a few years ago, you submitted, call it, $1 billion worth of LOIs for investments, what would that be like today than that you have common equity? Like are you able to perhaps submit like $1.2 billion? Or like, how has that sort of impacted the broader landscape of your capital deployment opportunities?

Yes. That's a tough one to put a number on yet. I think we need a little bit more time to see what normal years are like. Obviously, 2020 was not a normal year at all. We saw a very little deal flow kind of from March until August. And then it started to really pick up. So it's a little tough to tell right now. What I can tell you, though, is just our win rate has been, I would say, at least double what it has been historically on the deals that we have bid on. So that's the exciting part because I think it is a double whammy. I think we can bid on more, and we seem to be winning a higher percentage. So I'm excited to see what the rest of this year looks like. And that's again, like I mentioned, it's why we are excited about Federal Resources and Kimco and not fighting that. We've got lots of opportunities ahead of us.

Next question will be from Scott Fromson at CIBC.

Just a question about the resets. The 1% average that you referenced, sounds kind of low given the economic recovery underway. Is this conservatism on the part of either you or your investment partners or both? Or does it partly the portfolio resistance through the early stages of the pandemic and the resets are kind of more normal course?

Yes. Scott, it is -- the fact that it's up, I think, is an incredible stat. You had companies like Planet Fitness and Body Contours that were shut down for 3 months. And so there's no way they're going to have a same-store sales increase. You had others that did have some restrictions and softness. We did have others like LMS, Federal Resources and Kimco that were at the top of the caller, and we ended up with more increases and decrease. But if you'd asked me from my estimate last April or May, I would have said down 5% or 6%. So the fact that it's up is a great stat. And it certainly is pointing towards a very good 2022 reset because you do have some big hitters that did have at least 2, 3, 4 months of softness in 2021.

Yes. I think, Scott, too, it's fair to say that a lot of the recovery has been very late in the year and into 2021. So I think if you look at GDP numbers as a whole, obviously, they're going to be well down in 2020 versus 2019. And people expecting a big recovery this year. So I think the same goes for our portfolio.

Yes. I think given the uncertainty, that's probably prudent. Nice quarter.

Next question will be from Jeff Fenwick at Cormark Securities.

So just one follow up on the resets there, guys. The one I wanted to ask about was BCC. I think in the MD&A, you said it's just a negative reset, but you didn't give a number there. And I guess maybe you're just finalizing the year-end figures from them. But is there -- is the expectation that would be sort of near the lower end of the caller?

Yes. We're literally just going through that process because it is the same clinic sale. There were a whole bunch of different things we had to look at from clinic closures and how that fit into the calculation. So we were -- their overall revenue was almost back to historical numbers. Their EBITDA was up, but their same, I guess clinic revenue will be down, and we do think it will be closer to that bottom end, but that is included in our 1% weighted average calculation.

Yes. A lot of the improvements in their EBITDA, Jeff, was because their costs were so much lower. They spent a significant amount less on advertising, would be the key area that was quite a bit less for them. So they've made more money than they ever have on slightly fewer sales, but it bodes really well going into this next year or 2 where they won't have a 3-month period that they were closed down for, and they're still expecting to spend less on the advertising because they found that they were probably overspending a couple of years ago. So good things ahead for BCC.

Okay. That's helpful. And then I wanted to ask about your credit facility. I mean you've done a good job there of renegotiating that higher and the flexibility around the covenants. And I guess one thought that I had is just as you're getting bigger, more diversified, adding more people into that syndicate and sort of battle-tested through the last year here. I'm surprised they've left the normalized, let's call it, debt-to-EBITDA number still down at 2.5%. And do you think that's something down the road here, you might have a bit of flexibility on negotiating higher as well?

Yes. It's hard to see. I mean I do think that we still are a unique group. We have pushed that from, gosh, it was 1.5 a couple of years ago. So we have made good strides. I don't think we want to be much higher than that, quite frankly. We want to keep a conservative balance sheet, and the growth has really come from out of the increased EBITDA we've had. So 3x 125 is -- you're almost at the peak. So no, we've got the short-term flexibility that we need. Is there a chance for a longer-term flexibility? I'll have to phone my pal Dominic at HSBC. But I think we're in a pretty good spot where we are and all we need for the next, certainly, 12 months or so.

Okay. And then I wanted to move over to the dividend policy here. I mean you've kind of -- settling into a little more normalized environment here, things are progressing well. I know there's a couple of the redemptions that may come in that are larger. But just sort of philosophically, how are you thinking about the dividend here going forward? Are you going to return to being a more consistent, I guess, dividend increase as the book continues to grow here? I know you've set a lower payout ratio, but you look pretty comfortable certainly on that perspective. So how are you thinking about the policy here as you go through 2021?

I guess, Jeff, we're going to keep an open mind on it. Our stock has been bizarrely volatile given our fundamentals. And so it does give you pause with the stock that goes up and down as much as ours, you don't want to be as beholden to the capital markets to fund your growth as you would if you were properly traded. And so that does kind of make us favor continuing to lower the payout ratio more and more so that we can fund more of our growth internally. So with that being said, we're coming out of a very volatile time and a very volatile market. So I do want to keep an open mind on that. I think if our stock trades where it should trade and isn't as volatile. I think I would look to start increasing that dividend again.

Next question will be from Gary Ho at Desjardins.

Just -- Steve, just going back to your common equity investment topics here. So I see that you're including a few million in your run rate revenue guidance. Maybe you can comment how sustainable that is? And what are some of the key contributors to that looking out, and kind of point us to some of the lumpiness that might be with some of those common investments?

Yes. We've tried to make the run rate estimate, very conservative, Gary. That's one area that we always will be conservative on and surprised with extra dividends coming in because they are less -- they're obviously not -- they're not structured, and so they're less predictable. You never know when a company could have a huge growth opportunity pop up where they divert some of that capital away from common dividends and into growth. So we will always be conservative on that. And things will change as well. Like Brown & Settle is one of our largest common equity investments. They have a small amount of debt on their balance sheet between us and the other common shareholders, which is management. We've decided that the next kind of year, 1.5 years, we will be spent paying off all of that debt. And then after that point, the dividend will be substantial. So right now we don't have anything in there for it. But that's just a good example of decisions that will be made by each company's boards. So we'll -- I think we'll be pretty conservative. Darren, I don't know if you want to break it down a little?

Yes. I think that also each company does have different dividend track records, some pay it monthly, some quarterly, some annually. And so it won't be irregular -- for building into your models, it won't be -- and if we save $2 million on run rate, it won't be $500,000 a quarter. I assure you. And so a little tougher to track. But I think eventually, you'll just get used to seeing that here's when these companies pay, and we'll record them when they are paid. So a little tough to predict, but we certainly, as Steve mentioned, I think that $2 million is meant to be very conservative.

Got it. And then, Steve, maybe, I'm not sure if you've done the work. I think in your previous comments, you have mentioned that if you guys did do some comment in your prior investments, what would the IRR be? I think right now, you said it's 17%, but what would that have been if you guys invested, I don't know, another 10% common in some of those previous exits?

Yes. I haven't done that analysis, Gary. But certainly, looking at our table of exits over the years, it would have been substantial. I look back at LifeMark and Sequel and Mid-Atlantic Health Care and some of these companies that ended up selling for very high multiples and the common shareholders did unbelievably well. Certainly, 2 to 3x higher IRRs than we had as preferred shareholders. So just anecdotally, I wouldn't venture a guess on what our blended IRR would be. But certainly, the common would have been significantly higher. And the ones where we've had losses, the percentage losses on the common would have been probably pretty similar to that. So yes, it certainly is going to payoff for us. And obviously, already has with our deployment.

Got it. And then maybe for Darren. The fair value accounting for the commons, are they similar to the prefs, i.e., are you just using a discount on the projected dividend stream to come up with the fair value movements quarter-to-quarter?

No. As it turns out, it's a much more difficult process, Gary. We -- the prefs are easy. It's -- you've got a fixed dividend that goes up or down, and you guess that you have a discount rate you back into and you have a growth rate you assume. And it's a much easier mathematical equation for the common. You can't just say it's based on the dividend. We're looking at basically a weighted average cost of capital for the individual company. We're looking at their forecast. We're looking at the multiple set that industry trades in. And so it is a far more involved. And so my accounting team is quite looking forward to Q1 and Q2 and now we stack up more and more common investments, it will be quite an exercise. And again, we are learning as we go working through with KPMG, but certainly far more involved than the prefs. Just so many more assumptions going into it that are also not just the company's, that would have some external influence as well.

Got it. Okay. And then just my last question. On Planet Fitness update at the current run rate with the memberships down kind of 12%, is that supportive of the ramping up of the distribution back up to 100%? And I guess in the discussions with lenders, if Planet Fitness can support, say, a distribution up to 80%. Can you go up to that? Or is it all or nothing arrangement here?

We need the company to be on side the leverage covenant that's been put in place. And so certainly, they are on track at this level to do so. If they are on track on-site with their leverage covenant, then that -- the concept you described, that sort of ratchet, if there's only enough cash flow to pay 80% or 90% on their fixed charge coverage ratio, then they could do that. But if they're on side with their leverage, we believe that they will be able to pay that full amount with some room. But again, that is one that over the next few months, we're watching very closely. We like what we're seeing. We love the fact that the U.S. is way ahead of us. I guess I don't love the fact, but it's good for Planet Fitness, but they're ahead of us from a vaccination standpoint. And so that people are returning to gyms, and states are opening up. And -- but that is one that could have some near-term volatility. But we certainly like what we're seeing.

Yes. Every week has been -- has seen progress on the week before and their membership numbers. One of the biggest impacts on the way down was mandatory masks. So it was one thing to actually close the gyms. It was quite another to make people work out in masks. So states going against the mandatory mask restrictions, as we're starting to see is a big factor for them. But we are -- even before that, they don't have any states in their system that have gone no masks yet. But that will be a big driver for them. But as I say, each week has been better than the week before. For the last many weeks, they've gone from, I think, minus 15.5% to minus 12%. And that is a number that we can live with to get our full distributions.

Next question will be from Zachary Evershed at National Bank.

Congrats on the quarter. So Kimco and Fed looking at redeeming and DNT picking away. Are there any other partners that have been building a net cash position that might be used for partial redemption?

No. Nothing of the -- and Federal Resources is really an outlier. I mean their business quadrupled through the last couple of years. So they're the only one that would have sort of the ability to do that. And DNT is just -- there's a small contractual sweep. So it will just be a few million a year as cash flow allows. But no, nobody else in that situation.

Yes. You look back over our 17 years. And like we're coming in for a fairly significant chunk of the capital structure, an amount that can only be handled by equity. And so that's why we haven't been redeemed just by refinancing other than once, which was end of the roll, which took them 13 years to do, and now potentially Federal Resources. Every other redemption that we've had has been a full sale of the business. So yes, it's typically a very difficult thing to take us out just with that. And when somebody looks at alternatives on the equity side, we remain the cheapest equity partner that they can find. So that's kind of how we think of things and how it's gone over the last 17 years.

Appreciate that. And then still on the topic of redemptions. For Kimco, the redemption value is a pretty wide range. What factors go into that calculation?

Yes. So that -- the USD 20 million swing is the -- how much of those unpaid distributions we get. So the $53 million in our press release is basically our redemption value of the prefs of $35 million and the face value of the notes and the AR of another $18 million. So that's $53 million. You can get to $73 million collecting all of those unpaid distributions. And I think you can even get higher than that with the warrant that we have in place. But those were numbers we were comfortable putting in as a range. And then it will just -- it will depend on what they can get from a financing source. And we're going to be involved in that conversation. But this is one, again, with so much unlocked value that we are encouraging management to do, and they have lots to gain by doing so as well.

And I think fair to say that we probably wouldn't close on a transaction that ended up with us getting paid at the bottom of that range. And I don't think the management team would do something at that level either.

[Operator Instructions] Next is a follow-up from Scott Robinson (sic) [ Scott Robertson ] at RBC.

Just one quick follow-up on SCR. So we've seen a decent pickup in mining activity and interest in Ontario, over the last few months. Can you perhaps provide some color as to SCR is positioning in the market? And maybe also talk a bit about what the upside from that investment could look like in terms of cash flow, but also potentially fair value should we see sustained levels of activity there?

Yes. SCR. We are thrilled with what we're seeing out of SCR. The Seguin brothers have done a tremendous job managing through a very volatile last number of years. But the last 12 months has been exceptionally good. Each month, we get in is a little better than the next. They are a service provider. They've got long-term customer relationships with the big guys. They are also adding new customer relationships as we speak. So SCR, I think, does, certainly, in the near term, have significant upside. We have changed the way we have calibrated the SCR investment. So they're paying us basically a fixed amount of $4.2 million a year. And then there is a cash flow sweep, depending on the results of the business that can allow us to go even above our contracted amount to try to get back some of those amounts that were missed historically. So the fair value reflects none of that. This is -- that concept is brand new, starting in January here. And so I think you'll see by Q2, Q3, what are we seeing as far as that sweep amount. How is that affecting our long-term outlook. But their numbers -- their coverage ratio has increased significantly as has their revenue and EBITDA.

And do you have handy, the amount of distributions that have been deferred or, I guess, canceled over the last few years for them?

Yes. We -- it's a little under $20 million. But again, we have no -- this is not -- this is a little different and this is no fault of theirs. So that is an amount they contractually owe us. If there is upside, they'll be able to share that with us. If there isn't, we just won't get it. And that's a deal that we were happy to strike. We obviously need to make sure we're aligned with management and not piling up a bunch of unpaid things in front of them. They've done everything we've asked. They've been terrific partners. And again, if things go the way they think there, we'll both share in that upside, more so than our typical pref up or down 5% or 6% would.

And at this time, Mr. King, we have no further questions. Please proceed.

Okay. Thanks, Sylvia, and thanks, everybody, for tuning in. As always, happy to answer any other questions offline if people have them, but we're ecstatic to have reported what we reported last night, and look forward to updating you again in 3 months.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.