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

Good day, and thank you for standing by. Welcome to the Alaris Q4 2023 Earnings Release Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Amanda Frazer, CFO. Please go ahead.

Thank you, Daniel. We appreciate everyone taking the time to join us this morning. We're excited to present our Q4 results. I'm joined on this call by Steve King, President and Chief Executive Officer of Alaris. After a short presentation from Steve and I, there will be a question-and-answer section, as Daniel mentioned. But before we begin, I would 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 therefore, 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 under the headings Forward-Looking Statements and Risk Factors, copies of which are available on SEDAR+ and -- at sedarplus.com as well as our website. Non-IFRS data is also presented and may differ from the way other companies present such data. As with the forward-looking statements, please refer to last night's press release and our MD&A for more clarification regarding non-IFRS measures. The highlights from our Q4 include revenue from the quarter of $41.9 million, exceeding our guidance of $39.9 million as a result of higher-than-anticipated common distributions received. And as expected, was 18% lower than our Q4 2022, mainly due to onetime payments on the FNC redemption that occurred in October of 2022 as well as partial catch-up payments that we received of USD 3 million late in 2022 from Ohana regarding deferrals of their distributions from the COVID pandemic. For the year, revenue of $162.6 million was a slight increase over $161.6 million, of normalized revenue in 2022 after adjusting for both FNC and Ohana as well as USD 17.2 million of Kimco deferred distributions received in Q2 of 2022. EBITDA for Q4 of $61.3 million and per unit of $1.35 represents an increase of approximately 30% as compared to Q4 2022. And for the year, $202 million and $4.44 per unit, an increase of approximately 10%. The increase in EBITDA was largely attributable to capital appreciation on our common portfolio. For the year, the Trust had a net unrealized gain on investments of $65.2 million, of which $58.2 million relates to Alaris' common equity investments. Alaris realized an increase in fair value of approximately 34% on the opening carrying value of its common, in addition to a 7.5% return on common distributions or $12.8 million. Overall, Aleris' investment in common equity earned a total return of 41.8% in the year. Over the last 4 years, Aleris has added common equity as part of its overall investment strategy with 13 of 20 investments now containing common equity. Key drivers of the fair value increase in the quarter of $28.3 million were Ohana, formerly Planet Fitness Growth Partners, of USD 9.9 million; BCC of USD 5.4 million; Amur of CAD 5.6 million; LMS of $4.3 million and a decline in GWM of USD 3.1 million. Ohana Partners finished 2023 ahead of budget and further aided by tailwinds of positive announcements from Planet Fitness Corporate. Based on the budgeted growth for 2024 and continued expansion, Ohana expects this momentum to continue in the coming years. BCC continues to see impressive growth as they execute on their development and expansion plans, organic growth through the year saw BCC add 28 locations for a total of 98 centers. Based on Amur's unaudited financial results for the year, the reset is expected to be up 6%. Amur saw steady improvement throughout 2023 as borrowers positively adjusted to more stable macro environment and customer sentiment improved. LMS' results improved over the year with their ECR now recovering to 1.2x. Alaris expects this improvement in gross margin to continue into 2024. With these improvements, we expect LMS to begin catch-up payments on their deferred distributions in the latter half of the year, based on the 12% reset for 2023 and forecast 2024, there is an increase in the fair value of LMS during the quarter of $4.3 million. As discussed in previous quarters, GWM has not realized the growth expected at the time of our investment and a slowdown in early 2023 results impacted their growth expectations for the year. This performance against budget and negative reset for 2024 resulted in a decrease in fair value during the quarter of USD 3.1 million. Other less significant movements in D&M, B&S, SCR, FMP, Edgewater, Fleet and Sagamore rounded out our changes in the quarter. This strategic transaction involving BCC and co-sponsored Brookfield completed earlier in the year, in which we exchanged USD 145 million of our traditional preferred equity for convertible preferred units resulted in Alaris receiving an 8.5% distribution as well as an annual transaction fee of USD 1.5 million, with a total of $12.2 million received in 2023. During the year, there was also an increase of USD 13.9 million in the fair value of the convertible preferred units, resulting in a total annualized rate of return of approximately 20%. During the year, Alaris generated basic earnings per unit of $3.05 and paid out $1.36 per unit in distribution, resulting in total book value of $21.12 per unit, which represents a record for Alaris. The actual payout ratio for the year was 64% after adjusting for the settlement and legal costs relating to Sandbox litigation in Q1. During the quarter, we also amended our credit facility, which included increasing the facility to $500 million, expanding the leverage covenant to a permanent 3x and reducing our overall pricing. We currently have approximately USD 185 million outstanding, and have $258 million of capacity available on the facility. Since converting to a trust, in 2020, Alaris' tax profile on distributions change for being 100%-eligible dividends to a combination of return of capital, eligible dividends, capital gains and interest income. As a result of the decline in the amount of interest income generated directly by the Trust, the effective tax rate of Alaris' distribution for an Alberta individual in the top tax bracket for 2023 was 24.5% as compared to 34.3% for a dividend received from a corporation. Back to updates on our partners, our portfolio continues to perform well with a slight decline in weighted average ECRs to approximately 1.5x, with 11 out of 20 partners continuing to be above this threshold. With the effect of higher interest rates now fully burdening the portfolio, trailing 12-month period, we have seen a few partners' ECRs dip below the 1.2x threshold, with negative resets in these cases as well as stable interest rates and later year declines in interest rates expected, Alaris sees positive go-forward trends in these metrics. Ohana's ECR is affected by the drag created by growth. We view this as a positive and it is this growth that is driving the gains in common equity value. For the purposes of Ohana's bank covenants, this drag of new clubs is excluded for 18 months, we expect Ohana to grow back to an ECR above 1.2x over the course of the year. D&M, once the results of the acquisition in January and the lower preferred distributions are pro forma, D&M is above 1.2x, and with the pickup in lease activity forecast for the latter half of 2024, we expect to see D&M above 1.2x within the period. IT services have been most affected by a slowdown in the capital project spending over the course of 2023. Accscient's business is stable, but we see the bounce back above 1.2x is likely to take longer than D&M and Ohana. Of our 20 partners, 13 either have no or less than 1 turn of debt as compared to EBITDA in the business. Our anticipated aggregate partner resets are expected to be flat in 2024. Positive resets are expected from 9 partners, with negative resets from 8 partners and 3 who do not reset in 2024. Coming off of the high growth periods for many of our partners over the last few years, we did expect to see some flattening and declining back to more normalized levels. Our current outlook calls for $39.2 million of revenue in Q1, and a 12-month run rate of $169.6 million. Our G&A expectations have increased modestly to $16.5 million, reflecting the growth in the Alaris team and a general increase in costs. As noted in last night's release, we do have an upcoming change to reporting with the evolution of Alaris' investment model over the last few years, beginning with the introduction of common equity and continuing to evolve with the expansion of SPV investments. Subsequent to year-end, Alaris determined it had met the requirements of an investment entity under IFRS 10. As a result of this prescribed change, in 2024, Alaris will no longer consolidate its investment entity subsidiaries into its financial results. On a go-forward basis, these entities, including Alaris USA, the subsidiary which holds Alaris' U.S. investments as well as Alaris Equity Partners, Inc., which holds Alaris' Canadian investments as well as senior credit facility and convertible debentures, will be reflected in the trust as investments held at fair value. While this method of accounting will have a pervasive effect on the financial information on the face of the statements, supplemental disclosures and non-GAAP measures will be provided to ensure a similar visibility into Alaris' operations and results. While this change is prescribed, it does have some benefits for Alaris, which include the ability to utilize our full suite of rights, including stepping in without having to consolidate the partners into our financial statements, providing more flexibility in how we address issues within the portfolio. It also allows us more flexibility in how we invest capital as we are able to have a higher amount of influence or control and partners without navigating the accounting effects of this involvement. And on that note, I'll turn it over to Steve for his comments.

Great. Thanks, Amanda. January marked the Alaris' 20th anniversary, which on its own is extremely gratifying. Companies in the private equity industry don't make it to 20 years unless they're doing something right and creating value for the shareholders. It also happened to be one of the most exciting 12 months in our history because of the significant advances that our company has made strategically that manifested themselves in our results this year. Over the first 15 years of our existence, our unique preferred share portfolio created a low-risk, low-volatility cash flow stream. Entrepreneurs gave us downside protection in exchange for more control and more upside for them. At that point, and after analyzing the returns that our capped growth, preferred shares have created for the common equity holders of these companies, we decided to cap on a portion of common equity to go along with our prefs on to every deal where it made sense. We hope to expand our return profile while not materially changing the risk profile since we are still protected by the rights and remedies of our preferred shares. Fast forward to today and the 42% total return from our roughly $200 million common share portfolio, has more than justified our decision from 5 years ago. The other strategic initiative that crystallized this past year was the introduction of third-party capital management that resulted in a partnership with Brookfield, along with our long-standing partner Body Contours. Having an economic interest of -- in USD 400 million, that we didn't have to raise ourselves is completely additive to our return profile. It does have the additional benefit of really putting Alaris on the map in the U.S. private equity industry, as it was one of the most high-profile deals done in the U.S. last year. Investment banks and advisers are now very familiar with our company, and we can show potential partners a far more robust set of outcomes with Alaris as their sponsor. Prior to the BCC transaction, we were making a 13% return on that investment. 2023 saw a total return on BCC of 20%, a significant transaction in many regards. Looking forward, we expect to keep expanding our progress with traditional preferred and common equity investments into new partners, close another third-party capital transaction, and we also believe that 2024 will be a year to see some profitable exits. Because of COVID and the rising interest rate environment, we have had fewer partners decide to sell their businesses than usual. While we don't see a large number of them selling, we do expect that 1 or 2 decide to sell this year. Now that we have common equity upside, along with the prefs, exits have the potential to add a really nice upside to our returns and allow us to redeploy the capital into new situations. I've also set our goal for 2024 to be a year of growing through our partners. We now have a robust portfolio of 20 platform investments. Again, as a common equity holder in most of these companies, creating equity value while also deploying more pref shares into them at highly -- is a highly accretive strategy for us. Our business development professionals have been tasked with increasing that activity in the coming year. From a professional and personal perspective, it's been an incredible journey to be involved with this company as we've evolved and adapted over the 20 years, and I really can't wait to see what the next 20 years bring. So Daniel, happy to open it up to any questions.

[Operator Instructions] And our first question comes from Gary Ho with Desjardins Capital Markets.

So we're seeing -- starting to see a common equity investment strategy shine through here. Would you say the fair value of your common equity book now is fully marked to market already? Or could there be some upside when these assets are redeemed in the coming years? And I think, Steve, you mentioned in your prepared remarks, several potential exits this year.

So just in regards to the accounting standpoint, the -- there is a difference in the mark-to-market of our common and to what we expect to receive on an exit. When we mark-to-market our common, we are including a discount -- a minority discount, and in general, we exit these investments alongside our partners and control deals. Therefore, we will still have a pickup to the fair value on our book based on that control premium that we are not recognizing ourselves. Steve?

Yes, I think that's fair. We've tried to be conservative historically on our fair values. I don't think anything has changed in that regard. So that's just kind of the nature of the process. So we do think there's several of our companies that have had takeover offers on them recently that we don't think we'll go through in each of the cases, they've been at higher valuations than what we're holding them at. So we think there's definitely upside there.

Okay. Perfect answer. And then on Planet Fitness, I think you mentioned there's some positives from the Planet Fitness Corporate. Can you elaborate what those are? And also any opportunities for your partner to acquire other PE-led franchisees?

Yes. So Planet Fitness Corporate has had a change of their CEO over the last few months. Their interim CEO is one of the original franchisees and one of the largest kind of independently-owned franchisees in their system. So there's a renewed focus on franchisee economics, that starts with the cost of a build and to reequip. So they've changed the time lines and also the equipment requirements for each club that has reduced the cost and given more time in between rebuilds. There's some other things around the fringes. One of the other things that they're testing right now in about 250 clubs is a price increase for the first time, on their base membership of $10 a month. For our company, every dollar in base membership adds $2.5 million of -- straight to the bottom line. So it's significant. And so yes, it's a system that has been extremely stable over the years. That's why so many private equity firms have gone into the Planet Fitness system. And so it's just a wonderful cash flow stream. The membership count continues to grow past pre-COVID levels. And one of the things that they've really seen is that the Gen Z, Gen Z, as they call it there. Generation, is really providing some significant growth to their membership counts. They have something called the Summer Pass concept where every teenager, in America, gets kind of June, July and August for free at every Planet Fitness gym. And that's really led to follow-on membership growth, not just for those kids as they age, but also for their parents. So it's been a wonderful investment for us. We're 10 years in, just tremendous people, and we also do think, to your second point, because private equity went into this space so hard, starting about 6 years ago, and we were actually the first PE firm into the franchisee space in Planet Fitness, 10 years ago. A lot of those companies are now having to refinance. And because of the stability of the cash flow stream, banks were going up to 6x of debt on these things. So it's got 2 impacts: one, I think there's going to be assets for sale in the industry to help refinance some of those balance sheets; secondly, there may be some territories that become available from corporate where people don't have the capital to keep up to their ADA requirements, and they -- corporate has a track record of showing those opportunities to us because we've been one of the top operators in the system for almost 20 years. So yes, it's been -- the per club economics has gotten better and better, and we'll get better and better here with these moves. And we do think there's very good acquisition opportunities here as well, and we're ready for that.

Okay. Great. And then just last question, perhaps for Amanda. You do have your converts due in a few months. But you do like -- you, signaled there, have ample room on your credit facility. What's the game plan there as it stands today? I'm guessing you're comfortable with your dry powder position even refining that on your revolver.

Yes. We have ample room on our revolver to still fund continued growth and move these converts on to the line. We continue to evaluate what redemptions look like within our portfolio as well as opportunities to potentially refinance the convert. So we continue to look at the auctions, and I think we'll make a decision on which way we go in the next few weeks.

Our next question comes from Nik Priebe with CIBC Capital Markets.

Okay. So Fleet partially redeemed the preferred share investment in the quarter. That business seems like it's performing pretty well lately. Are there plans to redeem more?

No. Not at this point. Fleet has had obviously just enormous growth over the last few years. But we have a clause in all of our agreements where if we own common equity, they can't buy our prefs down past a certain amount, unless they buy everything out, all at once. So we're kind of near that point with Fleet. So we expect that to be a stable number.

Got it. And if that scenario were to materialize, how does the common equity investment get priced at exit? Like, is there a mechanism? Is it kind of formulaic in nature? Like, how does that work?

No. With the common equity, it's not formulaic, it would be market. So for the most part, our exits are in a third-party transaction. So we're just selling alongside the entrepreneur at the same valuation. In a situation where they somehow have financing where they're staying in and taking us out, which really hasn't happened before, it would be a third-party valuation that we both agree on.

Got it. Okay. Interesting. And then, Amanda, you made reference to qualifying as an investment entity under IFRS. And it sounds like that will have some changes to the P&L. Can you just preview for us what that will look like with this accounting change, how that might just impact the look and feel of your statements? Might just be helpful if you can help us kind of visualize how that change could sort of impact the interpretation of your results going forward?

So from the income statement point of view, all of the net operations of Canada and U.S.A. are 2 investment holding companies, will show up as one line as a fair value change and encompassed within that one line will be both the distributions from our partners, as well as the tax expense that is incurred on those. Some of the operating expenses in each of those entities as well as interest expense. So it will be more difficult to get back to a true EBITDA number. We still have the G&A expenses. Our staff and majority of our G&A is held in an entity that will continue to be consolidated. So a lot of that middle section of the income statement will continue to be there from a G&A, legal perspective, trust, taxes and financing costs. Through the notes of the statements, we will blow back out so that the same visibility is available with regards to partner distributions and the fair value gains and losses. So we'll be able to understand in that fair value pickup sort of what is cash and what is noncash. The notes of the statements will also give the same level of view into all of the movements in each of the partners. I think from -- a net asset value is going to be very similar in fashion, although the look will be different. We also will maintain reporting on our coverage ratio, we'll get back to some cash flow metrics, but we'll probably lose some of the visibility and ability to get back to EBITDA as we've traditionally had it.

Our next question comes from Jeff Fenwick with Cormark Securities Inc.

Steve, I wanted to circle back to some of the comments in your MD&A around the go-forward growth and some of the deal opportunities you might see. There was some comment, I believe, around maybe becoming more involved with M&A support for the existing partners. You were just commenting a minute ago there on the Ohana. What's the thinking there? Is that still going to be effectively the same model of common and pref, or are you going to be a bit more flexible in terms of what that mix might look like if you saw the right opportunity? Or what's the thinking there?

Yes. One of the nice things about this equity accounting that Amanda and her staff have put us into, as she mentioned, is we will have more flexibility there. We're still a cash flow-based investor though, Jeff. So I think the flexibility is more at the margin in terms of the cash versus exit profile of our returns. But yes, it will allow us -- typically, we've kind of capped ourselves at 20%-ish of the common equity of the companies we've invested in. We can go higher than that in certain situations, including in situations where that company maybe has kind of a next transition, and we can actually step in as the buyer instead of selling alongside of the owner if we're comfortable with the management team that we've been working with for years. So it does give us a lot more flexibility, including, as you mentioned, on M&A, our -- we just added to our business development department. We're going to be spending more time at industry conferences, in addition to kind of the generalist conferences so that we can really dive into each of our platform investments that is acquisitive and kind of have the management bandwidth to be rolling in acquisitions. So I really want to make that a focus this year to grow through them. It's lower risk than new deals. Obviously, we're going to keep on doing every good new deal that comes our way. But that's -- it's very competitive in that scope. We've, for 20 years, been successful in it, and that's not going to stop. But I just think we can really add to our growth by really digging into our platform investments. And quite frankly, a lot of them now, really compared to 10 years ago, they're looking for that. They're wanting us to provide value to them, whereas when I started this 20 years ago, people wanted us to stay out of their hair. That's completely changed in this market. One of the first things we get asked in every management meeting is, "How can you help us go to the next level?" And so we've got one of our former partners that sold out, that has now joined us as a full-time consultant, that is helping out with each of our partners, and we're spending more time with them and our BD guys, again, have been tasked to help them grow. So that's something I'm quite excited about in the near term here.

Okay. And then I just wanted to ask about a couple of the investments directly. I mean, Fleet has been obviously very successful and you referenced that earlier. Just, maybe Amanda, you might know the numbers here to remind me, but I recall that the -- I think the original common equity component there was about $8 million. And I think that you maybe have received close to $16 million in distributions now, and I think have continued to mark up the equity as well. Is that a correct way to characterize, it's hard to sort of discern the total return off of an individual investment like that?

Yes. We have -- we originally bought that common for $8 million. I think we have it -- I'm going to get this wrong, but I'm going to say $53 million is common at the moment. We've received $60 million in distributions. They paid down a bit of that pref, which attracts favorably to the common and future distribution. So we do expect that, that trend in distributions will continue, if not grow a little bit. So overall, a very successful investment with a strong backlog and runway ahead of it with regards to maintaining the level of growth for the next cycle.

Okay. Great. And then -- maybe you could just give us a bit of an update on GWM. I mean, that's one there where I think in the sort of 3 of the last 4 years, they've reset at the low end of the collar for them. What's the prospect for that business? It's still a pretty sizable investment for Alaris, but how are you feeling there with how that business is positioned?

Yes. Certainly the one company in our portfolio that really did get hurt by COVID, and that has been much slower to recover than what we or they would have hoped. We're still bullish on it, Jeff, to be honest, and the management team very much is as well. So they've -- in the last 3 years, while they haven't grown, they've done a wonderful job of diversifying their customer base. They're in a lot of different areas. They had too much exposure to the hospitality sector during COVID. So we think they're poised for growth. We still think it's a very good long-term play for us. We like the industry. We like the people. So while -- yes, it's disappointing that the last 3 years have not been what we had hoped for, certainly, a company in our portfolio that we actually have high hopes for.

Okay. And in terms of just their financial position when you're sort of in that period of decline, I mean, what's the -- is that one that has some senior debt sitting in front of you guys that might be a bit of a concern? Or how do you feel about that?

They do have senior debt sitting ahead of them. We are not concerned on payments there above -- they're in the 1.2x to 1.5x range with regards to cash flow. Where this investment has really been hit is by the growth profile and the common from a pure perspective, we don't see a lot of risk there.

Yes. They don't have a huge amount of debt, much lower debt than most companies in their sector would have. So we think we're fine there. But it's certainly one that we've been watching closely and talk to, obviously, very regularly, but yes, we still think there's upside there.

[Operator Instructions] Our next question comes from Zachary Evershed with National Bank Financial.

Congrats on the quarter.

Thank you.

Could you go into a bit more detail on the kinds of actions you'll be able to take after the IFRS 10 change already outlined?

So I guess he's asking more on the BD side, about the actions we'll take post change. I don't know that it will significantly impact anything we're doing. I think it gives us more flexibility in reacting potentially to things within the portfolio, if we do feel the need of stepping in or directing -- even just sitting on the board was something that we were restricted from an accounting perspective, where now we can sort of take a more active position on board on a regular basis. So we can have a bit more structured influence within our deals. Board seats -- we've always worked very closely with these partners more from an observatory position. We have great relationships with everyone. This just allows us the ability to be a bit more structured in that. We can take larger controlling positions with regards to equity, but I don't know that, that's something that we're really -- we're not set up to be a controlling equity holder. We really like that, that position is maintained by management. Just in the structure and how we rely on the management team and we want them incentivized in the future.

It can give us a little bit more upside. There will be situations where, like I said, if we go in initially as a 30% shareholder and then some other legacy shareholder wants to sell, we can be the buyer of that instead of that triggering an exit event. So it just gives us more flexibility with -- especially with the people that we already know and trust.

Okay. That makes sense. And so probably not a controlling position, but given that you will be able to strike above that 20% common equity mark, what would you say is the new ceiling on how high you'd like to take that?

It will be a situation-to-situation, Zach. I don't like to put hard boundaries on it. We've really, over our 20 years, become known for people that create win-win situations between our shareholders and our entrepreneur partners. So if there's a situation where we do have to take 55% because that's what the situation requires, but we're completely confident in the alignment with management and the motivation, then that's something that we can now look at. I would say, though, that in a situation like that, it would likely be a situation where the common equity also pays a fairly known dividend. We're not going to have too high of a percentage of our portfolio in things that don't have hard cash flow attached to them.

And from a mix of our capital going out, in some of these situations, 20% of our total check can still end up being 55% of the common. So it doesn't necessarily mean that we're going to change the mix of our capital. We've always sort of targeted an 80/20 split, pref to common, just from a cash flow return perspective, and we would continue to maintain that perspective from our balance sheet side.

That makes sense. And then for the 2 deals that you outlined, you walked away from that would have closed before year-end, how often would you say that happens when deals are well advanced? And what were the factors at play there?

Both very different, but just through due diligence, just raised enough concerns for us that we decided as a firm to not close them. So it's disappointing. We spend a lot of time and money on transactions to make sure we get it right. But that's the key phrase, is to make sure you get it right. And if you're not sure, then you move on to the next one. There's lots of opportunities out there. So we're only as good as our worst deal. So we've kept a very strict investment criteria, and that's not going to change.

Perfect. And I guess last one for me. The idea behind deploying more to existing partners for acquisitions. Is that driven from the partners' end? Or is that something that Alaris will be pushing?

It's both. So definitely, our partners want it. It's one of the reasons that they've chosen us. We just won a deal recently that we're working through right now that, that was the key differentiator for us. They got a lot of bids from other kind of structured equity providers, but none of them kind of gave them the upside and the value added that Alaris does. So they termed that we were kind of the best of structured equity and traditional private equity, and the fact that we can get involved and create value, but we're not firing the entrepreneur. We're not controlling their Board and all of those things. And then we're not controlling their horizon as much as private equity does. So yes, it's definitely both. And it's not for everybody. It's not for all 20 of our companies. There's probably 10 of them that would have no interest in acquisitions. But for the other 10, they're super keen and they just love it when our business development guys find some deals at different conferences that they go to and different connections that they have, that we bring to them. At the very least, it's great industry knowledge for them.

Our next question comes from Geoffrey Kwan with RBC.

I apologize, I joined the call late. So hopefully, these questions have been asked. But my first question was just on the deferred distributions at LMS and Ohana. I guess, is there any insight that you have in terms of the timing of those things? Because I think you've talked about wanting together or you think you'll get in 2024? Is it going to be kind of steady of those payments? And do you have, I guess, how strong is your confidence that you'll get those payments caught up by the end of this year?

So LMS currently have, I think, $2.5 million outstanding and deferred distributions from the first half of 2023. We expect them to resume payments in the latter half of the year. I don't know, we'll have to see how the year plays out to see what the excess cash flow is to make those catch-up payments. So I don't know if we'll have that all back in the latter half of the year or not. We're also very cognizant. We don't want these catch-up payments to be detrimental to the go forward of the business. So we're quite happy on that quantum of amount to ensure that the business is firing on all cylinders and making payments as they're able. With regards to Ohana, we have another $2.5 million outstanding base, currently been making payments of $200,000 per month on those catch-up payments and they'll be wrapped up at the end of the year. So we're very certain that we'll collect that $2.5 million at $200 per month over the next 12 months. And then by the end of the year, we will be fully back to caught up on their distributions.

Okay. And just my second question, was just -- taking a look at the resets that we had for 2024. You had a good number of companies that had high reset numbers and you had a fair number that had negative amounts. When you kind of take a look at the overall portfolio and the portfolio health, I mean, how would you kind of assess where you are today given the current macro environment?

I think we had 9 up. We had 8 down, I would say, out of the 8, we probably were expecting 6 of those to be down just given the rate of growth that they had and coming off of record years, we were expecting them to go back to normalized level. When we look at the weighted average of our ECRs, we're targeting when we close a deal to be at 1.5. So the fact that our portfolio is normalizing back to that 1.5 number isn't concerning for us. It's probably where we're targeting to be. We peaked up at 1.8x, while everything was very frothy and all of our partners were doing extremely well. But that isn't -- that wasn't our target. I think for the returns that we're getting, the balance with the risk, 1.5x is sort of where we expect to be.

Yes. And I think, in fairness, I think '23, if you look back in our 20 years, would be one of the lowest reset performance years that we've had, definitely kind of a choppy year where some companies had some tailwinds and -- but there was a lot of headwinds out there for different types of companies. And that's why we've created a portfolio like this, where you're going to have different drivers and different things happen in different years, all of which should come out to a very low volatility type of profile, and that's what we have. So I'd like to see a little higher. But -- and I think, based on the forecast that our 20 companies have for '24, we do expect it to be higher in the next year, but we're not completely displeased with it.

[Operator Instructions] Our next question comes from Trevor Reynolds with Acumen Capital.

So just -- looks like most of my questions have been answered. But on the last call, you guys highlighted that you had more deployment potential than you had capacity for. I expect with the deals that you walked away from and the redemptions expected and the increased credit facility that's not the same issue, but I'm just looking for a little bit more color on kind of what your expectations for 2024, in terms of deployment are, and what the competitive landscape is with PE right now?

Yes. It's always competitive. Really, there's still so much money out there looking for a home for a good company. It's always going to be competitive no matter what interest rates are, no matter what's happening in the world. It's what I've seen for the last 20 years, and I don't see any change in that. There are more people now in the structured equity space than there used to be. There's still nobody that does exactly what we do. And so for the deal we just won, for the deal that we closed in the late fall, there was only one choice for them. They -- both of those situations had 20, 30 bidders in the process. And after the face-to-face management meetings, both situations stopped the process and signed exclusivity with us because there is nobody else that does what we do. So we're still confident in our ability to deploy into new deals. In terms of redemptions, it's always a little harder to forecast. But as I mentioned in my talk, we do think that there will be more redemptions over the next 24 months just from the fact that there really hasn't been for the last 3 years. Our average hold period, if you look back at our 20-year history, has been about 5.5 years. And so when you go 3 years with very few, you just know mathematically that you're probably going to get some. And as I also mentioned, we have had some takeover offers on a few of our companies. We've got companies that are doing extremely well. They get attention from private equity or strategics. And so we have seen kind of more activity on that front in terms of unsolicited bids. But we think over the next 12 months, probably a partner or 2 will definitely redeem. And quite frankly, now that we have common equity investments, that's a real positive thing for us. That triggers nice gains. Triggers the ability to redeploy capital that we weren't getting structured revenue from into new investments where we've got that 80-20 split. So those are real positive things for us when we get redemptions now.

That's great. And so in terms of deployments, like, you do expect that to be higher likely in 2024 than 2023?

Yes. My over-under is always $200 million. We came in at $130 million for this past year. If we would have executed on those 2 deals at year-end, we would have surpassed the $200 million. So we were there in terms of deals that we won and had in-house, but sometimes things like that happen. So it's always a number you can't bank on, but we've had other years where it's been much higher than that. So $200 million is always my kind of over-under, I don't know, maybe I'm an optimistic guy, but I'm betting the over.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Steve King, CEO, for closing remarks.

Great. Thanks, Daniel, and thanks, everybody, for tuning in and for your great questions. As always, Amanda and I are available to answer any other further questions off-line if you'd like today, and we look forward to the new year and Q1 coming out in a couple of months. So thanks very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.