Alaris Equity Partners Income Trust ($ADUN)

Good day, and thank you for standing by. Welcome to the Alaris Q4 2025 Earnings Release conference. [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, Chief Financial Officer. Please go ahead.

Thank you, Didi. Good morning, and thank you all for joining us today to discuss our 2025 financial results. I'm joined on the call by Steve King, President and CEO. Before we begin, I'd like to remind everyone that all financial figures discussed are in Canadian dollars, unless otherwise indicated. Please note that some comments made during this call may include forward-looking statements. These statements are based on current assumptions and involve risks and uncertainties, so actual results may differ materially. For a more detailed information on the factors, assumptions and risks involved, please refer to our press release issued last night and the management discussion and analysis under the headings Forward-Looking Statements and Risk Factors available on SEDAR at sedarplus.com and on our website. We will also be referencing certain non-IFRS measures, which can -- which may be presented differently than similar measures by other companies. Additional information and reconciliations related to these measures can be found in the press release and MD&A. I'll begin with a review of our Fourth Quarter and Full Year 2025 results. Overall, 2025 was a strong year from an operating perspective. We generated growth in total revenue and operating income increased net book value per unit over the course of the year and completed record capital deployment and maintained a payout ratio below our target range. While reported earnings were affected by unrealized foreign exchange losses, the underlying operating performance of the business remains solid. Starting with net book value. Net book value per unit decreased $0.38 in the quarter to $24.79 reflecting $0.54 per unit of earnings from operations, offset by $0.44 per unit of unrealized foreign exchange losses and $0.37 per unit of distributions declared. For the full year, net book value per unit increased $0.64 driven by $3.33 per unit of earnings from operations, partially offset by $1.13 of per unit of unrealized FX losses and $1.39 per unit in distribution. NCIB repurchases added approximately $0.06 per unit to book value. On the income side, total revenue and operating income increased by 15.9% in Q4 and 14% for the full year, driven primarily by stronger fair value performance across the portfolio, including a $73.2 million net realized and unrealized gain on partner investments in 2025 compared to $47.3 million in 2024. Total partner distribution revenue decreased 2.6% in Q4 and 2.5% for the full year. Within that, preferred partner distribution revenue was flat in Q4, but increased 4.2% for the year, reflecting contributions from new and follow-on investments in Berg, PEC, McCoy, Shipyard, Cresa, Renew and Optimus. Those gains were partially offset by deferred distributions from GWM and lower yield on Ohana, following the 2024 transaction. and deferred distributions from FMP during the year. Common distribution revenue declined 36.3% in Q4 and 33% for the year, largely due to the timing and variability of common distributions. It's worth noting that 2024 included elevated common distributions from Fleet and a onetime common distribution from Ohana that did not reoccur in 2025. Excluding those 2 items, common distributions from the rest of the portfolio increased by approximately 10% year-over-year. The annualized distribution yield on preferred capital invested was 12.4% for both the quarter and the full year. Turning to fair value during the fourth quarter and full year, the acquisition entities recorded net unrealized fair value gains of $8.6 million and $72.1 million, respectively, on partner investments. In Q4, the most notable increases came from Fleet and SCR, along with smaller positive adjustments across several other partners, partially offset by decreases in FMP and PEC. For the full year, the principal valuation increases were reported in Shipyard, Edgewater and Fleet, partially offset by declines in GWM and FMP. The total value return on invested capital, which combines realized cash distributions and unrealized fair value changes relative to invested capital was 3.1% in Q4 and 16.2% for the year. Operating costs and other expenses within the acquisition entities decreased 17.9% in Q4 and 2.7% for the year, primarily due to lower income taxes, partially offset by higher transaction costs associated with the new investments and increased finance costs related to funding those transactions. At the trust level, general and administrative expenses decreased 17.3% in Q4 and 10.6% for the full year, primarily reflecting lower management bonus accruals driven by lower realized gains during the year. Finance costs increased in both the quarter and the year, reflecting the issuance of a $92 million convertible debenture in June and $115 million convertible debenture in December as well as the amortization of related financing costs. Earnings from operations increased 34.8% in Q4 and 17.3% for the full year, reflecting higher revenue and operating income and lower G&A expenses. However, earnings and comprehensive income for Q4 2025 was a loss of $200,000 compared to income of $77.9 million in Q4 2024. This change was primarily due to an unrealized foreign exchange loss of $20 million in Q4 2025 compared to an unrealized foreign exchange gain of $61.6 million in Q4 2024. Excluding unrealized foreign exchange in both periods, earnings and comprehensive income for Q4 2025 was $19.7 million, up 20.9% from -- sorry, $16.3 million in Q4 2024. For the full year, earnings and comprehensive income decreased by 61% to $90.8 million compared to $234.4 million in 2024. This decrease primarily reflects a $51.2 million unrealized foreign exchange loss in 2025 compared to an $80.8 million unrealized foreign exchange gain in 2024 as well as the absence of the nonrecurring $30.3 million gain related to our accounting transition, which was recorded in January of 2024. Excluding all the unrealized foreign exchange in both years and excluding the 2024 accounting transition gain, 2025 earnings and comprehensive income were $142 million, an increase of 15.2% from $123 million in 2024. Moving to distributable cash flow. Alaris' net distributable cash flow per unit decreased by 24.3% in Q4 and 16% for the full year compared to 2024. The decrease primarily reflects the timing and variability of common partner distribution, the timing of cash tax payments and higher transaction-related activity during the period. Even with that decline, the payout ratio was 64.2% in Q4 and 56.6% for the full year, both remaining below our target range of 65% to 70%. During 2025, we also repurchased and canceled 465,000 units under the NCIB at an average price of $18.87 per unit. For a total consideration of $8.8 million, including those repurchases, the payout ratio on cash disbursement was 62% for the year. From a balance sheet perspective, we continue to strengthen and align our capital structure in 2025. During the year, we amended our senior credit facility, extending the maturity to September 2029 and converting the facility from CAD 500 million to USD 450 million, better aligning our borrowing capacity with our U.S. dollar investment base. At year-end, $312.8 million was drawn on the facility, leaving approximately $138 million available for U.S., available for new transactions. As noted earlier, we also completed 2 convertible debenture issuances, $92 million in June 2025, bearing interest at 6.5%. $115 million in December, bearing interest of 6.25%. These financing supported investment activity and repayment of senior indebtedness at the acquisition entity level. From a portfolio perspective, the underlying picture remains constructive across the portfolio the weighted average ECR remains approximately 1.5x, which we view as healthy, overall. We continue to have strong diversification by industry and partner-specific drivers. That said, there were a few areas of pressure during the year. FMP was affected by suspended contracts tied to changes in U.S. federal procurement policies. GWM experienced lower earnings and deferred distributions, while it works through senior covenant issue. We also continue to be active on the capital deployment front. In Q4 alone, we invested $115 million in Optimus, USD 30 million in Renew and USD 20.5 million in a follow-on investment in Cresa. Looking ahead, we expect Q1 2026 total partner revenue of approximately $46.9 million. Based on current contractual terms and assumptions, our run rate revenue for the next 12 months is approximately $200 million. We currently estimate run rate G&A at approximately $20.5 million. And based on current assumptions, we expect the run rate payout ratio for 2026 to be in the 60% to 65% range. We believe that positions us well to continue funding growth, supporting distributions and maintaining balance sheet flexibility. And on that note, I will turn it over to Steve for his comments.

Great. Thanks, Amanda, and thanks, everybody, for tuning in. Really, as much as 2025 was a record year for Alaris. I'm even more optimistic about what could potentially transpire in '26. We have positive momentum from deployment coming off a record year of $387 million and new partnerships in '26 as well as follow-on opportunities with our now record number of 23 current platform partners promises to power even more growth into the future. Of our 23 partners, they're on pace to have very good years, we believe, as we strive to have our 22nd out of 23 years with positive partner contribution adjustments. This year, we benefit from $0.11 of new earnings that came from growth of our partners in 2025. While our largest holdings in BCC, Ohana and the Shipyard continue to be very stable, I'm pleased with the fact that a few of the companies that have experienced headwinds that Amanda was talking about are now showing very good signs of recovery. GWM is having an excellent first quarter, seems poised to regain the growth curve that they had exhibited in the past. FMP is also seeing positive signs that U.S. government spending in their sector is starting to return despite the uncertainty that still exists in Washington. And SCR has also received quite a bit of new work as you'd expect in the red hot mining services sector and has grown revenue and earnings dramatically. 2026 should also be the year that Alaris starts to harvest the common equity investments that we started making in 2019. While timing and even execution of divestitures can't be certain, we do expect that at least 2 of our partners will sell this year, triggering common equity gains that can then be redeployed into new transactions. In situations where common equity has grown faster than our preferred equity, which is almost most often the case, redeploying capital back into our normal deal structures of 80%, perhaps 20% common will result in increases of our structured revenues and earnings. This compounding effect, especially in our larger investments can accelerate our long-term growth and allow us to make meaningful additions to our dividend stream to shareholders. Being at the bottom end of our targeted payout ratio right now leaves us in a great position to consider another dividend raise when incremental earnings from deployment comes in the future. We believe that this formulaic approach to capital allocation will drive a lower cost of capital for our company as the market has shown in the past 3 months since our last dividend increase, and allow our company to grow quickly and profitably as new investments come to fruition. Finally, I'd like to reiterate what I mentioned in my President's message in the press release. Alaris' top quartile returns cannot happen without an extraordinary sacrifice from our 24 employees as well as our service providers. From deal sourcing, diligence, monitoring, legal, accounting attacks. These are people that not only do great work, but they also ensure that culturally, Alaris continues to be known as a group that entrepreneurs want to partner with. Thank you to each and every one of you as well as our unitholders for continuing to support our company. Didi will open it up to questions, if there are any.

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

Steve, maybe just go back to your last comments there. Markets have generally been fairly healthy, valuation as well. Sounded like you're more upbeat on monetization opportunities. Maybe can you talk about how the environment is today and what gives you confidence that perhaps maybe 2-plus monetizations this year? And any thoughts around that? Yes.

Yes. I think the underlying thing, Gary, is that in my 34 years in the business, if you have a really good asset, it almost doesn't matter what specific environment you're in, obviously, around the margin of valuations, it will have some impact. But there's still a massive amount of undeployed capital out there in the private equity industry. And what we continue to see even in an environment like this that isn't completely frothy like it has been in the past, is a really good assets sell at really good prices. So looking at a deal that we're bidding on right now, there were 50 bids from private equity firms and the company is taking private equity firms to management meetings in the finals, like that's just a huge number. So while mid- to low market private equity funds have had a really tough time raising new capital. There still is a lot of liquidity in the market and -- so that makes it tough to win new deals, but on the flip side, gives us some confidence on sale processes.

Okay. Makes sense. And then my second one, maybe on Sono Bello, your largest investment by fair value. Can you talk about how the business is performing, store growth, backlog, perhaps maybe more kind of up-to-date thoughts on the weight loss drug impact? And just remind me the monetization expectations with that one now?

Yes. Sono Bello, this is going to be a really pivotal year for them. If you rewind a couple of years ago when the GLP-1s really started to make their mark, we weren't sure what the net impact would be. So from one side of it, a very obese person, is not a candidate for liposuction. Liposuction typically can take out around 5 pounds of fat in a procedure. So if you're 400 pounds, what does that do for you? So GLP-1s have had a positive impact in terms of bringing more clients into the range where they are eligible for liposuction. But then on the flip side, people that do have an extra 10, 20 pounds they sometimes have gone to GLP-1s instead of liposuction. So I think net-net, a couple of years in, I think it's been neutral. So liposuction as a sector has been relatively flat. But what we've seen now 2 years in is that it's brought new products to the forefront, skin tightening has become a really big part of the business, where a couple of years ago, it wasn't. So if you have lost that amount of weight. Typically, people don't like the look of themselves after that's happened because they have so much excess skin. So now skin tightening is a big part of what Sono Bello does. And as you know, the company has also moved into breast augmentation. And so GLP-1s have also had very positive impact on breast augmentation business as people that have lost -- women that have lost a lot of weight look for lifts and implants as they've lost volume in their breast. So without getting too deep in all of this, it's been a positive net-net, the breast augmentation division is one that is going to experience significant growth this year as we retrofit our 130 locations to be able to accommodate that. Obviously, that doesn't happen overnight, and it doesn't happen all within this year, but the growth curve for Sono Bello is very much there. And we are looking at, between ourselves, the founders and Brookfield, our partners. We're probably looking at kind of '28, '29 for crystallization there.

Okay. Perfect. And maybe just one more for me, more higher-level question. So AI chatter has been topical and accelerated in the past few months. Steve, curious if you have had chats with individual partners and how to kind of prepare for any potential disruptions, any specific partners to call out that might be a bit more susceptible?

Yes, we have. And it's a big part of our diligence on any new deal as well and what the potential impact there could be. So I think of particular interest would be our consultant companies, and I think you've got a couple of answers there, short term and long term. In the short term, AI is making their businesses quite a bit better and more efficient as they're able to do more with fewer people. And they're also helping to bring AI to their customers. So they're part of that solution. Over the long term, I think that kind of remains to be seen. That does AI replace the need for some of these consultants -- management consultants and business consultants, that's I think what remains to be seen. One thing I'm very confident in the managers we have in our consulting businesses are extremely well aware of this, and I think we'll pivot as needed. So right now, it's a positive 10 years from now, we'll see.

Our next question comes from Stephen Boland of Raymond James.

Just a technical question. Just in terms of your payout guidance for 2026. Does that include the harvesting of those 2 partners that you mentioned?

No. That's just based on the outlook table in the MD&A. So that's just go-forward expected revenues as well as G&A distribution and financing costs and taxes.

And Steve, just in terms of like, you were asked about AI, but I'm curious what segments you find attractive right now. I know you're opportunistic in terms of good businesses. But is there any sectors that you'd like to enter or ones that you're staying away from?

Well, I mean things that have too much of a technology bent to them that would have more disruption and obsolescence risk are ones that we've kind of always tried to stay away from and that will continue. So there will be, as there always has been a real focus on required services. So you look at something like health care services, Renew the company that we just invested in out of California, supplying anesthesiologists and radiologists to major hospital systems in the U.S. that's the kind of steady business that is not impacted really by technology or the economy for that matter. So things like that will continue to be our focused low debt, low CapEx. Number one thing being young managers that choose us because they want to stay in as opposed to wanting to sell. So those are things that have worked for us for 22 years, and I think still will work.

And our next question comes from Zachary Evershed of National Bank Capital Markets.

Congrats on the quarter. So just a few housekeeping ones for me. Any portion of FMP's partial payments still included in your run rate revenue projections?

Not at this time, we disclosed that we'll assess on a quarterly basis, their cash flow ability, and we'll probably do something more of like a quarterly sweep, but I have -- we haven't currently reflected anything in the outlook. So that will all be incremental for the year.

Got you. And could you provide us any additional indication on your expectations for common distribution timing and magnitude this year?

So there's currently about $16 million of distribution -- common distributions reflected in the outlook. It's lower than last year, really just with some uncertainty in the market, we were being more conservative, but probably room for upside as we continue through 2026.

Got you. And similar pacings last year, I assume?

Yes. With generally Fleet being one of our largest common dividend payers in Q3. Generally, we'll see that seasonality. Q3 will be a bit common quarter for us historically and then something more measured and equal through Q1, Q2 and Q4.

Yes. I think on the common side, we'll also start to see enhanced common dividends from Edgewater. Edgewater is our nuclear engineering firm out of Tennessee. And as most people know, nuclear is a very hot space right now, both from an energy point of view with AI data centers as well as defense in the U.S. So they have won some very large contracts, has really grown their earnings. We think that's just the start of it. So I think you can expect to see some significant increases in their common dividends.

Great color. And just one last one. What's the intention for the renewal of the NCIB program, given that the stock is still trading under book value per unit and the payout ratio is below target as well?

Yes. I think for us, that's something that we'll play it by ear to see how our stock trades. I do want to establish a really clear track record of dividend growth. And I think the market has shown that they will pay for companies that have a good consistent dividend growth track record. So I think that will be probably more of the focus at this point, especially as our share price goes closer and closer to our book value. So -- but that all depends if you have some kind of a shock to the market or to our stock specifically that we could certainly put more capital into NCIBs if that happens.

And the next question comes from Matthew Lee of CGF.

I jumped on a little late. So hopefully I didn't ask someone -- ask something that's already been answered. But as a whole, things look pretty sturdy in the portfolio, FMP and GWM though both to pretty sizable reductions this quarter. Maybe just talk about the outlook on those 2 businesses. Can it be rectified in '26? And should we start expecting most fair value to sort of flatten out in the coming quarters?

Yes. I did touch on it, Matt. But yes, both companies are actually seeing very good signs early this year. Both are ahead of their budget. GWM in particular, has had some nice contract wins much needed. So they're ahead of budget and ahead of where they need to be to pay what we want to be paid this coming year. So that's a great sign. FMP, also they're seeing government agencies start to spend money. Again, there's been a huge amount of fear to put it bluntly within a lot of government agencies in the U.S. with all the uncertainty and kind of fear mongering within Washington right now. But work needs to be done. And so they're seeing contracts come back. They're seeing new requests for information and request for proposals that they haven't seen in the last year come back. So they'll be just fine. We've got just a wonderful management team there and with GWM as well. So we don't have any kind of long-term issues there, but just businesses that need to be built back up and they're definitely well on their way to doing that.

Okay. That's helpful. And then maybe just one on Shipyard, good year overall, but then a bit of a turn on the fair market value this quarter. Is there anything in particular that happened there or just a change of inputs?

Shipyard did a transaction earlier in the year. It's just been a bit slower to start. It affected the cash flows really going into their DCF model. So a bit of a step down over the -- when you look at the year overall from fair value, Shipyard is definitely an outperformer, just a bit of tightening of that fair value at December as we look to their 2026 forecast.

One of the issues with using a DCF model every quarter is that it's probably too reactive, to be honest. Values of companies don't change based on one quarter of slightly lower earnings. So that's unfortunately the world we're living in as a public company, but yes, no issues with Shipyard.

And our next question comes from Trevor Reynolds of Acumen.

I was wondering if you guys could provide an update on Ohana. You did highlight in the release the click to cancel had a little bigger impact on the full rollout. So I was just wondering if you could provide a little update there.

Yes, I think that's fair to say, Trevor. The click to cancel that the corporate headquarters at Planet Fitness instituted for all of their franchisees has been a negative. And so we've -- our membership growth has definitely stalled because of that. It's unfortunate because it ended up -- click to cancel ended up not being mandated by the government. It was just our own headquarters doing it. So that's been a little bit of a negative there certainly no issues in terms of profitability or anything like that, just kind of a slowdown of membership growth. So I think there are some franchisees out there that will slow their build-outs of new clubs. There could be some other franchisees that -- they'll look to sell because of this. And that could be a definite interest to us between ourselves and our co-invest partner on this one, we would be ready to acquire other locations as they come up, and hopefully, the multiples of -- have come down a little bit because of this. So it could be opportunistic for us. We don't view it as a long-term thing once you get through kind of the initial impact of click to cancel. I think that goes away and you can get back to regular growth rates. So I think we're almost there. But yes, it has been a negative for the last few months in that system.

And is that -- and how would the membership increases being absorbed?

Sorry, I don't understand your question.

Just the fee increases that have been introduced over the past kind of year. I know that there was some increases on the rates, membership rates.

Yes. I think all of that has gone fine. I don't think that that's had any real impact on memberships. One of their larger competitors Crunch has stayed at $9.99, and that's maybe giving them a slight leg up. But I think overall, I like kind of what it's done for our system, getting 50% more from base customers, obviously, that's -- it would take a significant amount of lower membership numbers to make up for that. So I think net-net, it's been a smart move.

And just on Sono Bello payment in time again or this quarter. What's the expectation here over the coming quarters? Do you think they continue payment in time?

No, they don't expect to pick in '26, as I talked about before, we've got a pivotal time in terms of retrofitting a lot of our clinics. So a lot of their capital has been focused on growth and build out, which is why they picked us. But yes, I think in their budget for '26, it does not include any [ pick ] .

And last one, just any update on Heritage?

Heritage is chugging along. I think the management team is doing a good job building back some contracts and they're cash flow positive with no debt. So really, the goal is there to just keep on building, keep on working with their management and likely sell the business once it's at a reasonable size.

I show no further questions at this time. I'd like to turn it back to Steve King for closing remarks.

Great. Thanks very much, everybody. A really gratifying year for us in 2025. And as I mentioned in my notes, I couldn't be more excited about '26. We've been cultivating a lot of these investments that have common equity in them, which is now most of our portfolio. And we're getting to a time now where we're going to have some pretty exciting end results. One of the things that I love about our structure is that we get into an asset class that other people really have a tough time getting into. Managers buying companies from founders, one founder buying out another founder, and we get to go in along with those insiders at those insiders valuations that they've negotiated with the other parties. And then with the traps being capped in their annual growth and capped on exit, it really magnifies the returns of the common equity. So I'm excited to start being able to show that to our shareholders, especially over, not just this year, but the next 36 months, in particular, I think, is going to be a really active time for us on those crystallizations and certainly give us some great catalysts to not just deploy more capital, but also really drive some significant dividend increases over that time. So thank you very much for tuning in, and we'll report back to you next quarter.

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