Alaris Equity Partners Income Trust ($ADUN)

Good day, and thank you for standing by. Welcome to the Alaris Q1 2026 Earnings Release. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Amanda Frazer, Chief Financial Officer. Please go ahead.

Thank you, Antoine. Good morning, everyone, and apologies for the technical difficulties this morning. There was an issue with our link, but I think we've got -- it's somewhat sorted and this tape is being recorded, so the recording will be available to everyone after this call. I am joined on the call this morning with 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 the 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 more detailed information on the factors, assumptions and risks involved, please refer to our press release issued last night and the management's 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 financial measures, 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. Overall, we had a strong start to 2026 with improved portfolio income and solid growth in distributable cash flow. There are 3 main takeaways this quarter. First, portfolio income continues to grow, reflecting the investments we made throughout 2025. Total revenue and operating income increased 2.7% in the quarter, while partner distribution revenue was up 11%. Within that, preferred distributions increased approximately 10%, supported by contributions from investments completed last year, along with distribution resets, while common distributions were also higher quarter-over-quarter, reflecting timing and variability. Second, distributable cash flow improved, increasing approximately 6% Q1 '26 over Q1 '25, supported by those higher distributions and lower transaction costs. And third, our payout ratio remains very conservative at 51.9% for the quarter compared to just over 51% in the prior year period and well below our target range of 65% to 70%. From a balance sheet perspective, net book value per unit increased to $25.31, up $0.52 in the quarter, driven by $0.55 per unit of earnings from operations and $0.44 per unit of foreign exchange gains, partially offset by distributions of financing costs. On the earnings side, earnings from operations were down modestly year-over-year, primarily due to higher compensation expense related to the new participation plan approved this quarter. However, earnings and comprehensive income increased significantly, driven by an unrealized foreign exchange gain this quarter as compared to a loss in the prior year. As we've noted before, these movements can create volatility in reported earnings and are not reflective of underlying operating performance. Overall, the quarter reflects the benefit of capital deployed in 2025 now contributing to earnings and cash flow along with continued strength in the core portfolio. From a portfolio perspective, the business continues to perform well and remains well diversified. Our portfolio continues to generate strong reoccurring cash flow and earnings coverage remains around 1.5x, which we view as a healthy level. During the quarter, we saw a positive fair value movement of approximately $8 million, driven largely by Fleet, which increased by over USD 10 million, partially offset by a decrease in Shipyard of approximately USD 6 million related to a softer forward outlook. We also had some capital recycling during the quarter, including a partial redemption from 3E, which generated a realized gain of approximately $3.8 million and returned capital for redeployment. Subsequent to the quarter end, we continued to deploy capital with a new investment of $75 million in Kubik, reflecting the strength of our pipeline and ongoing opportunity set. Looking ahead, we expect Q2 partner revenue to remain consistent at approximately $48 million and over -- sorry, and our run rate revenue for the next 12 months is now approximately $203 million. We've also increased our annual distribution to $1.52 per unit annually, reflecting confidence in the stability and growth of our cash flows. On a pro forma basis, the payout ratio for the quarter would have increased modestly to approximately 53% with the increased distribution. Overall, the quarter reflects solid underlying performance with growth in portfolio income, improving cash flow and a payout ratio that remains below our target range. And with that, I'll turn it over to Steve for his comments.

Great. Thanks, Amanda. Our first quarter really highlights the consistent and predictable nature of our company. Our structured cash flow stream continues to grow, both through organic growth in our partners and also through the record levels of deployment we've shown in 2025 and already in '26. Investors will be hard-pressed to find a higher quality revenue stream than what Alaris exhibits with a broadly diversified 24 company portfolio of required service businesses that have little to no debt, have proven to withstand external economic volatility, have track records going back decades and probably most importantly, are owned and operated by the people that built them. Alaris' unique structure, which has failed to be replicated despite our 22-year track record of industry-leading returns, continues to allow us to deploy capital into the companies that others cannot. Our recently announced investment into Kubik is another great example. Kubik's management team was looking to buy out the original founder. Finding a capital partner like Alaris, who allowed the management team to move from minority ownership to majority was an incredible outcome for them. Being able to participate at a favorable valuation that was negotiated by the management team with the founder also allows Alaris to target returns on our common equity investments that others cannot. This unique alignment shows up in other ways as well. GWM is a partner that has experienced a few years of disruption in their industry and that has led to weaker results than what they had forecast because the management team is a majority shareholder of the company, the motivation to dig in and work their way out of the situation is very different than what a dropped-in management team would be, which is what traditional private equity model would entail. GWM has doubled their efforts, and I'm happy to report that distributions restarted this month, and they're operating well above their budget to this point of the year. The competitive environment in the private equity industry remains highly competitive with a particular focus on the kind of basic cash flowing industries that we've always specialized in. We expect deployment to remain strong for the year as entrepreneurs continue to select Alaris as the capital partner of choice despite processes that have drawn more than 50 bidders per process. The other big positive of having a competitive market will be in the potential sale processes where Aleris and our founding partner decide to go to the market to sell. We are hopeful that this will lead to favorable outcomes and provide capital gains over and above what we're carrying these investments at in our fair value. So Antoine, happy to open it up to any questions.

[Operator Instructions] Our first question comes from Scott Fletcher from CIBC.

Steve, you noted in the press release and some of your comments that there's potential for partner exits in H2 and that the climate for transactions sounds constructive. Just hoping you could expand a little bit more on that. Are there partners that are exit candidates? And then what are you seeing in the market that is constructive, whether that's bid-ask tightening, any shift in sentiment? So some color on the environment would be helpful.

Yes. We have targeted a couple of our partners that -- well, I shouldn't say that we've targeted them in every case. It's our partners that have targeted transactions along with our guidance, I would say. It is always up to our entrepreneur partners to make that decision at the end of the day. So yes, we do expect to be active in the second half of this year with potentially a couple of exits if the bids are strong enough. The nice thing about getting cash returns on a monthly basis from your investments is that there's no -- there's never a gun to your head. So if the bids aren't good enough, we certainly wouldn't sell. But if they are, then we will, along with the founder. And as I said, the competitive environment is very, very strong right now. I think people have gone away from some of the tech industries that have been adversely affected by AI or could be adversely affected by AI, companies that are reliant on imports and exports that have been disrupted by tariffs or the price of oil. All of those things are not in favor. So it's really pointed the whole market to exactly the kind of company that we've targeted for our full 22 years. So that's why I was mentioning processes that are getting 50 bids for kind of small to medium-sized businesses, which is very unusual. So what that means is, yes, it's a competitive environment to deploy capital, but we're still so unique that, that doesn't bother me. We're the only option for entrepreneurs that really believe in their business and want to stay in and keep a majority stake. But the biggest thing for us is it means that the probability of success on sales is probably higher than it's ever been just because people are chasing our kinds of companies.

Okay. That's great color. And then I did want to ask a second question about Sono Bello. You saw revenue and EBITDA decline year-on-year in the quarter and after declining in '25 as well. But your comments have generally been quite positive on the outlook there. So can you just help us square sort of the difference between the declining EBITDA and general confidence?

Yes. Sono Bello is actually doing quite well. So they are actually ahead of budget for the year, and the budget is calling for about a 25% increase over last year. So obviously, kind of the end of 2025, when you look at kind of a TTM period, which is what our numbers reflect, the end of '25 was weak for them based on kind of consumer sentiment in the U.S. The first quarter and the first month of the second quarter have been quite strong.

Our next question comes from Matthew Lee from Canaccord Genuity.

I noticed a bit of a change in language in the MD&A this quarter, the answer with a new focus on raising and managing third-party capital. Is the long-term vision still predominantly a preferred equity income model? Or is there kind of an evolution towards a more traditional asset manager maybe with larger common equity and fee-based earnings streams?

No. Yes, it is without a doubt, as a preferred structured equity investor investing as principal is our main focus. There will be situations where third-party capital can add to that as we did with Sono Bello and Ohana. There may be some situations where we have a sidecar fund. But as I look forward over the next 36 months, I think we are going to have a fairly significant amount of our companies that we have good common equity positions in. I think we're going to see them transact just on kind of our average hold periods over 22 years, a lot of the seeds that we planted 6, 7 years ago are going to start blooming here. So I think for us, we're going to have a significant amount of our own capital as principal coming back at us. And the vast majority of our deployment will be focused on redeploying that capital. If we have more deployment capabilities than that, I would prefer to raise that money myself. The economics of investing as principal are far superior to being an agent as you would be in managing other people's capital. So that is going to be our -- continue to be our focus is acting as principal. If we can add to it with specific types of third-party transactions, we'll do so, but we're definitely a principal investor.

Yes. That's helpful. And then on the Kubik deal, a bit more debt than I think you've used in the most recent deals. Can you just maybe talk about why you chose debt on that deal? And how do you decide about the mix with regards to any given transaction?

Yes. And I always have to be careful because the tax people -- they've structured this deal with a debt component for a reason. And so that, every aspect of this deal for us in terms of the economic and kind of conditions and remedies and rights and whatnot are identical to every other deal that uses straight prefs. This was done to get the best outcome for the selling party. So it's just a kind of a tax structural consideration, but everything is identical to a straight prep and common deal.

And you'll often see debt used where there's corporations in the structure.

But yes, all the economics, all the rates and remedies are the same as the press.

So, just an optimization thing?

Our next question comes from Jeff Fenwick from ATB Cormark Capital Markets.

I wanted to start my questioning off on Fleet. So it was nice to see continued markups on the equity -- on the common equity there you referenced in the quarter. Can you just speak to maybe some of the dynamics there that trigger that magnitude of the write-off? I see just a surge in activity to the beginning of the year, driving ROE higher? Or any color you can sort of offer there on that?

Sure. One of the primary drivers of that increase is just there has been some equity set aside for future issuance that sort of incremental plan has been wound down, and it drove an increase in the value of our equity. We also raised sort of left room in our valuation for some dilution from that program. And since that has been canceled, it's sort of elevated everybody's common equity share for the individual holding equity of Fleet. So that drove about $7 million of the USD 10 million increase. And then the remainder was really driven by the strengthening of their backlog and new customer wins being factored into those forward cash flows. I don't know, Steve, if you'd like to add?

Yes. No, yes, Fleet has had a very successful first quarter. One of the keys to that company is diversifying their customer base. They added a really significant customer in the first quarter. They now have 5 of the top 10 fleet companies in the world as customers. So they've been doing extremely well. So that is reflected in the ongoing increases in Fleet.

Great. And then maybe related to that, I mean, there was a significant equity-related compensation component there, the TRP program you referred to in the quarter. Can you just remind us, what's that, that is tied to? I think it is associated with common equity gains across the portfolio. But if you just clarify that for us?

Yes. That was really reflective of kind of the evolution of Alaris over our 22 years. As you know, we were strictly a preferred share yield-based investor up until 6 years ago. And our compensation plan was completely dialed to distributable cash, then there was nothing in our comp system that compensated management for the capital gains on common equity, which has just started. So that was really trying to reflect all the facets of our business where we kind of had a blind spot before. And so, we've got a 10% carry, if you will, on common equity gains and with a 2-year lag on them. So you see the compensation that we got in '25 was based on gains that were made in '23, and that's basically making sure that those gains stayed and you didn't have something with a gain and then a write-down in the years subsequent to that. So that was what the Board and the compensation advisory group that they hired came out with. I think it's a positive move for us. We've been kind of in the bottom quartile of pay for our industry for really our whole 22 years, even though our returns have been top quartile. So I think this is an important move for employee retention.

Okay. And that's completed annually and reflected in the first quarter? Or is it something that you do on a rolling basis over the year?

So because the plan was just approved formally at the Q1 -- or sorry, the year-end Board meeting in March, that expense hit in Q1 for this period. On an ongoing basis, it will be something that we won't report at year-end. So the program should -- is recorded once those performance -- that 2-year hold period and performance hurdles are achieved and once the value of the programs can be fully estimated and accrued. So each Q4 go forward provided that there has been maintained that growth above a 10% hurdle, we'll book that compensation expense there. Also, while it is sort of a bonus pool program, it's settled in units. So subject to our AGM later this afternoon, we do expect that, that shareholders will approve that this is a stock-based comp plan. So it won't be driving a cash expense through the financials, but it will be settled in units on a go-forward basis.

That was the other thing that I really wanted, Jeff, is I wanted our employees to be tied to the company as much as possible with units and be aligned with our shareholders. So all of this is paid in units.

Okay. Makes sense. And maybe one more sort of accounting-related one here is the timing on the cash tax payments, swings fairly significantly by quarter, obviously impacts your free cash flow. So can you give us any insights or thoughts, Amanda, how we should be thinking about that? Is there like a cadence over the year or things that trigger that payment?

It is a tricky one to forecast and the challenge is that we're not actually paying tax off of our own earnings, but we get allocated earnings as partners within all of these investments. So throughout the year, we are making our tax installments based on our best estimates of what that cash tax is going to be. When we get to the end of the year, so U.S. tax are filed in November, we true that a lot and compare to what we've installed. So the reason that Q1 cash tax payments are so low, and I think they're actually a recovery in the quarter is just we over installed last year. So we have credit on file for forward quarters. So I appreciate that it makes it incredibly difficult to forecast into cash flow, but it's just a bit of a lumpy process, and there's a lot of estimates that go into it. I expect that Q2 will also be pretty low on a cash tax basis, just as we have those over installments from the prior year drawing down.

Okay. Great. And maybe one last one here. Could you just speak to financial capacity here? It sounds like you've got a busy pipeline. You obviously continue to have access to your revolver. But with the E3 redemption there, brought some cash in. So do you have an approximate value of available draw now to go out there and look for new deals?

Yes. So we have USD 115 million available on the line of credit. So we expect that, that will be able to fund 1 or 2 additional transactions. And then we do expect some further redemptions later in the year, which would also add to the available balance. There's also an ability to draw an incremental USD 50 million preapproved on that line. So we could extend the line from USD 450 million up to USD 500 million as well if an opportunity came up and there was any need to bridge between a redemption and closing a transaction.

Our next question comes from Gary Ho from Desjardins Capital Markets.

Maybe just to start off, I want to get an update on 2 of your partners, FMP and GWM. They were deferring distribution at some point in time. Can we get an update on those? I think you mentioned restarting of distributions, FMP, if I'm correct, and outlook for continued distributions over the next 12 months or so?

Yes. GWM, as I mentioned, is operating well above their budget, having some good customer wins and good success. So I feel very good for those people. They just to kind of hammer home my point about having owner operators instead of just operators, the 2 top people at GWM have not taken a salary in the last 12 months. That's something you just don't see from people that don't own their businesses and sort of talk about being tied in and aligned with us. So yes, they expect to restart distributions and then they don't expect to stop them again. Obviously, this is life. So you never know what happens in the future, but that's their expectation. And based on, on kind of the track that they're on, the run rate that they're on, they shouldn't have any problems continuing those distributions. FMP is and has been paying partial distributions. We expect that level to continue. As I mentioned in our Q4, they are seeing some renewed business activity with the customers. So they do expect to recover fully, but we're probably a year or so away from that, I would guess.

Okay. Great. And then my second one, I want to chat on Edgewater. We did see the 1.7 million comments. Nuclear has been quite topical. I believe they were in the bidding of other projects or have RFPs out. Can we get an update on that investment?

Yes. No update there. Those are kind of long processes once they get an RFP from the Department of Defense. So yes, no updates on the other contracts. But obviously, Edgewater is sitting in a very hot sector and are incredibly well positioned within it.

Okay. Great. And then my last question. You mentioned deployment should remain strong for the balance of this year. Can you talk to the pipeline? Are those -- some of those maybe follow-ons? Are they new partners? And then maybe just related to Jeff's question, maybe talk about the sequencing versus some of your larger monetizations.

Yes, always -- it's a 24 ring circuit. As you know, Gary. We've got a lot of -- with 24 partners, there's a lot of our partners that are looking at acquisitions. So those aren't done until they're done, but there are some in process that would require our capital. So I think we should have a pretty decent amount of follow-on deployment this year. And then we do expect more new partner activity as well. We have a good line of sight on that as well. So nothing imminent. These are, as you know, take several months to do these deals. But yes, we've got good line of sight on both new partners, plural and follow-on deals as well.

Our next question comes from Nathan Po from National Bank Capital Markets.

My first question is, can you give us some color around the lost customer for the Shipyard, perhaps what happened there and what they're doing to backfill that?

Yes. So the Shipyard is run by a real veteran of the industry, Rick [ Millenhall ], and he's kind of known in the industry. So he's done a remarkable job since we became partners of adding new customers. And you've seen over time, like we have written up that investment based on some really nice growth in the business organically and through acquisition as well. So this is -- I hate to say, but it is part of this industry. When you have a customer at a certain point, it's pretty natural for them to choose a different advertising agency just to get kind of a fresh look to their advertising campaign. So, there is some churn in the industry. And if this would have happened with this particular client when we first invested, it would have been a pretty material hit to the business. Now it is not because they've had so many customer wins. So yes, the backfill of that business is already underway. We don't expect this to cause any issues, but it just kind of hampers -- slows down the growth profile is really when it reflected in the fair value number. There's no -- there's not a big decline in the business. There's no cash flow issues. So it's just -- unfortunately, just a part of this business.

Okay. Great color. And could you also give some background on the 3E redemption? And any thoughts as to when or if the rest will be redeemed?

Yes. It's a good news, bad news story. 3E has been a huge success. This company is several times the size it was when we first invested in it. The bad news is we don't own any common equity in 3E. And the reason for that is that 3E is a minority-owned business and issuing common equity to us would have jeopardized their ability to win contracts based on being a minority-owned business. And so that was -- that's unfortunate because it is -- it has been a big winner. They've grown so much where, quite frankly, they don't need our capital in their capital stack. But they really like having us as partners. And so they basically brought us down to the minimum level. In every deal we do, there's a minimum level you can take it down to until you have to take us all out because we don't want $5 million left in the business. So they took us down to that minimum level. They don't anticipate taking us out because they like having us as a partner. We show them deals to look at. They think at some point, maybe there's a big deal that they can't finance on their own that they would like more of our capital for down the road. But -- so it's flattering that they wanted to keep us in even though they had far lower costs of capital alternatives that they could have taken us out with. So yes, according to them, they have no plans on buying us fully out.

All right. And how much do you want to deploy or need to deploy in short order to get to your targeted payout ratio? Does the pipeline you described previously right now get you there?

Well, we're already below our targeted payout ratio. So anything that we do would take us even further below and would probably lead to another dividend increase. So yes, we don't need to do anything to -- but we're already ahead of our target as it stands today. Maybe what we do in the quarter.

Yes, we're currently at 51.9% payout ratio. Our target is 65% to 70%. We -- even with the bump that we did after quarter end, that would take us up to 53% based on those numbers. If you look more to the outlook, we're sitting in that 60% to 65% range, so closer to our target. The thing that drives us down in actuals compared to the outlook target is when we receive more common distributions than we were expecting in Q1, it was the Edgewater distribution that really drove that down. Also, we're leaving -- given the potential for some redemptions and then redeployment, we are leaving a bit of cushion to being able to absorb those redemptions if they come through and give us time to redeploy that capital back out. But with the way that our pipeline is looking, we don't anticipate any issues getting any capital that comes back redeployed.

Got you. And what are your thoughts on the NCIB versus dividend raise allocation decision?

Yes. I think the dividend raise is our priority today. Our stock is within 10% of our book value. So when you factor in the taxes on buybacks, it's not very accretive. So I think you get more value out of a consistent dividend growth profile and get a premium multiple on the stock as we had before COVID. So that's going to continue to be our focus is dividend increases.

All right. And just one last housekeeping one. Apologies if I missed this. How much of the common dividend stream is embedded within the $203 million run rate revenue figure?

I believe it's about $15 million at the moment.

Which is, I would say, very conservative. That's why our actual payout ratio is always well below our outlook payout ratio. Amanda keeps a very conservative list of common dividends that we typically meet every quarter.

Our next question comes from Bart Dziarski from RBC Capital Markets.

I wanted to start with just on AI software, obviously, a very topical theme these days. And as you look through the portfolio and you talk to the portfolio companies, like are you seeing this as a net positive? Are there opportunities to harvest this to surface value? Or are there any kind of names that are maybe more at risk of being disrupted? Just help us think through that exposure within the portfolio companies.

Yes. So it's interesting. One of our newest partners, Optimus out of Toronto is a management consulting company. And part of what they do actually is do AI audits for companies. And so we are retaining them to do that for each of our partner companies. And for the most part, these are kind of older economy nuts and bolt required service type businesses that aren't going to be significantly impacted by AI one way or the other. There are -- we think there are some opportunities with some of our partners. We haven't seen anything yet in our portfolio that gives us great pause in terms of negative aspects of it. So -- but Optimus is going to do that kind of study for us. And I think it's going to be great value add for each of our 24 companies to have that done for them by us as their partner. So that's something that we've initiated. And -- but in our own review of our portfolio because we go through this with our Board each quarter, we definitely see it as more of a positive. But really, I wouldn't overemphasize that. I think it's really marginal with the kinds of companies that we have.

Okay. Great. Got it. That's very helpful. And then apologies if I missed this earlier, but the common equity holdings of $330 million, thereabouts, how should we think about the realization time frame of that? Like is that fairly, I don't know, a 1/3, a 1/3, a 1/3? Or is it more of a ramp call it, over the next few years?

Yes. That's not something that we're really going to be able to put kind of a curve on in terms of expectations. It really is just individual company based. But as I said, when you look at when we started doing common equity investments, which is kind of 6, 7 years ago, you also have 2 of our larger ones in Sono Bello and Ohana that we have third-party partners with that do require an exit in a certain period of time. So those would -- both of those would be within the next 3 years. So I think the next 36 months, Bart, is going to be a fairly significant time for us for crystallizations with some of the common equity portfolio. So I think it's pretty heavily weighted towards kind of 2028 and 2029.

Our next question comes from Trevor Reynolds from Acumen Capital.

I think most of my questions have been answered. But just on GWM is, mentioned restarting payments there. Is that built into the guidance?

Yes. At the moment, we have 50% of GWM's distribution for the year within the outlook. So we are -- we do have sort of more than 50% for the go forward of the year factored into that outlook.

Yes. So -- so we should beat that. But again, we wanted to be conservative with somebody that's coming out of some issues.

Yes. And they're still subject to their senior credit facility. So we wanted to make sure that there was room there if anything had to be adjusted because of that.

Great. And then is there any update on Heritage, like that's just kind of one that's been dragging along, but any update there?

Not really. Still just -- I'd be kinder than dragging along, but they're doing well, but it's -- yes, it's a slow rebuild. We've got advisers and airlifted management in there. So I wouldn't really expect much out of Heritage for the next year or two.

This concludes the question-and-answer session. I will now turn it over to Steve King for closing remarks.

Great. Thanks, Antoine, and thanks, everybody, for tuning in. Apologies again for the bad link on joining us today. We're not really sure what happened there, but I think that's our first time in what I'll say 18 years as a public company. So anyways, we'll get that double check for next quarter, but thanks again for tuning in, and please feel free to reach out if you have any further questions. Thank you.

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