Thank you for standing by, and welcome to Alaris Equity Partners Income Trust fourth quarter 2021 earnings release conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's call is being recorded. Should you require any further assistance, please press star zero. I would now like to hand the call over to Amanda Frazer, Chief Financial Officer. Please go ahead.
Thank you, Ricky. Good morning, ladies and gentlemen, and welcome to Alaris Equity Partners conference call and webcast to discuss the financial results for the three and twelve months ended December 31, 2021, as well as a brief trust update. I am Amanda Frazer, Chief Financial Officer of Alaris, and I'm joined on this call by Steve King, President and CEO. After a short presentation from Steve and I, there will be a question and answer session. The lines will be placed on mute until then to avoid background noise. Before we begin, I'd like to remind our listeners that all amounts given are in Canadian dollars unless otherwise noted. Listeners are cautioned that comments made today may contain forward-looking information. This forward-looking information is based upon a number of important factors and assumptions, and as a result, actual results could differ materially.
Additional information concerning the underlying factors, assumptions, and risks is available in last night's press release and our MD&A for the period under the headings Forward-Looking Statements and Risk Factors, copies of which are available on SEDAR at sedar.com as well as our website. Non-GAAP 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 the period for more clarification regarding non-GAAP measures. We appreciate everyone taking the time to join us this morning. We're excited to present our 2021 results.
Some of the highlights include Q4 revenue of CAD 37.6 million and cash generated from operations of CAD 34.5 million, both boosted by higher than expected common dividends from FNC and the additional follow on investments in November and December, including 3E, D&M, and BCC, causing us to beat our recent guidance. 2021 revenue of CAD 147.7 million and cash generated from operations of CAD 124.7 million represents a 35% increase in revenue and a 44% increase in cash generated from operations. The increases were largely driven by the significant deployment that occurred at the end of 2020 and beginning of 2021, as well as the additional payments received from Kimco for unpaid and unaccrued distributions relating to the prior period.
Deployment in the year totaled CAD 357.8 million, including CAD 93 million in Q4, resulting in four new partners, six follow-on investments, run rate revenue of CAD 150.7 million or CAD 3.34 per unit as compared to CAD 136.7 million and CAD 3.04 per unit in the prior year. Run rate net cash from operating activities of CAD 92.1 million or CAD 2.04 per unit compared to CAD 81.1 million and CAD 1.80 per unit in the prior year. Our payout ratio remains at historically low levels between 60% and 65%.
We are expecting net positive resets for 2022 of approximately 2.4% despite LMS's uncollared reset down of 18%, resulting in CAD 2.6 million of additional revenue or CAD 0.06 per unit. There were significant increases in fair value at December 31, CAD 23.8 million or CAD 0.54 per unit, demonstrating both an almost complete recovery from the portfolio from the effects of COVID driven write downs, as well as significant growth and strong performance of new partners such as FNC and D&M. Planet Fitness up $6.7 million, both on preferred and common, restoring what was written down in 2020 and reflecting expected growth in 2022. FNC up $4.8 million on both preferred and common reflects significant growth in the company over the short time of our investment.
D&M up $3.4 million on common as a result of strong performance over the last six months and expected in the coming year. Other preferred increases, including $1.6 million from DNT, Accscient up $1.5 million, Amur and B&S, each up $1.8 million, reflect an outlook for 2022 that maintains and builds on the growth experienced in 2021. These increases were offset by cumulative decreases of $5 million in Edgewater, Fleet, and SCR. During the year, net fair value increases by a total of CAD 63.2 million, contributing to a 13% increase in book value per unit from CAD 15.51 in 2020 up to CAD 17.93 in 2021.
Subsequent to year-end, we completed a CAD 65 million bought deal offering of senior unsecured debentures that was used to reduce our senior debt outstanding to CAD 265 million. This results in CAD 135 million of available capacity, and we do also continue to expect the redemption of Kimco, which would add another $65 -70 million to the amounts we have available for deployment. Our portfolio continues to perform extremely well and has a weighted average ECR now over 1.8 x as compared to 1.7 x in the prior year. This metric has continued to beat the all-time high of previous quarters for the last year. 15 of our 19 partners or 80% have an ECR over 1.5, and 12 of those are over 2x as compared to 6x over 2 x a year ago.
As previously mentioned, we are expecting net positive resets based on unaudited information, 11 up, four down, and one flat. Planet Fitness has started additional catch-up payments for the deferred distributions associated with 2020 of $196,000 per month as of this January. Overall, we are extremely pleased with the performance of our partners. A couple of unique items from our release worth expanding on. Due to the changes in non-GAAP measures, we are no longer presenting normalized EBITDA. Replacing this metric is cash generated from operating activities. This metric does include the effects of unit-based compensation expense, current income tax, and changes in working capital as compared to normalized EBITDA.
In prior periods, the material normalizing items primarily related to unrealized gains and losses in foreign exchange, as well as realized and unrealized gains and losses on investments at fair value, all of which are removed from cash generated from operating activities, which is why we've determined it's the most comparable figure within our financial statement. Also worth mentioning, since converting to a trust, the tax profile of our distributions changed from being 100% eligible dividends to a combination of return of capital, eligible dividends, capital gains, and interest income. The effective tax rate of Alaris' distribution for an Alberta individual in the top tax bracket for 2021 was 37.5%. If the same distribution was received from a corporation, the effective tax rate would be 34.3%.
We also continue to work with our external advisors in producing our ESG report and target to release in Q2. We have paid close attention to these issues throughout our company's history, and we look forward to presenting our first report. Our outlook for 2022 based on recent deployment calls for CAD 38.6 million of revenue in Q1 and a run rate for the year of CAD 150.7 million. We do expect our G&A to increase in line with our growth in revenue to around CAD 14 million. I'll pass it over to Steve to add a few comments before we continue with the G&A.
Great. Thanks very much, Amanda. Thank you all for tuning in. Simply, it's an extraordinary year for our company, showing 35% revenue growth, 44% cash flow growth, not including the fair value increases, is something that everyone at Alaris is very proud of. There's no question that the small change initiated two years ago to add a portion of common equity to our traditional preferred shares has had the exact benefit that we had hoped for. We're already seeing the prospect of increased overall returns, and the fact that we've deployed over CAD 500 million within the last eighteen months has undoubtedly been helped by the addition of common equity and allowed us to offer a more flexible solution for partners, new and old.
Amanda's already talked about the unprecedented performance within our portfolio, but I'll speak a little bit on the specific risks that are out there in the economy right now. First of all, we have no company that has any exposure whatsoever to Russia. Given the service nature of our entire portfolio, we also have very little exposure to the increase in commodity prices. LMS is one out of Vancouver that relies on imported steel for their rebar installation, so the current environment has certainly negatively impacted their gross margins, as you saw in their negative reset as steel has spiked. But they've also been experiencing record volume, so that has buffered some of the hardship. The only other partner that's experiencing anything negative fundamentally is Edgewater, where it has been a difficult labor environment.
The company has done an excellent job recruiting new nuclear engineers, but the scarce labor market has certainly inhibited their results. It's unusual to have only 2 out of our 19 partners where there's anything negative to say. Our portfolio continues to show record results and average earnings coverage ratios and growing distributions to Alaris, both preferred distributions and common. Adding over CAD 63 million of book value in the year from fair value increases to our partners is another all-time record. Looking forward, we expect 2022 to be another year of record results for our company. Deal flow remains strong. Both new partner and follow-on opportunities have near-term visibility.
Rising interest rates for Alaris is actually mostly a positive thing, as our primary competitors, traditional private equity firms, for the most part, use extremely high levels of debt to produce the returns that they look for. Even a small change in interest rates materially affects their economics of those leveraged buyouts. Conversely, half of our portfolio doesn't have a cent of term debt in them, and even our most highly levered partners would be considered under-levered within the PE industry. In general, we feel this is a very favorable environment for Alaris to continue to deploy capital as we've shown for the last many years, despite the highly competitive landscape. Latifa, I'll turn it over to you and open the floor for any questions.
Thank you. As a reminder to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Nik Priebe of CIBC. Your line is open.
Okay, thanks. Last quarter, you indicated that you might explore the management of third-party limited partner capital, to generate a fee-based earnings stream. I was wondering if you could tell us a little bit more about that opportunity, how seriously you've considered it, and whether you have an indication of institutional interest yet.
Yeah. Thanks, Nick. We have been going down that road. We've been learning a lot over the last three months since we started talking about that. We do feel that there's interest out there in having us manage third-party capital in addition to our public investors' capital as well. You know, we've got an 18-year track record that with very high returns for the industry, especially on a risk-adjusted basis. That has certainly raised a lot of eyebrows, and we think that that is a realistic opportunity for us. The exact form of it still needs to be figured out. There's corporate governance conflict of interest issues and just structurally how it happens remains to be seen.
Yeah, suffice to say that we are still very interested in adding that to our company and, you know, based on preliminary results, we think there's a good chance of that happening.
Understood. Okay. On Kimco has been contemplating a redemption for some time. You know, I understand there's pretty healthy level of unpaid distributions as well. Can you just update us on the status of that investment, why that redemption hasn't occurred quite yet, and just whether you have any visibility on potential timing there?
I'm sounding like a broken record on this topic, but we continue to expect it in the very near term. Nothing has changed in the last three quarters in the situation or our expectations on anything closing, and we hope that we'll be able to announce that in the near term.
Okay. One last one. Brown & Settle deferred a portion of their contractual payment last quarter. Can you just give us an update there? Have they caught up on that? If not, are there plans to collect over the next 12 months?
They did pay their Q4 distribution a bit late. We collected 90% of that, I'm gonna say, distribution in Q1. We expect that there'll probably be a bit of a deferral for Q1 into Q2. As you recall from, I believe, our last conference call, we had a bit of a discussion that Brown & Settle had some challenges in Q1 of 2020, and it's putting some pressure just on their TTM covenants. As soon as we can roll that period out of their results, we fully expect to be paid on their, as contracted. Probably one more month with our Q1 results, there'll be a bit of a delay in the B&S payments, and then we expect for them to be back on track. They have the highest backlog in their company's history.
We have their one-month results, and they're performing extremely well. We really have no concerns on the B&S front. We're nearing the end of that Q1 period, and we should see both of the ECR on B&S rebound back up and our payments continue to be in full and on time.
Understood. Okay. Very good. I'll pass the line. Thank you.
Thanks, Nik.
Thank you. Our next question comes from Geoffrey Kwan of RBC. Your line is open.
Hi. Good morning. Steve, you talked about it, I guess, a little bit, just talking about what some of the companies with LMS and Edgewater, but just maybe thinking about it from another perspective and also taking into account, you know, how big an individual company investment is to your overall portfolio. Which companies within your book would you say are best positioned for a higher inflation environment, and which ones might be more vulnerable?
Yeah. You know, one of our largest investments is Planet Fitness, and Planet Fitness has been known as a, you know, very much a, I call it a recession-resistant program because they are, you know, on the budget end of the fitness industry, where they're charging, you know, between $10 and $20 a month, compared to multiples of that, for other clubs. That is one where, you know, if interest rates go up and discretionary income declines because of inflation and debt costs, that's one that I think will actually benefit from that and succeed very well. They've shown that historically.
Other than that, gosh, there's very few that would have much correlation with inflation and interest rates, to tell you the truth. They're. As I mentioned before, you know, they are very much kind of required service type of businesses. The whole reason we invested in them in the first place is, you know, we do have oftentimes a 20- to 40-year track record put up by these companies. That's something that we look at, is historical fluctuations based on different economic and industry environments. We feel pretty good about where we're gonna be here over the medium term.
Okay. Just my second question, just given some of the volatility we've seen in credit markets and the overall markets, you know, what impact, if any, is this having on the competitive environment for you making new investments?
Yeah. We haven't seen that much, to be honest, Jeff. You know, it's still a highly competitive industry. There's still, you know, over $1 trillion of private equity capital that is uninvested right now. You know, to the previous question about you know, forming an asset management business and raising a new fund, we've gotten to know even more about that industry and there's still just a huge amount of capital coming into private equity. At the end of the day, only 2% of the middle market companies in the U.S. are public. You know, the private equity industry is covering a huge amount and people need to be in that sector. There's still a huge amount of capital coming in.
Regardless of the kind of day-to-day, week-to-week instability that we're seeing, the liquidity in the market is overriding that.
Okay. Thank you.
Thank you. Our next question comes from Jeff Fenwick of Cormark Securities. Your line is open.
Hi, good morning, everyone. Just one follow-up, guys, on the Brown & Settle amounts owing to Alaris. Are those accrued as revenue in the period, or are you gonna capture that revenue later on? Like, is it a receivable, or is this something that's gonna roll in the beginning of this year?
The amount of the payment that we received in Q1 related to Q4 was accrued, and you can see that in our accounts receivable. We did not accrue any amounts beyond what was received in that Q1.
Okay. I'm just trying to square the revenue guidance for the beginning of the year and some of the factors that might be at play there. It's a bit above where my modeling might suggest it might be. Maybe it's common dividends or other items like that that might be there. I'm trying to figure what's Brown & Settle.
No. The Brown & Settle, how it's laid out within that guidance is sort of as expected, the payment's as expected. I think that-
All right.
There, there's a CAD 250,000 an accrued amount right now, but it wouldn't have a material impact on.
Okay. I did wanna ask about the common dividends. You gave us some guidance on the 2022 outlook. I think CAD 3.1 million is the number that you're guiding to here. Just, you know, can you speak to that, to how that's coming together for you? I know a lot of them, they might pay you periodically. Some of them don't pay at all because they're investing for growth. How do you get a sense of that number, and is it tilted towards the beginning of the year?
We do have some visibility. FNC pays a very regular distribution. Amur generally pays a very set distribution. So we have visibility on those. History with companies like Carey, whereas the other ones, the newer ones, D&M, Planet Fitness, those will be sort of just as declared. We don't have a ton of visibility on those ones. I think if you look to our MD&A, we've sort of given guidance on who we see as being regular payers and who we see as being in that category of investing for growth, the Planet Fitnesses, the D&Ms, et cetera.
Okay. One more on the common dividend investments. It was interesting at the end of the year when you did the GWM investment there. You effectively swapped out pref for common. You know, what drove that decision between you and them, and how does that change your position in terms of you know, your ability to sort of influence what's going on there?
Yeah. GWM is a company that we've been trying to become common investors in really since the day we met them. This is a very high performing company in a very high performing industry. Like, the industry growth rate for them and the programmatic media space is well into the double digits annually just from an industry perspective. This is something that we wanted for a long time. As with a lot of situations, it, you know, after we've been partners for a few years, you know, people enjoy being our partners, to be frank. Even people that were very reluctant to bring us in as common equity holders, you know, we can hopefully soften up over time, and that's what happened with GWM.
At the same time, you know, they had quite a bit of senior debt capability because of their growth and under-levered balance sheet. From a cost of capital point of view, replacing some of our prefs with a little bit of debt is something that was prudent for the company to do. We wanted to help facilitate for them, but you know, in exchange for that, because we do have full veto rights over any increased debt, we did say, "Hey, like, it's time to bring us in as common shareholders so that we both benefit from doing that." That's kinda how it came to be, and we do expect to you know, to get common dividends from GWM, and also experience in their high growth.
Okay. That's good color. Thanks. There was one more I wanted to ask you here. Well, just in terms of pipeline, Steve, maybe just a comment there. You've given yourself some added capacity with the hybrid debenture offering that you did. You know, how does the pipeline line up right now versus funding capacity? I know you're trying to handicap the timing on the Kimco redemption as well.
Yeah. It's been a challenge obviously with how long Kimco has dragged on. As Amanda said, we do expect to have that done in the very near term. That obviously helps our balance sheet quite a bit. We do expect to have that reinvested almost immediately. The nice thing about that swap is that a good chunk of the capital coming in from Kimco is for previous unpaid distribution. You know, we will be able to deploy that capital into a new situation and increase our revenue considerably. You know, by losing the Kimco revenue, adding the new one, we should be up $ several million of revenue and actually still have more money on our balance sheet.
It's a rare opportunity for us and, you know, we do expect that to happen in the very near term.
Okay. That's all I had. Thank you.
Thank you.
Thank you. Our next question comes from Zachary Evershed of National Bank Financial. Your line is open.
Morning, everyone. Congrats on the quarter.
Thank you.
With the strong investment pipeline ahead, it likely won't take you long to deploy your available dry powder, and it sounds like Kimco will be out as soon as it's in. Excluding organic cash flows and the funds from Kimco, what's your pecking order for incremental sources of funding?
Yeah, I think, you know, we're at the last round of funding that we just did was a debt offering. You know, we wanna keep, you know, a conservative and balanced approach to our balance sheet. I would expect the next offering after that would be common equity. But we don't expect to need that for, you know, a decent period of time. You know, things, you know, may be alleviated as well if we can set up an asset management business and have outside institutional capital as well that, you know, that may, you know, allow us to grow for longer without adding common equity.
Makes sense. Thanks. I'll turn it over.
Great. Thank you.
To ask a question, please press star one on your touchtone telephone. That's star one on your touchtone telephone to ask a question. Our next question comes from the line of Gary Ho of Desjardins. Your line is open.
Thanks, good morning. Steve, when I think about your payout ratio in the low 60s%, and you probably have the Kimco redemption coming first half of this year, so that might increase it just marginally. You know, historically, the company has been known to be a dividend grower, and you raised it last year, obviously. Steve, you know, what are your thoughts around kinda excess capital and potential dividend increase this year?
Yeah. You know, as I just went through, like, we should be able to decrease our payout ratio with a swap of Kimco proceeds for new opportunities. That will drive our payout ratio down even further. We'll still have a decent amount of deployable capital. You know, as you get, you know, even halfway through that excess deployable capital, we'll be well below 60%, and I think that is, as I've indicated in the past, I think that's probably the tipping point on increasing the dividend. We're pretty close. You know, there's definitely things, you know, on the front burner that would trigger that. You know, we're not gonna get ahead of ourselves.
We'll wait for those events to happen.
Okay, great. My second one, just going back to Jeff's question on inflation. When I look at your preferred equity structure, you know, the collars are based, you know, for the most part on revenue as opposed to kinda bottom line. Am I reading this correctly that, you know, if your portfolio companies could pass through higher costs, inflation and whatnot, on the top line, could you perhaps benefit disproportionately from elevated inflation in this current environment?
You're absolutely correct. Yeah. No, that's one of the nice features of our setup, and that was one of the things that, you know, I really wanted to ensure when we started, you know, over a decade ago with this collar concept of capping the volatility of our distribution changes. I wanted to make sure that in all cases that the top end of the collar would, you know, be within the bounds of what typical inflation would be, so we're not losing out to inflation. You're absolutely right. We actually do benefit from that. If a company's revenue and costs both go up at the same amount, you know, a bottom line investor would not benefit from that, but we do.
Okay. Great. Just wanna confirm that. Those are my questions. Thank you.
Thanks.
Thank you. Our next question comes from Trevor Reynolds of Acumen Capital. Please go ahead.
Good morning, guys. Just curious on the deployment levels that you guys expect coming off of the records that we've seen over the last kind of 12 and 18 months that are well highlighted.
Yeah. It's impossible to tell, Trevor. All I can tell you is that, you know, our deal flow would be comparable to last year. You know, we are a very, you know, opportunity-based company. You can't put a forecast out there or an expectation on capital deployment other than kind of, you know, the overall health of the market and the number of deals that we're seeing. I would say that on that front, it's at least as good as what we've ever seen. Our kind of reputation and credibility within the advisory market, I don't think has ever been higher. You know, you gotta go out and you gotta win those deals and you gotta close them.
Yeah, I feel very good about it, but I can't kinda go get into any specifics.
Got it. Then in terms of, as we've seen, restrictions rolling off across North America, COVID restrictions rolling off, how has that impacted the deal flow? Have you seen an increase or decrease?
No. It's been, you know, we're a U.S. business, so, I would say that, you know, things have been pretty normal for some time already, in the U.S. in terms of, you know, conferences and, face-to-face meetings with management, et cetera. Yeah, we've been back at it. Our business development guys are, they're on the road right now. They've been on the road most weeks, for the last several. Yeah, we haven't seen much of an impact from COVID in some time.
Got it. Last one, just in terms of new deals or follow-ons, is there a balance there? Is it mostly new deals at this point that you're looking at?
No, a good mix. The next thing that we'll do will be a follow-on in a current partner to fund an acquisition that they are closing. We've got a few new opportunities as well. Yeah, I think just like last year, I think it'll be a really good mix of the two, which is kinda perfect for us.
Perfect. Thanks.
Thank you.
Thank you. At this time, I'd like to turn the call back over to Steve King for closing remarks. Sir?
Thank you, Latifa, and thank you for everybody that's tuned in and for your support through this past year. We, as I mentioned, we're really excited about what happened over the last 12 months and also where we're going over the next 12. As usual, please feel free to reach out to myself and/or Amanda if you have any follow-up questions, and thanks again for tuning in.
This concludes today's conference call. Thank you for participating. You may now disconnect.