Good day, and thank you for standing by. Welcome to Alaris Q3 2023 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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, Amy. We appreciate everyone taking the time to join us this morning as we present our Q3 results. I'm joined on this call by Steve King, President and Chief Executive Officer of Alaris. 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 the 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 heading Forward-Looking Statements and Risk Factors, copies of which are available on SEDAR at sedar.com, as well as our website. Non-IFRS data is also presented and may differ from the way that 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 clarifying information regarding these non-IFRS measures. Now for the Q3 highlights. Q3 revenue of CAD 47.2 million was up 10% over the prior period, driven largely by the $5.9 million US distribution received from Fleet. While comparable to the prior year's distribution, a portion had previously been recorded as an unrealized gain. The impact of our new investments in Sagamore, FMP, and the Shipyard also increased our three-month results. EBITDA for Q3 of CAD 83.9 million and per unit of CAD 1.85 represents an increase of approximately 110% as compared to Q3 2022, and for the nine-month period, an increase of approximately 3%, respectively. The increase in EBITDA was largely attributable to capital appreciation on our common portfolio.
EBITDA isn't a metric that we have historically focused on as we primarily look to cash flow metrics. As our portfolio over the last four years has introduced common, currently in 13 of our 20 companies, unrealized gains have become a more meaningful metric, reflecting the growing value of this portfolio. Cash generated from operations prior to changes in working capital of CAD 36.2 million was a decrease of 17.7% over the prior period and a result of an increase in current tax expense in the quarter. Basic earnings per unit of CAD 1.40 is 109% above the prior period and represents a record quarter for Alaris.
As we paid out CAD 0.34 per unit as of distributions, the resulting CAD 1.06 increase to book value represents a 7% increase and brings book value per unit to CAD 20.90 at September 30. Also contributing to the increases in the noted metrics was our second consecutive quarter with a greater than 26% decrease in G&A. With the wrap-up of the Sandbox matter and salaries and wages based on a more normalized operations as compared to an unusually profitable 2022, we expect G&A to maintain these lower levels. Q3 earnings were impacted by a CAD 39.6 million gain in net realized and unrealized fair value of investments, as compared to a net loss of CAD 7.1 million in the prior period.
The gain was driven by a CAD 37.2 million increase in the common portfolio and a CAD 2.2 million gain on the preferred investments. Key drivers of these fair value increases were Fleet of $20.5 million, Ohana, formerly Planet Fitness Growth Partners, of $5.2 million, and Brown & Settle of $4.8 million. Fleet continues to generate increases in syndications through both new customers and growth in current relationships. With an ever-growing backlog, their outlook for the remainder of 2023 and 2024 continues to be very positive. The business continues to prove that their data-driven approach to fleet management has entrenched them within their syndication customers. While we continue to expect there to be cycles within the business and the industry, there has been a permanent and sustainable growth in the business.
Ohana Partners is firmly back in growth mode after emerging from the aftermath of COVID, expecting to finish 2023 ahead of budget and further aided by the tailwinds of positive announcements from Planet Fitness Corporate. Ohana expects this momentum to continue well into 2024 and the coming years. Continued growth and demand in the NoVA Data Center market has driven year-over-year increases in both revenue and EBITDA for Brown & Settle, as well as a continued record level of backlog. Other less significant movements in a number of our partners, including D&M, Accscient, Amur, SCR, Edgewater , Heritage, and Carey Electric, rounded out our changes in the quarter.
With the completion of our investment into The Shipyard at the end of August, we have invested a total of approximately CAD 130 million year to date, and with no redemption so far in 2023, the incremental annual yield contributes CAD 0.30 of revenue per unit. We currently have CAD 265 million of senior debt outstanding, resulting in CAD 185 million of available capacity for new investments. On the portfolio side, our portfolio continues to perform well, with a slight decline in weighted average ECR to above 1.5 times, with 10 of our 20 partners continuing to be above this threshold. Slight movements in the number of partners have contributed to the decrease. Thirteen of our 20 partners have either no debt or less than 1 times debt as compared to EBITDA in their businesses.
Our current outlook calls for CAD 39.9 million of revenue in Q4 and a 12-month run rate of CAD 166.4 million, up from CAD 157.3 million last quarter. Our G&A expectations remain consistent with the prior quarter at CAD 15.5 million. I'll turn it over to Steve now for his comments.
Great. Thank you, Amanda, and thanks everybody for tuning in. Obviously, we're very pleased with the performance of the portfolio in this quarter. Our investment criteria that we've strived for and executed on for the last 20 years has resulted in a group of companies that, on a combined and diversified basis, has shown that it's capable of delivering low volatility cash flow in every different economic and fiscal environment. So we're very pleased with that. We don't see any change in, in that, performance going forward for the portfolio. And obviously, adding $1 of book value per share just in the quarter displays the value creation that's occurring, a good portion of which is tied to the common equity positions that we've been building over the last five years.
Alaris stock clearly from looking at the graphs has been directly correlated to a fixed income product. And if you're just basing us on our cash yield, you're going to be missing out on a really good cash value creation story that we've developed here by adding common shares to our portfolio over the last five years. While ECRs have come down marginally, we're still very comfortable at the level that they're at. One point five five is actually above historical levels. And with such little debt in the portfolio, as well as some fundamental factors that we already know have reversed in companies such as LMS, will soon be soon showing.
Deployment front, we look forward to adding on to our successful additions of FMP and Shipyard this year, with additional new partners, hopefully by year-end. Continue to be very competitive in this higher rate environment, and our capital is much invested. But on the side, we do have to stay very disciplined in our approach, particularly given the very high cost of our own equity at the current valuations of our stock. So, operator, we'll, we'll turn it back to you, and, happy to, to open it up to any questions.
As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Gary Ho with Desjardins. Your line is open.
Thanks, and good morning. This first question is on Fleet. Wondering if you can just walk us through the drivers behind the sizable fair value markup on that investment.
Sure. Fleet has a June 30 year-end, and we received their audited financial results as well as their budget and outlook for 2024 and beyond. And really, the cash flow drivers within those two items are what fed into our DCF model and the write up. We've always been, you know, somewhat discounting for a cycle, downward cycle in the business and the industry. And while we continue to think that that's a potential, we just think that the low point in that cycle, given the sustained growth that Fleet has been able to achieve, is a, you know, a permanent step from where it would have been maybe two years ago.
Okay, great. And then, second question is on Planet Fitness. And I did hear you prepared remarks. You know, there's been talks, at least from the corporate franchisor side, of a potential membership rate increase. I don't think you baked that into your fair value calculation wrong. But can you also kind of walk us through what that could do to your press? And I think you also hold some comments in that investment as well.
Yeah, Gary, I'll take that one. I was just at the Planet Fitness corporate conference two weeks ago, and there has been some testing of new pricing, including at some of our clubs. I think it's gonna be at best kind of a phased approach, where there's gonna be different, maybe some different... So very much away from the basic $10 a month calling card. So, we think there's some upside on average revenue per customer based on the different levels that will be available, which will be a little higher than what they are today.
Probably the bigger move, though, is some concessions that corporate made on renovating the clubs and also the requirements on new builds that will make economics of new builds and refreshes much better for franchisees. So we actually view that as a bigger move in terms of unit economics as the price. So we're very pleased with all of that, and none of that has been taken account into our forecast at this point, but provides some really good upside for us.
Great, thanks, Steve. Those are helpful. And then just lastly, while I have you, always interested in hearing your comments on the deal activity environment, what are you seeing on both the capital deployment and any redemptions that you're aware of near term?
Steve, sorry, I'm just-
Go ahead.
I was just gonna say, you're cutting out a little bit, so I don't know if there's a way to just adjust. I know you're on a cell phone.
Yeah. Okay. I'll try and answer. Hopefully, it's, it doesn't cut out too bad. On the capital deployment front, it is very active right now. We are kind of being forced to be very, very selective, you know, we've got a certain amount of capital, which, you know, is adequate. But because we haven't had any redemptions for some time, we are making sure that we can kinda spend within our means, because at these valuations for our equity, it's not something that, you know, we're not gonna go out and raise equity at anywhere near these prices. So, on the redemption front, we are starting to see some potential activity there.
We have had unsolicited offers on a couple of our portfolio partners. So we'll see whether those will be adequate for our partners and whether they go through. But for the first time in a couple of years, there has been some activity there, which would be very welcomed by us. Would be able to show some more gains on some of the common parts of our portfolio that we're not getting credit for, and we'd obviously be able to redeploy that capital very easily. So we are starting to get some more activity on that front deal.
Perfect. Okay. Those are my questions. Thank you.
Thanks, Gary.
One moment for our next question. Our next question comes from Nik Priebe with CIBC Capital Markets. Your line is open.
Okay, thanks for the question. I was just wondering if there's any additional color that you could provide on how Fleet is funding distributions to common shareholders. You know, have there been any chunky asset sales or other corporate development action that has helped facilitate those large payouts, or has that just entirely been funded by the organic free cash flow of the business?
Yeah, that's been entirely through cash flow. They are just a syndicator, so they don't really have large assets to sell. They're really a service-driven organization, so that is purely cash flow and growth.
Understood. Okay, well, that's encouraging. And then, I was just hoping I could ask a little bit more color on the events that have driven SCR's earnings coverage ratio a little bit lower. I recognize it only represents about 3% of run rate distributions, but, can you just give us a bit of an update there, and your outlook for distribution sustainability from that relatively smaller partner?
Yeah, SCR, I mean, has always been a very project-based business, and there's always been ebbs and flows to the cycle of when they have those large project hits. So I think as you look back over the course of, you know, our relationship with them, they're always sort of bouncing around quarter to quarter. You know, we believe that their $4.2 million a year distribution is, you know, secure at this point. It's, it's what we're basing our DCF on. So, yeah, just always, always a little bit, one that's a little hard to predict just with how those projects fall into the earnings.
Okay, very good. That's it for me. I'll queue. Thanks.
One moment for our next question. Our next question comes from Jeff Fenwick with Cormark Securities. Your line is open.
Hi, good morning, everyone. I guess I wanted to start off just maybe with a bit of a discussion around the fair value accounting in the context of having that larger common equity portfolio today. Like, should we be expecting to see more of this type of these types of moves quarter by quarter and maybe a bit more volatile, just given the nature of common valuation versus pref? And are you contemplating anything there that might change the approach to how you tackle that fair value calculation?
Definitely no contemplated changes in the approach. I definitely will be a more volatile part of the portfolio, as, you know, common, common doesn't have the same floors and collars that we benefit from on the preferred side. You know, it is a bigger piece of the portfolio, so I do think that, you know, as it continues to grow, it will become more a meaningful portion. Movement-wise, I think that there was some common that was being held sort of below cost, and we've really seen some recovery from that standpoint that brought those numbers up. But I do, I do think that we will see fair value movements on the common side being a bit more significant over, over the future.
Yeah. I'll just add in on that, Jeff. One of the... You know, the main driver for KPMG's valuation on our, both our prefs and the common is, is, discounted cash flow. But then, every now and then, you'll have, you know, whether it's a, a sale of shares between parties within a company, or maybe it's an unsolicited takeover offer that then kind of sets the value of, of those shares, and may override a DCF calculation, and, that's when you'll see some, some bigger moves, like you've seen here. So, you know, that-that's one thing that will trigger some, some larger moves than just a kind of an ongoing DCF model will.
... That's helpful, caller. Thank you. Then, maybe just another question on Fleet. I mean, I think the headlines generally are that the trucking market's been pretty terrible across North America, you know, over the last number of months, and these guys are sort of blowing the lights out. So what's driving that difference in performance? Is it that they're trying to help these trucking companies perform better, or how should we be thinking about that?
They're really not servicing trucking companies per se. Their area of focus is really in larger businesses that have a fleet component to their business, but it's not the main focus of the business, and that's really where they can have their service offering can help manage a fleet as they don't have it. It's not the sole focus of the business. So they're generally working with a fleet manager who is, you know, running a division of the business, but their operations are much more focused on services and delivery. You know, Walmart is a large customer of theirs. They have a lot of grocery delivery trucks. So there's a lot of focus more on businesses that have operations where they just need things delivered.
You know, grocery stores, as you can imagine, they just need the food there at a certain point every day, regardless of that, you know, trucking industry overall metrics. So that's really what is driving them more so than, you know, those macro dynamics.
Okay. Thanks for that. And then, you know, maybe a question just on, on the SG&A. I mean, it came down for a couple of reasons that you cited there. I think in the fourth quarter, I know you've been accruing bonus, more so on a, on a quarterly basis now, but usually in Q4, I recall there's a bit of a true up that can happen. So should we expect to see that this year, that might, might take the, the salary line a bit higher through the end of the year?
It is being accrued based on earnings in the quarter, so the only thing that should really take that estimate higher is if we, you know, have, say, you know, something large happen. You know, if there was a redemption that drove a lot of gain, that could factor into the bonus, but it's 3.5% of distributable cash flow. So without a, you know, change in cash flow to drive that, there shouldn't necessarily be any true up with regards to what's already happened in the first three quarters that hits in the fourth quarter as an adjustment.
Okay, thanks for that. That's all I had. Thank you.
As a reminder to ask a question, please press star one, one on your phone. Our next question comes from the line of Zachary Evershed with NBF. Your line is open.
Hi, good morning. It's, it's actually Thomas calling in for Zach. Most of my questions have been answered, so maybe one last one for me. Would you, would you increase the yield on prefs if rates stay higher for longer?
Yeah, it's been a great area of discussion internally. And you know, around for 20 years, we have been through some various interest rate environments. And what we've tried to do is, in order to make our product more competitive in the market, more appetizing to entrepreneurs, we've decided to leave the current yield in a fairly tight band and increase the total return expectations of what we do in other ways. So for example, on our prefs, we are building in a higher premium on exit than what we've built in before in different environments. We've added the common equity, which you know, we have priced so that we believe that we'll be getting a much higher IRR on those investments than we are on our prefs.
So we look at it on a total return basis, and we feel like we've moved up our total return expectations, probably at least 5%, from where we would have been, several years ago in the lower rate environment. So... But with that being said, you know, the kind of the headline sticker shock of a deal is always the current pay yield. And so for that reason, from a marketing perspective, we've chosen to leave that, as is, and it's looking very appetizing for entrepreneurs. So that's the way we've decided to do it, to deploy more capital into better companies. But we have indeed moved up our return expectations.
Perfect. Thank you for your time.
Thank you.
I'm showing no further questions at this time. I would now like to turn the conference back to Steve King for closing remarks.
Great. Thank you very much. We're obviously very pleased to have surprised the market this week, and we hope to do more of that. We are continuing to build on more sources of revenue outside of the current yield. So I again point to the Sono Bello investment that we switched over from straight prefs to convertible prefs. That one is going to lead to surprises in the future. We're doing another deal in process that will be similar to that with a current portfolio company that we're hoping to raise some that that will get a fee and a carry-on as well as stay in as principal.
So, we feel like we've got some very exciting things going on, and we're creating a lot of value for our shareholders. So, we'll be excited to report back on our year-end in March. So thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.