Mr. Steve King reports

ALARIS EQUITY PARTNERS INCOME TRUST RELEASES 2023 FOURTH QUARTER AND ANNUAL FINANCIAL RESULTS

Alaris Equity Partners Income Trust has released its results for the three months and year ended Dec. 31, 2023. The results are prepared in accordance with IFRS (international financial reporting standards) accounting standards as issued by the International Accounting Standards Board. All amounts in this news release are in Canadian dollars unless otherwise noted.

Highlights:

• For the year ended Dec. 31, 2023, the trust had a net unrealized gain on investments at fair value of $65.2-million, of which $58.2-million relates to Alaris's common equity investments. During the year, Alaris's common equity investments realized an increase in fair value of 34.3 per cent on the opening carrying value in addition to a 7.5-per-cent return in common distribution revenue earned in 2023 of $12.8-million. In total, Alaris's investment in common equity earned a total return of 41.8 per cent in the year on the opening carrying value. Over the years, Alaris's holding of common equity investments as part of its overall investment strategy has grown with 13 of 20 investments now containing common equity. It is management's belief that participating in minority common equity alongside preferred equity investments allows Alaris to participate in the growth of that partner and can amplify returns.
• During the year, the trust completed a strategic transaction in Sono Bello LLC (BCC), which involved an exchange of its existing preferred units for newly issued convertible units. Alaris receives an 8.5-per-cent preferred distribution, as well as an annual transaction fee of $1.5-million (U.S.), with a total of $12.2-million (U.S.) received in 2023. Over the year, there was also an increase of $13.9-million (U.S.) in the fair value of the convertible preferred units, resulting in a total annualized rate of return of approximately 20 per cent. In addition, the convertible preferred units also participate in common distributions paid in excess of 8.5 per cent and receive an additional allocation of profits in the event specific return-based threshold are achieved.
• Revenue in the three months ended Dec. 31, 2023, of $41.9-million exceeded previous guidance of $39.9-million by $2.0-million as a result of higher-than-expected common dividends from Alaris's partners.
• EBITDA (earnings before interest, taxes, depreciation and amortization) (1) in the three months ended Dec. 31, 2023, of $61.3-million or $1.35 per unit and in the year ended 2023 of $202.0-million or $4.44 per unit represent increases of 30 per cent and 10 per cent, respectively, as compared with the respective periods in 2022.
• For the year ended Dec. 31, 2023, Alaris generated basic earnings per unit of $3.05 and paid out $1.36 of distributions per unit, resulting in $1.28 per unit of additional book value, improving the metric at year-end to $21.12, which represents a record book value per unit for Alaris.
• Capital deployment was $130.1-million in 2023, which included initial annual contracted distributions of approximately $14.0-million, or incremental revenue of 30 cents per unit.
• In Q4 2023, Alaris completed an amendment to its credit facility with senior lenders, which included increasing the base of its credit facility from $450.0-million to $500.0-million, a reduction in pricing and an increase in the senior debt to contracted EBITDA covenant from 2.5:1 to 3.0:1, and as a result of these amendments, Alaris expects its realized interest rate to decline on a go-forward basis as compared with the realized interest rate in 2023.
• Revenue of $162.6-million in 2023 is comparable with $161.6-million generated in 2022 after normalizing for one-time items, including the collection of previously deferred distributions of $17.2-million from Kimco Holdings LLC and $4.1-million from Ohana Growth Partners LLC, as well as $7.1-million in make-whole distributions from Falcon Master Holdings LLC, doing business as FNC Title Service, as part or their redemption.
• The weighted average combined earnings coverage ratio (5) for Alaris's partners remains above 1.5 times with 11 of 20 partners greater than 1.5 times. In addition, 12 of the trust's total partners have either no debt or less than 1.0 times senior debt to EBITDA on a trailing-12-month basis.
• Alaris's actual payout ratio (2) for the year ended Dec. 31, 2023, was 64 per cent after adjusting for the settlement and legal costs related the Sandbox Acquisitions LLC and Sandbox Advertising LP (collectively, Sandbox) litigation. The settlement of this dispute has resulted in a reduction of legal costs within general and administrative expenses in the second half of 2023.

Message from Steve King, Alaris Equity president

"In 2023, we saw the growing impact of the common equity strategy that we put in place five years ago. Over that period, we have added significantly more upside exposure to our total returns, all while maintaining an adjusted payout ratio on our current distribution of less than 65 per cent. While the foundation of our company has not changed -- cash distributions from a diversified portfolio of no- or low-debt companies that have a long track record of repeatable free cash flow, we have added equity upside on expected exits. Adding significant upside through common equity positions, as well as a profits interest in third party capital, has changed our return profile considerably without materially changing the level of risk taken. Year-over-year returns of nearly 42 per cent on our common equity portfolio plus the more than 13-per-cent current cash yield on our preferred equity portfolio creates a unique return profile for our shareholders that did not exist in previous years.

"The year came up short of management's expectations for capital deployment. At the micro level, we walked away from two deals that were scheduled to close before year-end that would have seen us hit our internal targets. Regardless of how attractive our capital is to companies in this environment, we will continue to be uncompromising in our investment criteria. On a macro level, the higher interest rate environment has caused a slowdown for the entire private equity industry, prompting many deals to be delayed until there is a more favourable environment. In addition to seeking out great new partners, we will make a more concerted push in 2024 to also grow through our twenty platform partners. Now that we have common equity upside in most of our partners, creating value through strategic acquisitions is a sound strategy that will potentially increase our returns while also increasing our annual capital deployment.

"We are moving through 2024 in a strong position. We have capital on our balance sheet to deploy, a low payout ratio that gives us flexibility in our capital allocation decisions, a healthy portfolio and a 20-year track record of creating true win-win partnerships between owner-operated businesses and our shareholders. I look forward to what the next twenty years has to bring for our company."

For the three months ended Dec. 31, 2023, revenue per unit decreased by 18.6 per cent compared with the same period in 2022. This decrease is primarily due to distributions received in Q4 2022 that were one time in nature. In Q4 2022, revenue included $7.1-million of distributions received upon FNC's early redemption and $4.1-million related to Ohana catch-up distributions, which were deferred in prior periods as a result of the impact of COVID-19. Also contributing to the decrease in revenue per unit was a reduction in distributions as a result of the BCC strategic transaction that occurred in Q1 2023. The previous preferred units in BCC were exchanged for newly issued convertible preferred units that are entitled to an 8.5-per-cent distribution, as well as participation in any common distribution above 8.5 per cent, paid when declared and as cash flows permit. Partially offsetting these decreases were distributions earned from new investments in Federal Management Partners LLC (FMP) and The Shipyard LLC (Shipyard).

During the year ended Dec. 31, 2023, revenue per unit decreased by 14.8 per cent compared with the year ended 2022. The decrease is largely a result of additional distributions received in 2022 as part of certain partner redemptions and that were non-recurring in 2023. For the year ended Dec. 31, 2022, $17.2-million of additional distributions were received from Kimco as part of their redemption, as well as the additional distributions received from Ohana and FNC's redemption described above. The remaining decrease can be attributed to the deferral of distributions by LMS Management LP and LMS Reinforcing Steel USA LP (collectively, LMS) in the first six months of 2023 and the BCC strategic transaction in Q1 2023 described above. Partially offsetting these decreases were higher common distributions earned in 2023 as compared with 2022 and distributions from new investments in Sagamore Plumbing and Heating LLC, FMP and Shipyard.

As the trust's cash from operations, prior to changes in working capital, excludes primarily all non-cash items in the trust's consolidated statement of comprehensive income, the cash from operations, prior to changes in working capital per unit, and the changes from period to period is an important tool to use to summarize the ability for Alaris to generate cash. In the three months ended Dec. 31, 2023, cash generated from operations, prior to changes in working capital per unit, decreased by 23.1 per cent compared Q4 2022, which is the result of the decrease in revenue per unit discussed above, as well as higher current income tax expense in Q4 2023. For the year ended 2023, cash generated from operations, prior to changes in working capital per unit decreased by 31.2 per cent compared with 2022, primarily due to the year-over-year decrease in revenue per unit, higher general and administrative costs in 2023 as a result of the litigation and legals costs associated to the Sandbox settlement, and higher current income tax expense in 2023.

The actual payout ratio (2) for Alaris for the year ended Dec. 31, 2023, was 75 per cent, an increase from 39 per cent in 2022, largely due to tax payments in 2023, as well as the decrease in revenue and increased general and administrative costs as discussed above. Excluding the settlement and associated legal costs in the year ended Dec. 31, 2023, the adjusted payout ratio would be 64 per cent.

EBITDA (1) per unit increased by 29.8 per cent in Q4 2023 and by 9.6 per cent in the year ended Dec. 31, 2022, each as compared with the respective comparable periods in 2022, primarily as a result of an increase in the net realized and unrealized gain from investments in 2023. In 2023, net realized and unrealized gain on investments was $28.3-million in Q4 2023 and $70.6-million for the year ended, as compared with $5.6-million in Q4 2022 and $8.0-million in the year ended 2022. Driving these gains in 2023 were relatively higher increases to the fair value of investments in both comparable periods. Partially offsetting the increase in EBITDA (1) per unit in Q4 2023 and the year ended 2023 were the decreases in revenue per unit as described above, as well as higher general and administrative costs in the year, due to costs associated to the Sandbox settlement in the first half of 2023. Basic earnings per unit increased by 18.4 per cent in Q4 2023 and by 5.5 per cent in the year ended Dec. 31, 2023, each as compared with the respective comparable periods in 2022, primarily due to the same reasons described above for increases in EBITDA (1) per unit, however, also negatively impacted by higher income tax expense and an increase in finance costs in Q4 2023 and year ended 2023 as compared with the same periods in 2022.

Outlook

The trust deployed approximately $130.1-million in the year ended Dec. 31, 2023, consistent with the trust's total acquisition of investments in its consolidated statement of cash flows. Total revenue of $41.9-million in Q4 2023 exceeded previous guidance of $39.9-million as a result of higher-than-expected common dividends from Alaris's partners. As presented below, the outlook for the next 12 months run rate revenue (3) is approximately $169.6-million, which includes an overall flat reset expectation on preferred distributions that are resetting in 2024. This includes current contracted amounts, an additional $2.4-million (U.S.) from Ohana related to deferred distributions during COVID-19 and an estimated $10.5-million of common dividends. Alaris expects total revenue from its partners in Q1 2024 of approximately $39.2-million.

The run rate cash flow (6) table outlines the trust's expectation for revenue, general and administrative expenses, interest expense, tax expense, and distributions to unitholders for the next 12 months. The run rate cash flow (6) is a non-GAAP (generally accepted accounting principles) financial measure and outlines the net cash from operating activities, net of distributions paid, that Alaris is expecting to have over the next 12 months. This measure is comparable with net cash from operating activities less distributions paid, as outlined in Alaris's condensed consolidated interim statements of cash flows. Annual general and administrative expenses are currently estimated at $16.5-million and include all public company costs. The trust's run rate payout ratio (4) is expected to be within a range of 65 per cent and 70 per cent when including run rate revenue (3), overhead expenses and its existing capital structure. An attached table sets out the trust's estimated run rate cash flow alongside the after-tax impact of positive net deployment and the impact of every 1-per-cent increase in the SOFR (secured overnight financing rate) based on current outstanding U.S.-dollar debt and the impact of every one-cent change in the U.S.-dollar-to-Canadian-dollar exchange rate.

The senior debt facility was drawn to $242.4-million at Dec. 31, 2023, net of the unamortized debt amendment and extension fees of $3.2-million. The annual interest rate on that debt, inclusive of standby charges on available capacity, was approximately 7.9 per cent for the year. Subsequent to Dec. 31, 2023, Alaris drew on senior debt to finance a follow-on investment with a current partner, as well as used proceeds from excess cash flow to repay senior debt. Following these draws and repayments, the total drawn on the facility on the date of the MD&A (management's discussion and analysis) is approximately $247-million with the capacity to draw up to an additional $253-million based on covenants and credit terms.

Alaris's financial statements and MD&A are available on SEDAR+ and on the trust's website.

Earnings release date and conference call details

Alaris management will host a conference call at 9 a.m. MT (11 a.m. ET), Friday, March 15, 2024, to discuss the financial results and outlook for the trust.

Participants must register on-line for the call. Preregister to receive the dial-in numbers and unique PIN (personal identification number) to access the call seamlessly. It is recommended that you join 10 minutes prior to the event start (although you may register and dial in at any time during the call). Participants can access the webcast on-line. A replay of the webcast will be available two hours after the call and will be archived for six months. Participants can find the link on the trust's website, stored under the investors section -- presentations and events.

An updated corporate presentation will be posted to the trust's website within 24 hours.

About Alaris Equity Partners Income Trust

Alaris, through its subsidiaries, provides alternative financing to private companies (partners) in exchange for distributions, dividends or interest (collectively, distributions) with the principal objective of generating stable and predictable cash flows for distribution payments to its unitholders. Distributions from the partners are adjusted annually based on the percentage change of a top-line financial performance measure, such as gross margin or same-store sales, and rank in priority to the owner's common equity position.

Non-GAAP and other financial measures

The terms EBITDA, actual payout ratio, run rate revenue, run rate payout ratio, earnings coverage ratio, run rate cash flow, IRR (internal rate of return) and per-unit amounts are financial measures used in this news release that are not standard measures under international financial reporting standards (IFRS). The trust's method of calculating EBITDA, actual payout ratio, run rate revenue, run rate payout ratio, earnings coverage ratio, run rate cash flow, IRR and per-unit amounts may differ from the methods used by other issuers. Therefore, the trust's EBITDA, actual payout ratio, run rate revenue, run rate payout ratio, earnings coverage ratio, run rate cash flow, IRR and per-unit amounts may not be comparable with similar measures presented by other issuers.

(1) EBITDA and EBITDA per unit are non-GAAP financial measures and refer to earnings determined in accordance with IFRS, before depreciation and amortization, interest expense (finance costs), and income tax expense, and the same amount divided by weighted average basic units outstanding. EBITDA and EBITDA per unit are used by management and many investors to determine the ability of an issuer to generate cash from operations, aside from still including fluctuations due to changes in exchange rates and changes in the trust's investments at fair value. Management believes EBITDA and EBITDA per unit are useful supplemental measures from which to determine the trust's ability to generate cash available for servicing its loans and borrowings, income taxes and distributions to unitholders. Refer to the reconciliation of EBITDA and calculation of EBITDA per unit in an attached table.

(2) Actual payout ratio is a supplementary financial measure and refers to Alaris's total distributions paid during the period (annually or quarterly) divided by the actual net cash from operating activities Alaris generated for the period. It represents the net cash from operating activities after distributions paid to unitholders available for either repayments of senior debt and/or to be used in investing activities.

(3) Run rate revenue is a supplementary financial measure and refers to Alaris's total revenue expected to be generated over the next 12 months based on contracted distributions from current partners, excluding any potential partner redemptions, it also includes an estimate for common dividends or distributions based on past practices, where applicable. Run rate revenue is a useful metric as it provides an expectation for the amount of revenue Alaris can expect to generate in the next 12 months based on information known.

(4) Run rate payout ratio is a non-GAAP financial ratio that refers to Alaris's distributions per unit expected to be paid over the next 12 months divided by the net cash from operating activities per unit. Run rate payout ratio is a useful metric for Alaris to track and to outline as it provides a summary of the percentage of the net cash from operating activities that can be used to either repay senior debt during the next 12 months and/or be used for additional investment purposes. Run rate payout ratio is comparable with actual payout ratio as defined above.

(5) Earnings coverage ratio (ECR) is a supplementary financial measure and refers to the EBITDA of a partner divided by such partner's sum of debt servicing (interest and principal), unfinanced capital expenditures and distributions to Alaris. Management believes the earnings coverage ratio is a useful metric in assessing the trust's partners continued ability to make their contracted distributions.

(6) Run rate cash flow is a non-GAAP financial measure and outlines the net cash from operating activities, net of distributions paid, that Alaris is expecting to have after the next 12 months. This measure is comparable with net cash from operating activities less distributions paid, as outlined in Alaris's consolidated statements of cash flows.

(7) Per-unit values, other than earnings per unit, refer to the related financial statement caption as defined under IFRS or related term as defined herein, divided by the weighted average basic units outstanding for the period.

The terms EBITDA, actual payout ratio, run rate revenue, run rate payout ratio, earnings coverage ratio, run rate cash flow and per-unit amounts should only be used in conjunction with the trust's annual audited financial statements, complete versions of which available on SEDAR+.

We seek Safe Harbor.