Alaris Equity Partners Income Trust (AD.UN) Q3 Earnings Call Highlights

Key Points

• Cash flow and distributions grew strongly: Q3 partner distribution revenue rose 25.9% to CAD 72.2 million, while net distributable cash flow increased 46.4% to CAD 54.7 million, or CAD 1.19 per unit.
• Valuation losses drove a quarterly net loss: Alaris recorded a CAD 6.2 million loss, including CAD 58.9 million of unrealized investment losses, largely due to higher interest rates. Book value fell to CAD 24.87 per unit from CAD 25.83 at quarter-end in June.
• Alaris retains capacity to invest: After deploying CAD 188 million in the quarter, the company estimated about CAD 200 million in available investment capacity, including retained cash flow. Management said two or three portfolio companies could potentially exit within the next 12 months, though timing is uncertain.

Alaris Equity Partners Income Trust AD.UN) (TSE: AD.UN reported higher partner distributions and cash flow in the third quarter of 2026, although non-cash investment valuation losses pushed it to a net loss and reduced book value per unit.

Total partner distribution revenue rose 25.9% from a year earlier to CAD 72.2 million, while net distributable cash flow increased 46.4% to CAD 54.7 million, or CAD 1.19 per unit, Chief Financial Officer Amanda Frazer said on the company’s earnings call. Per-unit cash flow rose 45.1%.

Alaris recorded a net and comprehensive loss of CAD 6.2 million, compared with income of CAD 86 million a year earlier. The quarter included CAD 58.9 million in net unrealized fair value losses on partner investments, versus a CAD 47.9 million gain in the prior-year period.

Higher Rates Weighed on Valuations

Frazer said approximately 60% of the quarter’s fair value adjustment was attributable to higher risk-free interest rates. Five- and seven-year rates rose nearly one percentage point during the quarter, increasing the discount rates applied to certain investments. The remaining adjustments primarily reflected changes in individual partner outlooks, she said.

Net book value per unit fell to CAD 24.87 at September 30 from CAD 25.83 at the end of June. Frazer attributed the CAD 0.96 decline to the quarterly comprehensive loss, unitholder distributions and the effect of the company’s September equity offering. Book value remained CAD 0.08 per unit above its level at the start of the year.

Frazer said the company reviews its valuations quarterly. Rates had recovered by about 50 basis points from their level around September 30, she said, adding that, barring further changes, Alaris could recover about half of the rate-related write-down. The final outcome will depend on movements through the end of the fourth quarter.

President and CEO Steve King said short-term softness at Sono Bello, Optimus and a shipyard investment also affected valuations. He said he did not expect the issues to change Alaris’ investment returns through the eventual exits.

Portfolio Growth and Cash Flow

Preferred partner distributions rose 22.6% year over year, supported by recent investments and contractual resets. Common partner distributions increased 34%, largely because Fleet generated CAD 13.8 million in common distributions, up from CAD 10.3 million a year earlier.

Alaris ended the quarter with 26 partners and a weighted average earnings coverage ratio of approximately 1.5 times. Sixteen partners had no senior debt or senior leverage below one times EBITDA, Frazer said. The company expects contractual distribution resets for 2027, based on partners’ 2026 performance, to be relatively flat overall.

The payout ratio for the first nine months improved to 45.1% from 54.4% a year earlier. Alaris estimates its run-rate payout ratio at approximately 63%, below its long-term target range of 65% to 70%. Its current assumptions include annual net cash from operating activities of CAD 125.8 million and unitholder distributions of CAD 79.2 million, leaving approximately CAD 46.6 million for reinvestment, debt repayment and other corporate purposes.

Frazer forecast fourth-quarter partner revenue of approximately CAD 53 million, down from CAD 72.9 million in the third quarter. She attributed the sequential decline primarily to the timing and variability of common partner distributions, which are typically more significant in the third quarter. Estimated revenue for the next 12 months stands at a record CAD 231 million.

Investment Capacity and Potential Exits

Alaris deployed CAD 188 million into new partners during the quarter, bringing new invested capital for the first nine months to CAD 265.1 million. It also completed a CAD 115 million equity offering and increased its senior credit facility to US$500 million from US$450 million.

Frazer said approximately CAD 140 million was available on the credit facility, with annual retained cash flow bringing available room to about CAD 200 million. King said Alaris did not see a near-term need to raise more equity and could consider the high-yield market next year to pay down its revolving facility and increase flexibility.

King said the company sees opportunities from softness in the U.S. private equity market, but cautioned that investment exits remain uncertain. He said two or three portfolio companies could produce exits within the next 12 months, while emphasizing that investors should not assume a transaction will close by year-end. One company stopped exploring a sale after bids did not meet the threshold agreed with its entrepreneurs, he said.

Partner Updates

At Sono Bello, King said changes in consumer search behavior had reduced lead volumes for its liposuction business. Alaris expects the partner to use some payment-in-kind distributions over the next couple of quarters before returning to cash payments next year. King said the rollout of skin-tightening and breast-augmentation services was above budget.

King said GWM had a strong quarter and expects to pay its distribution in the fourth quarter, while FMP was recovering from earlier contract reductions. Heritage’s recovery remains longer term, and Alaris does not expect distributions from it until around the time the business is sold, he said.

At DNT, Frazer said the valuation adjustment reflected an expectation of a flat distribution reset rather than the increase previously anticipated. King said the business had its second-best year, following an unusually strong prior year, and that its market and backlog remained positive.

About Alaris Equity Partners Income Trust (AD.UN) (TSE:AD.UN)

Alaris' investment and investing activity refers to providing, through the Acquisition Entities, structured equity to private companies (' Partners ') to meet their business and capital objectives, which includes management buyouts, dividend recapitalization, growth and acquisitions. Alaris achieves this by investing its unitholder capital, as well as debt, through the Acquisition Entities, in exchange for distributions, dividends or interest (collectively, ' Distributions ') as well as capital appreciation on both preferred and common equity.

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