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Edited Transcript of AD.TO earnings conference call or presentation 6-Nov-19 10:59am GMT

Q3 2019 Alaris Royalty Corp Earnings Call

CALGARY Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Alaris Royalty Corp earnings conference call or presentation Wednesday, November 6, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Curtis James Krawetz

Alaris Royalty Corp. - VP of Investments & IR

* Darren Driscoll

Alaris Royalty Corp. - CFO

* Stephen Walter King

Alaris Royalty Corp. - CEO, President & Director

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Conference Call Participants

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* Anoop Prihar

GMP Securities L.P., Research Division - MD & Special Situations Analyst

* Derek Spronck

RBC Capital Markets, Research Division - Analyst

* Gary Ho

Desjardins Securities Inc., Research Division - Analyst

* Jaeme Gloyn

National Bank Financial, Inc., Research Division - Analyst

* Jeffrey Michael Fenwick

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* Scott Douglas Fromson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst

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Presentation

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Operator [1]

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Good evening. My name is Leonie, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Alaris Royalty Corp. Q3 2019 Earnings Conference Call.

(Operator Instructions) Thank you. I would now like to turn the conference over to Curtis Krawetz, VP, Investments & Investor Relations. Please go ahead.

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Curtis James Krawetz, Alaris Royalty Corp. - VP of Investments & IR [2]

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Thank you, Leonie. Good evening, ladies and gentlemen, and welcome to Alaris Royalty Corp.'s conference call and webcast to discuss the financial results for the 3 and 9 months ended September 30, 2019, as well as a brief corporate update.

I am Curtis Krawetz, Vice President of Investments & Investor Relations. And I'm joined on the call today by Steve King, President and Chief Executive Officer; as well as Darren Driscoll, Chief Financial Officer. After a short presentation from Steve and Darren, there will be a question-and-answer session. (Operator Instructions)

Before we begin, I would 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 on today'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 as well as our website.

Non-IFRS data is also presented and may differ from the way other companies present such data. As with forward-looking statements, please refer to today's release and our MD&A for the period for more clarification regarding non-IFRS measures.

I will now pass the call over to Darren Driscoll, Alaris' Chief Financial Officer.

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Darren Driscoll, Alaris Royalty Corp. - CFO [3]

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Thanks, Curtis, and thanks, everyone, for joining us.

I'll start with just highlights on the quarter summarized in 3 separate areas, the first being really fantastic financial results this quarter, Alaris' highest revenue and EBITDA quarter ever, revenue in the quarter of $30 million as estimated in our Q2 outlook. Now that's up over 30% compared to $22.7 million in Q3 of last year; and up almost 10% over the previous quarter of this year, $27.4 million in Q2 of this year. A normalized EBITDA in the quarter of $25.9 million, and that's up nearly 30% compared to $20.2 million in the same quarter last year and again up over the previous quarter of $24 million in Q2.

Our year-to-date results also excellent, year-to-date revenue up 14% and normalized EBITDA up 23%. And all those numbers are on a gross and a per share basis. And the main driver being deployment over the last 12 months, a gross deployment of $230 million net of just over $200 million, plus the positive resets experienced in January.

Now the second area is significant portfolio improvements to report on, most significantly of Body Contour's delivered as promised and better. Not only is the ECR back above 1x, it's above 1.2x. And we are extremely pleased with the effort and commitment shown by the BCC management team, as they have delivered exactly as they promised us a few months back. SCR continues to put out month after month of solid results. Again, they bought the monthly amount from $200,000 to $250,000, starting in Q4, with additional increases expected in 2020. Again another solid year of resets are expected. We're 8, 9 months into this year and have a good handle on what our resets are going to be. And we do expect in a range of at least $0.06 or $0.07 a share of positive resets in January.

Amur capital, our first common dividend well ahead of schedule. We received $0.4 million just at the end of Q3, declared and received, and really weren't expecting that until the earliest Q4 and even to Q1 of next year.

Our payout ratio is in the low 80s. And that doesn't include any common distributions, any increases from SCR next year or the resets coming in January 2020.

A couple of interesting stats this year. Again, the weighted average earnings coverage ratio of the portfolio is still approximately just over 1.5x. And excluding Sandbox, who's undergoing a sales process, our top 10 largest partners by distribution that's over $100 million on a run rate basis, almost 85% of the portfolio, has an earnings coverage ratio of above the 1.2x. And as you go through the MD&A, you will see 14 of our 17 partners, representing over 91% of our revenue, are reporting year-to-date results better than the previous year.

The third area is our deployment runway is in good shape, alongside the continued support and confidence shown by our senior lending syndicate. Just a few days ago, closed on an amendment to extend our senior credit facility from $300 million to $330 million, under the same covenants, to allow us to execute on our deployment goals. Again, each of the 6 members of the syndicate really took an extra pro rata piece, all jumping into help support our deployment plans. So at $266 million drawn today, that gives us about $115 million of dry powder today.

Our Q3 deployment was CAD 83 million, anchored by the Planet Fitness deal in July, and approximately $170 million of gross deployment year-to-date.

Our other items throughout the financials. Cash G&A expenses as expected at just under $2.5 million in the quarter, still on track for approximately $10 million in total cash G&A expenses for 2019. Transactions costs of $1.1 million in the quarter versus 0 on the prior year, but you'll recall, on prior years, that number was capitalized as part of the cost of value of a new deal. So we've added it back to normalized EBITDA and we'll continue to do so going forward. And again, this number will be lumpy and deal-timing specific. We previously guided to 1% to 1.5% of invested capital, and year-to-date, that number is about 1.2% of invested capital.

The noncash stock-based compensation expenses in the quarter do require a little explanation. The number spiked in Q3 to $1.9 million. Since we were under trading restrictions most of the last 12 months, there's a tranche of RSUs that should have been issued last September. And at the end of the day, they were granted and vested in the current quarter, which required an accelerated expensing of an entire year's worth of expense around that -- those pieces of the RSUs. Add to that, the company achieved a performance metric which increased value of the portion of those RSUs, and that translates into an extra $1 million of noncash stock-based comp in the quarter. Next quarter, you'll see the noncash comp number come back to around $1 million a quarter and about $200,000, $250,000 for that specific piece.

We had a realized gain of $9 million during the period, and that relates to crystallizing that $7 million U.S. gain on the Planet Fitness transaction, previously recognized as an increase in fair value. So you'll see a flip on our income statement in Q3 from unrealized increase in fair value to the realized gain. So you'll see the new year-to-date number is a wash when you combine the 2. A number of fair value adjustments for the quarter with a handful up, LMS, SCR, GWM and Unify; and 3 down, Kimco, Providence and Sandbox, for a net no change in the fair value of the portfolio. And each of the changes up and down are a result of just adjusting expectations for distributions in 2020 and beyond.

I'll just add a quick update on the continuing disclosure in our tax note relating to potential changes in the U.S. We get a lot of questions on those, and still none of the proposed changes are final. It remains to be determined if and when they would take effect. And the later end of 2019 progresses, the less likely, it seems it would be backdated to January 2019, but we just don't know either way.

And secondly, the amount of $8 million in the note for the first 3 quarters of the year is based on our current capital structure, which certainly changed as the guidelines changed. So very important to note that our current run rate ratio -- payout ratio of 83% already assumes an increase in our overall tax rate. And we continue to actively manage our tax structure with our advisers. And so it's a guess, the guideline changes were retroactive, yes, we'd have to pay that extra tax, but what we call is a small increase, maybe 1% of 2%, to our run rate payout ratio; and that's only if we can't find a more efficient structure. Additionally, there are a number of items out there that are not included on our run rate ratio -- payout ratio that would make up, more than make up for some extra tax. And that includes increased distributions from SCR, more common dividends from Amur and the resets expected for 2020. So this is something we are managing internally but should not be a topic of concern.

For the record numbers of revenue and EBITDA, portfolio continues to strengthen alongside an improving payout ratio, and our lending syndicates showing full support, we're pleased to provide yet another strong quarter for our shareholders.

And I'll pass it over to Steve for some further comment.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [4]

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Great. Thanks, Darren.

Obviously, extremely proud of our financial and operating performance over the last many quarters. To be able to show a 30% year-over-year growth in a business that's designed to limit volatility and to pay out a high percentage of its cash flow is extraordinary. I won't go into any more detail on Darren's comments on our individual companies, happy to answer questions once I'm done here, but I will talk about kind of the current landscape and our deployment outlook.

From a macro point of view, our economic -- the economic environment for our current partners remains very strong. We haven't seen any slowdown in the macroeconomics of any of our companies in the States or in Canada. From a competitive standpoint, private equity remains very active. Multiples remain at all-time highs. The only slight change that we've seen in industry publications is a slight decrease in debt levels being offered by senior lenders. They've tightened up a little bit, which is a positive for us since we don't rely on debt leverage to deliver our returns like private equity does.

In the near term, we do expect to be active over the next 6 weeks before the end of the year. We have a few smaller transactions that we hope to close, starting fairly soon here. So that's the reason why we wanted to make sure that we had ample room on our debt facility regardless of the timing of the Sandbox disposition. Overall, deal flow remains very strong. We're seeing lots of opportunities. And we're in the process on several transactions that we would hope to close in Q1, should they proceed.

So Leonie, I'll turn it back to you to open the floor up to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Gary Ho from Desjardins Capital Markets.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [2]

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My first question is, maybe to start off, on BCC. It looks like a decent turnaround this quarter. Wondering if you can elaborate? And can you remind us what the financial thresholds they need to hit before you provide tranche 2 funding?

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Darren Driscoll, Alaris Royalty Corp. - CFO [3]

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Sure, Gary. The threshold is after funding an ECR of over 1.5x. So they have made tremendous strides, had good months, even expecting a good finish to this year as well, but that's still I would expect it at least a year away. But we're certainly that -- those follow-on tranches are looking a lot more realistic now than they were 3 months ago.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [4]

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Great. And then Steve, I think, in your prepared remarks talked about a few small transactions over next couple of weeks. Can you give us a range to help us with the modeling? And are these more follow-ons? Are these new partners?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [5]

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Mix of the 2, Gary. They're all on their own not material, kind of in the -- kind of USD 6 million to USD 12 million range. All 3 transactions that we're hoping to do are U.S. So yes, they're not material on their own but add up to a decent amount and supporting our current partners and also adding a small-cap new one as well.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [6]

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Okay. And then just lastly, just on the Sandbox there, can you give us an update? It sounds like you guys drew on their facility, but also there was a write-down. Can you give us an update on the sale process?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [7]

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Yes. The write-down was just a result of reduced expectations for their distribution resets, so that's kind of more of a formulaic process that KPMG and Darren go through every quarter on each of our partners. The process continues to proceed. We are being guided to a closing in December of this year. So that's very positive. So we'll keep on working through that. And hopefully, that closes successfully because that would add a significant amount of cash, reduce our debt by a significant amount.

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Operator [8]

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Your next question is from Scott Fromson from CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [9]

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Just following on the -- Gary's questions on Sandbox. How much of the, and correct me if I got these numbers wrong, $40 million preferred investments and 52 -- or sorry, $21 million senior debt do you expect to recover? And what kind of -- in other words, what kind of sense on the dollar?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [10]

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Yes. We're hoping to recover everything, Scott, is our objective here. So if everything lines up correctly, that should be the case. I think it's -- you never know when you're dealing with these processes. A lot of deals get repriced at the end, but we don't expect that to happen. We're hoping to recover everything.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [11]

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Okay. And do you anticipate taking any of that consideration in the form of equity?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [12]

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No.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [13]

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Okay. Just one more question. On the deal pipeline, you mentioned that it's looking good into the next year. Are there any specific regions or industries that are prominent?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [14]

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No. We've got -- we actually had a lot of fun today in our Board meeting because we've got probably the most diverse group of companies that are in our pipeline that we've ever had in industries, quite frankly, that I didn't know existed. So it's good. I mean that is -- our goal is to build a diverse portfolio as possible. So no, there's no specific sector that stands out more than the others. The one thing I would say from a deal flow point of view, we are seeing kind of more kind of cyclicals showing up in our inboxes than we did a year or 2 ago. So I think a lot of those companies feel that this is a good time to raise money. If there -- people are getting nervous about a recession in the U.S., then they're trying to get to the market before that happens, but a lot of the companies that we've seen really aren't heavy cyclicals. They're companies that have made money in every market. And so there's lots of good opportunities out there. I'm actually quite excited about 2020. I think we can beat the -- our record again, but we'll see how it goes. We only have about 90 days of visibility really on our pipeline, but the next 90 days look good.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [15]

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And how are your underwriting standards? Have these -- are they more stringent? Are they more lenient? Or how have they changed? Do you feel you have a better choice of investment?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [16]

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We do. And yes, I mean, we've always tried to be strict, I mean, but you always learn more and more as you go as an investor. And this is our -- we're almost into year 17 here at Alaris. So I think we've gotten better over the years, for sure. When we look at companies that may have some exposure to the economy, we would build in a huge ECR at the start, knowing that it can come down from there. We need to make sure that they can pay our distribution even at a trough. We would never allow any debt in front of us in those situations. And so yes, I think we're much better investors than we were 10 years ago, and hopefully, we'll be saying the same thing 10 years from now.

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Darren Driscoll, Alaris Royalty Corp. - CFO [17]

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And I'll just add, Scott, I think we're also much better remediators than we were. I think we mentioned last call on some of the things we've done with a senior debt and the ability to get in sooner as well as some of the fixes that we've got in place in a situation like Sandbox. So we are better at repair than we used to and will continue to try to get better at that going forward.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [18]

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Yes, Sandbox is a good example. We acted very quickly on that one and ended up not being in a great solution, but we'll still end up with a nice double-digit IRR on a tough situation. So we're proud of that.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [19]

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Good stuff. I like the tough, new Alaris.

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Operator [20]

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Your next question is from Derek Spronck from RBC.

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Derek Spronck, RBC Capital Markets, Research Division - Analyst [21]

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Just on the capital deployment. Without the Sandbox sale, how much capital do you have available to deploy?

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Darren Driscoll, Alaris Royalty Corp. - CFO [22]

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About $115 million, and that includes the $50 million accordion. So we're drawn to $266 million today. We've got lots of room on our covenant, so we can go to $330 million on the base, plus another $50 million. So $114 million, $115 million today.

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Derek Spronck, RBC Capital Markets, Research Division - Analyst [23]

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Okay. That's great. And just in terms of, sorry, the overall portfolio trends from an ECR perspective, I mean, as you see it right now, do you feel that you're in a bit of an upswing, stable, kind of downswing? I mean you've had a nice lift, but how do you see that trending by and large?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [24]

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Yes. I mean all of our companies -- well, I shouldn't say all, but as Darren mentioned, 14 out of our 17 are technically on upswings at the current time. We're seeing really good trends from those companies. The fact that BCC not just gone above 1x but went to the next range of 1.2 to 1.5x, I thought, was tremendous, just for 1 quarter. And we were with them in Seattle on the weekend, and they couldn't be more excited about where their business is going. So I mean we've got a lot of that, GlobalWide and Planet Fitness, we've got some really high-performing companies right now and very few that are having a tough time.

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Derek Spronck, RBC Capital Markets, Research Division - Analyst [25]

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Okay. That's great. The $120 million run rate, does that include or anticipate any sort of positive rate resets?

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Darren Driscoll, Alaris Royalty Corp. - CFO [26]

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No. That is exactly as it stands today, so it doesn't include any of the small-cap or follow-on deployment we have in place. It doesn't include any of the resets, as we mentioned. And it's -- also doesn't include any further common distributions. We won't include those common dividends from Amur until we see a real steady state quarter after quarter after quarter. And again, pleased with that first one we got, but we won't include that in our run rate until it's a reliable source.

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Derek Spronck, RBC Capital Markets, Research Division - Analyst [27]

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Okay. That's great. And with the majority of the rate resets coming up here, do you have any visibility into that as it stands? Or is that a process that you still need to go through?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [28]

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Well, I think it has a chance to be a bit anomalous on the upside. And a lot of that has to do with LMS, which is that one company that doesn't have a collar on it. And they are experiencing a really extraordinary year, so -- they're always a tough one to judge because they do sometimes have some end-of-year adjustments that go through the audit process. So we won't know for sure until probably March, but yes, I think this has a chance to be a pretty big year because of them.

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Operator [29]

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Your next question is from Jeff Fenwick from Cormark Securities.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [30]

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I think we've covered most of the questions that I had there, but why don't we talk a little bit about that Amur common equity dividend there? It sounds like that was a bit of an unanticipated one for you so early into the investment, but how do the owners there look at that distribution? Is it just purely their option? Do they have a bit of a policy around what they're looking to do there? And as you say, you're a little bit reluctant to build it into the run rate just yet, so how are you thinking about that going forward?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [31]

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Yes. I think from their point of view there's a few different factors. First of all, the top 2 people who own the company and are running the business, they don't take a penny of salary. Their only compensation is by way of common equity dividend. So I think it will be fairly regular, but they're not quite ready to make kind of a formal policy yet because there are some growth initiatives that they're looking at that could require them to pay out a little less than what they currently can. So they are going to kind of keep communicating with us on that. They haven't kind of really formed that yet. They'll work with us on that, but yes, that's the only reason we're not wanting to commit to a firm number, because they haven't either. But it is their only way of getting paid as individuals, so we think it will be quite regular.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [32]

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Okay. Fair. And then thanks for the color on the RSU and the non -- or the equity-based comp in the quarter. Now Q4 is typically one where we do see now, I guess, under the structure you adopted, I think, it was last year or the year before, where you're taking some of the annual bonus. So is that still -- but I assume that's still going to be a factor in the fourth quarter separate from this current allocation?

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Darren Driscoll, Alaris Royalty Corp. - CFO [33]

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Yes. And then -- and right now that's sort of our preliminary estimate for that bonus, would combine with all of our cash G&A and still come in around $10 million all-in. So we've got sort of a running estimate. Now having said that, we haven't accrued anything because we do have to hit certain targets to achieve that cash bonus. And so while we expect to, there is still -- we still need to finish off our good -- with another good, strong Q4. And you will see that number in Q4, but again, it will be in and around that -- a part of that $10 million all-in cash G&A number.

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Operator [34]

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Your next question is from Jaeme Gloyn from National Bank Financial.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [35]

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First question is related to the Sandbox sell process. I think -- correct me if I'm wrong, but last quarter, you guys making comments that would imply that there was a 10% premium included in any sale. Was that -- is that still the case? Is that adjusted lower? Or is it wiped out completely at this point?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [36]

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Yes. We don't know yet, unfortunately, is the answer. There's a whole bunch of different factors in play in terms of other stakeholders within Sandbox that need to be sorted out in terms of the waterfall of proceeds. So until all of that gets sorted out, we don't know whether we're going to get a premium on our preferreds or not. So yes, that will kind of play out over the next 2 to 3 weeks here.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [37]

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And if you can, can you just dive into or refresh me on, I guess, exactly what's going on with Sandbox in terms of what's driving that decline in ECR? Or is it geographic specific? Is it a product specific? Is there some sort of change in regulatory environment? What's going on exactly?

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Darren Driscoll, Alaris Royalty Corp. - CFO [38]

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It's -- they did lose a customer or 2 and are replacing them, but just they were a couple of sizable customers. And so if this is -- we're going from maybe expecting it to be up 2% or 3% to down 4% or 5%, so it's not a massive swing, but that does change our DCF model. So this is still making good, healthy top line and bottom line; and still servicing all of its commitments. And again, we're looking to get this cross finish line here in December, but nothing at all that big, concerning or catastrophic at Sandbox.

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Curtis James Krawetz, Alaris Royalty Corp. - VP of Investments & IR [39]

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This is Curtis here. I'll just add one thing. There was just a bit of CapEx this period, but -- yes, but the ECR, it came down a little bit just because there was a bit of CapEx and moving into a new floor in their office building that got included in the ECR. But EBITDA was up year-over-year.

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Darren Driscoll, Alaris Royalty Corp. - CFO [40]

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Yes.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [41]

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Okay. And in terms of getting just, I guess, back to the sell process. Are you able to sort of talk about who the natural buyers are of this business? Is it consolidators of the market or other PE? What -- like who's been looking at it? Who's shown interest at this point?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [42]

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Yes, we anticipate that it will be a strategic buyer.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [43]

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Okay. Just getting, shifting to the RSU commentary, I just want to make sure I understood this correctly. It was RSUs that were issued in Q3 2018 but due to blackout periods were not able to be, I guess, given out to employees and therefore the -- that occurred in Q3 2019, and then they were expensed in Q3 2019. Is that what I understand? Is that correct?

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Darren Driscoll, Alaris Royalty Corp. - CFO [44]

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That's bang on. So yes, so they should have been issued in Q3 of last year. We were unable to grant them until this current quarter. So they were granted the first 1/3 vested and accelerated because of our performance metric. And so the entire years of expense was recorded in the current quarter.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [45]

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Okay. As opposed to the -- as opposed to it gradually ticking up through the...

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Darren Driscoll, Alaris Royalty Corp. - CFO [46]

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Yes. Just to put this quite simply. Had they -- had we not been under any trading restrictions, you would have seen $250,000 a quarter in -- while you wouldn't have seen -- you would have seen half of that because of performance metric, but you would have seen a chunk accrued each of the -- in our book, each of the previous 3 quarters.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [47]

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Right, right, understood. And then in terms of the RSU compensation, is that something that is recurring? I'm not talking about the 1/3 vesting and going into future years, but RSUs as a component of the compensation, should we expect to see this number go from, let's say, the $1 million per quarter run rate for noncash stock-based comp, should we see that increase in subsequent years as this becomes a piece of the compensation platform?

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Darren Driscoll, Alaris Royalty Corp. - CFO [48]

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A year ago, we did change our compensation program. So the option plan is now done. So there are a few options. They're all out of the money at the moment, but there are still some that are out there. We are more of an RSU/PSU-based comp plan now. So half are just time-vested RSUs. The other half are performance units. And those performance units are based on increasing the book value of the business. So better alignment I think from a shareholder standpoint, better achievability from an employee or management standpoint. And as far as it growing, I think, right now as they fall off and vest, more will be granted. Will that increase? That will be up to the Compensation Committee, but I think for now, it's sort of a steady state of $1 million a quarter is a good number to use for modeling.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [49]

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Okay. And then last one was just around the debt capacity, senior debt-to-EBITDA at 2.47, I think, based on the presentation. Where are you comfortable taking that assuming a scenario where Sandbox doesn't repay? Where are you comfortable taking that if a -- if an investment is to come across the line?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [50]

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Yes, I think that's probably as high as we're comfortable with. Sometimes, you're going to have some short-term changes in that, that you'd carry for a little while, but I don't think we'd be -- want to be any above that. We always want at least $100 million of room on our balance sheet to show prospective companies that we can fund without them taking on market risk. So -- and we don't want to be a high-risk entity for our investors in terms of our balance sheet. So I think somewhere between a 1.5 to 2.25 range is what we're comfortable with long term, but we're not afraid to have kind of short-term spikes in that if we know something like Sandbox is coming or if we're going to do an equity raise and -- but -- so in this case, we're totally comfortable where we are, if not a little higher, because we know Sandbox has a very good chance of closing here in the next 6 weeks.

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Darren Driscoll, Alaris Royalty Corp. - CFO [51]

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And that's USD 60 million, so that's $80 million to $90 million coming off that $266 million, so that is a material change to that covenant. So we are entirely comfortable closing the next couple of small-cap investments on our facility. Our max covenant is 3x, but again, we want to always offer it with some room, as Steve mentioned.

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Jaeme Gloyn, National Bank Financial, Inc., Research Division - Analyst [52]

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Okay. And I take the confidence level over that statement, Steve, around within the sort of 6 weeks period. That's a very high confidence that this thing is going to get done in that time frame, like there's not -- like, what -- I guess, what would be a risk? Or what will be the risk that it doesn't occur?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [53]

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Yes. There's always risk. We've been in this business a long time. We've seen lots of strange things happen, but we're dealing with a very legitimate buyer that has lots of resources already in place to fund it. So it's really just getting through the last bits of due diligence and the paperwork done, but there's always a risk in any of those transactions.

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Operator [54]

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(Operator Instructions) Your next question is from Anoop Prihar from GMP Securities.

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Anoop Prihar, GMP Securities L.P., Research Division - MD & Special Situations Analyst [55]

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Most of my questions have been answered. Just one quick one, just an update on Kimco, Darren, if you don't mind, please.

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Darren Driscoll, Alaris Royalty Corp. - CFO [56]

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Yes. We had another small write-down on the quarter. We -- they continue to plug along and they're making a reasonable amount. They're servicing their debt. They're servicing our debt, but really that expectation of we really want to get to $100,000 a month just to get it started. We thought it may have happened by now. And they have -- the group we have in there now has done a tremendous job of rightsizing expense side, but right now, I think it's a revenue issue. They are optimistic. They have made some significant changes in their sales force and management team and are expecting that to get back on track, but it is one that we are certainly frustrated with and wish it was recovering a little faster; and really, quite frankly, as is the management team because they are incented to get those distributions back on as well. So really just another small write-down, just pushing out our expectation into -- well into next year as far as when those might restart again.

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Anoop Prihar, GMP Securities L.P., Research Division - MD & Special Situations Analyst [57]

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I guess I'm a bit curious to know just how patient you guys are going to be because we've been -- it is a small issue, but we've been dealing with it for a while now. So Steve, how much longer do we wait?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [58]

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Yes. It's a tough question. I mean it's not a material part of our portfolio. It hasn't been contributing revenue for a long period of time, so it's not like we're -- it's not like there's a gun to our head on it. And you don't want to sell low, if you can help it. So the management team has asked us for a little more time. They've just added some significant resources on the revenue generation side. We're inclined to give them a little bit more time, but certainly it is a topic of discussion, that when would be the right time to sell the business.

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Operator [59]

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We have a follow-up question from Scott Fromson from CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [60]

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Just a quick one. Do you anticipate any further redemptions other than Sandbox?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [61]

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We don't have anything that we know of in the current time, Scott. We just had a small redemption from SBI of $10 million. We've got Sandbox. We don't know of anything else or anybody that's considering that. We had -- obviously, we have extensive conversations with all of our partners on a regular basis. There isn't anything that's come up.

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Operator [62]

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There are no more questions at this time. Please proceed, Mr. King.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [63]

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Okay. Well, thank you, everybody, for dialing in at a late hour, especially for those of you out East. Darren and I are off tomorrow morning to a Deloitte conference with, well, 260 private companies looking for capital. So we thought it was important that we'd be there, and so we appreciate you all accommodating us in the evening this quarter. We look forward to reporting more great results in our Q4.

So thank you very much.

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Operator [64]

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Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.