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Edited Transcript of AD.TO earnings conference call or presentation 29-Jul-20 3:00pm GMT

Q2 2020 Alaris Royalty Corp Earnings Call

CALGARY Jul 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Alaris Royalty Corp earnings conference call or presentation Wednesday, July 29, 2020 at 3:00:00pm 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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* Ace Mirali

CIBC Capital Markets, Research Division - Research Analyst

* Anoop Prihar

Stifel GMP Research - MD & Special Situations Analyst

* Anthony Sandler

* Gary Ho

Desjardins Securities Inc., Research Division - Analyst

* Jeffrey Michael Fenwick

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

* Trevor Reynolds

Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Research Analyst

* Zachary Evershed

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Q2 2020 earnings conference call. (Operator Instructions) This call is being recorded on Wednesday, July 29, 2020.

I would now like to turn the conference over to Curtis Krawetz. Please go ahead.

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

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Thank you, Veronica. Good morning, ladies and gentlemen. Welcome to Alaris Royalty Corp.'s conference call and webcast to discuss the financial results for the 3 and 6 months ended June 30, 2020, as well as a brief corporate update. I am Curtis Krawetz, Vice President of Investments and 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 are given in Canadian dollars, unless otherwise noted. Listeners are also 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 are available in last night's press release and our MD&A for the period under the headings forward-looking statements and risk factors, copies of which are available on SEDAR 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 last night's press release and our MD&A for the period for more clarification.

I'll now pass the call over to Darren Driscoll.

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

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Thanks, Chris, and thanks, everyone, for joining. We're certainly pleased to be reporting a really solid quarter in a truly unique business environment.

We continue to be so impressed with the management teams we partnered with. A couple have had to battle through full location closures and back to reopening, while most have operated really well throughout and a couple have thrived as opportunities have presented themselves. The financial impact of COVID on this quarter was much different than Q1.

In Q2, we saw the deferral of revenue, as we disclosed last quarter, from Body Contours and Planet Fitness, which resulted in expected period-over-period declines in revenue and EBITDA in both the 3 and 6 months ending June 30. At this time, we still do expect to collect that revenue but haven't recorded any of it on our financial statements, and we'll do so when we collect.

On the upside, we did collect all accrued interest on the Kimco subdebt as they finalized their new credit facility in the period as well as a $400,000 common share dividend we received from Amur in the quarter.

Normalized earnings in the quarter of $16.2 million and normalized EBITDA of $17.3 million, down from the prior year period again due to those revenue deferrals. We included a normalized earnings in this quarter as there was significant -- there was a significant accounting entry in the period related to tax that related to 2019 change in U.S. income tax regulations. It's important to add, though, just as we disclosed last quarter that our max exposure is still less than $2 million. So that's something we felt we needed some additional explanation in the notes of the financial statements and in the MD&A.

Normalized earnings and normalized EBITDA in the 6-month period again down due to revenue deferrals and the fair value adjustments that hit earnings in Q1.

Overall, a number of positive developments to report on for the quarter. First and foremost, the fair value increases of $8.5 million and a book value per share for Alaris at June 30 at approximately $15.50.

Start with LMS. A write-off of about $8 million. They were down $5 million in Q1. And we were expecting LMS to have some challenges in a COVID environment, but the required nature of their business instead resulted in increasing revenues and EBITDA in April, May and June. And so instead of a small negative reset for LMS in 2021 and the potential for a deferral of revenues, we're expecting a reset of better than 10% and no interruption in distributions.

GWM. After no fair value adjustment in Q1, we do have a small $3.2 million decrease in fair value in Q2 as April and May were softer than expected due to the hospitality industry drop off. But June and the rest of the year are looking much better. GWM management is forecasting a 10% decline in revenue, which would mean an 8% decline in our distribution and results in reduction in fair value. Having said that, we remain very bullish on GWM in the long term, and they expect a very good year of growth in 2021.

Kimco, one of the businesses we haven't had positive news on in quite some time, they are thriving in this environment. Businesses are cleaning more than ever. Some specific to COVID cleanups and some just regular contract increases from cleaning from 3 or 4 days a week to 5 or 6 or once a day to twice a day. Kimco refinanced its prior credit facility, switching to a new bank and a much more flexible facility and a bank that we know well during the quarter. We've already received their first partial distribution of USD 100,000 in the middle of July. And note, that's their first distribution in 2 years. So that translates into a small but important fair value increase of $1.5 million.

For BCC, what a terrific comeback they've had from a complete shutdown of all locations in the middle of March. Full credit to this terrific management team for managing through the closures right back to all locations now open and distributions restarting in full for Q3, well ahead of schedule of our initial estimate of Q1 2021, resulting in a $2 million increase in fair value.

We also added a new partner Carey Electric for USD 17 million, a 15% yield on our prefs and small amount of common shares that we do expect to dividend on, on a management team, we are big fans of. We also announced the conversion to an income trust that will go to shareholders for a vote at the end of August, alongside a 7% increase in the annual dividend or trust distribution to account for higher taxes on the trust distribution.

The trust conversion will allow us to retain more capital internally by reducing admin expenses relating to operating subsidiaries in the Netherlands, and more importantly, reducing our effective tax rate on U.S. revenue, returning us to an overall tax rate comparable to where we were before these changes came in, as well as a lower payout ratio.

Our NCIB that we launched in late March allowed us to buy back 1.2 million shares at an average price of $8.69, saving almost $1.5 million in after-tax dividends at the new expected annual distribution rate of $1.24 per share.

We also announced a favorable bank amendment that gives us all the flexibility we need over the next 12 to 15 months, and we're getting to work on an extension of the facility that currently matures September of 2021. And I'd just add, we've been very appreciative of the support our entire banking syndicate has shown us throughout.

In one of the more interesting developments, the significant opportunity arose for us to support our current partner, Federal Resources, on their largest U.S. government contract in their history.

Not our typical preferred equity investment, but instead a show of support that allows us to use our balance sheet availability to participate in a meaningful way as Federal Resources continues to be a primary provider of PPE to the U.S. government agencies. In this case, collectively buying over 4 billion protective gloves to provide the U.S. government over the next 75 to 100 days.

G&A was higher than normal in the current quarter, with approximately $1.5 million spent on that trust conversion, a onetime nonrecurring expense that we added back to normalized tables in the MD&A. Sadly more than offset the savings on G&A we've experienced as Steve and I or anyone else that Alaris has been on a plane or stayed in the hotel since early March.

And finally, given the continued uncertainties in the economic environment, we continue to not provide full year detailed guidance for now, and we'll get back to providing those numbers as soon as we can. However, we are confident in providing our expected Q3 revenues of $22.8 million, and that's just what we're expecting from preferred distributions and nothing on the Federal Resources opportunity.

So those are the things I wanted to mention. I'll pass it over to Steve before heading into Q&A.

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

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Great. Thanks, Darren. I have to say it's been tough to watch the news and read the newspaper over the last 5 months without feeling some serious nervousness presiding over $850 million portfolio of private companies. But as we sit here in late July, that nervousness has really turned into the admiration for our partners and excitement for the opportunities that are presenting themselves coming out of this lockdown.

So when you step back and look at our portfolio as a whole, we have 17 partners. And the degree of successes that they've had over this period is quite incredible. 12 of the partners have had very strong performance with no disruption and distributions, no material change to their risk profiles going forward. And in fact, the majority of those 12 companies have continued to grow. And included in that list now is Body Contour who's, as Darren said, had to close all of their locations in March and April and are now operating at record levels.

Two of our partners, Federal Resources and Kimco have hugely benefited. And that leaves 3 companies that have been negatively impacted by the lockdown in Providence, ccComm and Planet Fitness. The first 2 are longer-term recoveries, but Planet Fitness is ahead of forecast in their reopening. And we have full confidence not only in them restarting distributions but also catching up on everything that was missed during this time.

So for us, this unusual success has made the structural benefits of our investment model even more obvious than during the good times. The vast majority of our portfolio have several things in common. They're companies that provide required services that don't fluctuate greatly with the economy. They have very low and, in most cases, no senior debt. They have very low required CapEx to maintain their operations. They have a large cash flow buffer to withstand unexpected volatility. And their business -- and finally, they have skilled management teams that are fully incented as long-term equity holders. So all of those things have kind of come home to roost here in an extremely positive way during this pandemic.

It's also been a great example of our value to our private company partners and their entrepreneurs. So during depressed times like this, entrepreneurs don't want to put a value on their business, but by the same token would love to access capital to take advantage of unique opportunities in their industries. They also don't want to share in all the upside as they come out of a trough. So bidding on new deals. We're at a distinct advantage versus our common equity peers. And with our limited participation preferred shares, entrepreneurs are allowed to accomplish all of their goals and not give up control or all of the upside.

Also, our speed and flexibility in helping own our partners has led to several outstanding opportunities, and this current one with Federal Resources that Darren described now moves to the top of that list that we've done over the years. Federal Resources came to us just a few days ago, as a matter of fact, with this opportunity. They have the largest PPE contract in their history and one of the biggest in American history for more than 4 billion gloves. Part of their supply chain had lost their financing and required -- and the required fulfillment cycle was a very short period of time. So they could not really go to anybody that would have to start from scratch and need various levels of approval through big banks and whatnot. So this was a super important deal for Federal Resources financially. It's, as I mentioned, their largest contract in their history. It's also a vital one for them because if you aren't able to perform on something like this, your chances of getting other large contracts with the government would be severely limited. And then finally, it's an important one for the American people. Gloves -- medical gloves have become the hardest thing to acquire because of shortage of rubber. So this one was extremely important for a number of reasons. We were very, very happy that we could have stepped in, and we'll be well compensated for doing so.

So looking forward, we're seeing several actionable items to deploy more capital in this environment, both with our current partners and also for new partnerships as well, transactions similar to the one we closed with Carey Electric. Carey is a 97-year-old family-owned business in a required industry -- required service industry that was able to grow nicely through the lockdown.

There are several of those types of opportunities for us to pursue. And I'm confident that we'll win those mandates and -- as we have for years now.

So Veronica, I'll turn it over to you to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Jeff Fenwick with the company Cormark.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [2]

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So why don't we start with Federal Resources in that agreement there? Just help me understand, this is effectively a working capital line for them. Is that how it's structured with you guys?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [3]

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It's not really, Jeff. And because of the sensitivities of the contract and who the end user is, we can't go into a huge amount of detail on it. Obviously, we'll see the revenue and earnings show up over the next couple of quarters here. But we essentially took the place of someone in the supply chain directly and used our balance sheet. Obviously, Federal Resources is the expert in this industry. So we don't have any additional things that we need to do here. But yes, it's not a traditional financing per se.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [4]

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Okay. But I guess at the end of the day, the U.S. government is a counterparty, and it sort of mitigates the, I guess, the risk of doing that, that's fair to say.

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

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The -- it's a guaranteed government contract, the dollars already in an account waiting for delivery.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [6]

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Yes. Okay. And granted, I understand you can't really disclose a lot of the terms here, but like in terms of the economics, is this sort of in the ballpark of the sort of returns that you tend to target normally? Or is just more about being a good partner and it'll help the overall revenue picture and the subsequent resets for you?

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

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Yes. It's -- we're getting paid on a per box. So we're getting a margin on the product as opposed to a return on our capital. So the returns on the outlay will be, if all goes well, significantly higher than what we're used to. But the #1 thing was to facilitate this order and help out a company that's been absolutely booming through this through this pandemic.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [8]

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Okay. And I guess you said this is a 10-week contract. It sounds like it's already kicked off. Just to clarify, you said this was not included in your Q3 partner revenue guidance.

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Darren Driscoll, Alaris Royalty Corp. - CFO [9]

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Yes. Yes, that's correct. So yes, we've made our first deposit, but it was so fresh. We're just not sure -- we're actually even talking with our accounts. We're not sure how we're going to account for it when it comes into. So lots to be sorted through. But -- so our guidance on the 22.8 is just our regular preferred distribution revenue and interest from our partners.

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

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And Jeff, the way I look at this one is, obviously, this is not something that is going to be repeated often. So for yours or anybody else's model, this is not something that you would annualize, obviously. So really, what we're looking at here is some, hopefully, some unusual profits that will pay for some of our future deployment without needing to raise it through debt or equity.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [11]

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Okay. That makes sense. And as far as we're getting back to work here, it looks like you're getting distributions back online. Have you given much thoughts about how you structure those extra themes in the future? Are they just going to be sort of rolled in and (inaudible) period? Or what kind of options are you looking at in terms of how you're going to structure those?

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

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Yes. It seems like both with Body Contours and Planet Fitness that their cash flow streams, they had such large buffers pre-pandemic and are expected to get back to that. And Body Contours is already at that, but we can probably make this up fairly quickly over the next few months. Planet Fitness is a little tougher because you've got a senior lender that needs to be looked after. So that one is going to be a little longer. But again, I don't think it's going to be too complicated. I think it'll just be almost like a cash flow sweep going forward and hopefully paid back in relatively short order.

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Jeffrey Michael Fenwick, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [13]

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Okay. And I did want to ask just about that senior lender at Plant Fitness. I know in the past, it's been a bit of a obstacle to negotiating, working with your partners. What's the sort of outlook in terms of how willing they are to play ball with you? Is this one of those ones that you did structure at the time with them? Did you have a little more flexibility in how you relate to that lender? Or what's the status there?

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Darren Driscoll, Alaris Royalty Corp. - CFO [14]

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Yes. I'd say it's a senior lender. We have -- the lead senior lender is a bank we have a long-term relationship with. They've been the lender on a number of different files. It is one of our more favorable covenant situations. But we do need all of those locations to be open. I mean they were, in February, at an all-time high of revenue and EBITDA. And so it -- really serves quite tragic to timing, but this is a great business. People have been coming back to gyms in the U.S., certainly the Plant Fitness ones, certainly that low cost $10 a month. They can operate at 50% capacity because they've never been full. And so this is a business that we do expect to return back to -- close to normal. And as far as the senior lending relationship, it's certainly not a lock by any means, but we're having regular conversations, and it's a group that we're familiar with. And we're hopeful. But we need the business to be -- to have all their locations open and showing the bank that their cash flows are returning to normal, and then we'll be good to go.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [15]

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Yes. We thought it was an interesting thing. One of the counties in Florida that they have just one location in, they actually reclosed last month and then reopened within 2 days thereafter. It's proven to be a very difficult thing in the U.S. to close things down again, and they certainly don't see that happening. So we're cautiously optimistic that we'll get all their -- the gyms reopened here over the next few weeks and be able to have that negotiation with the bank to see when we can restart our distributions and also start repaying the ones that were missed.

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Operator [16]

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Your next question comes from Gary Ho calling from Desjardins Capital Markets.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [17]

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Just going back to Federal Resources as well. Maybe can you talk about kind of what are the risks that this might carry that we might not be aware of with the structure on the PPE?

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

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Yes. I think the main risk is probably at the very front end in terms of the supplier manufacturing adequate quality gloves, but the nice thing there is that we will have only put the small deposit down by the time when we've seen the quality of those gloves. So the rest happens after inspection. So we think the risk is fairly low, but I think that would be the main risk in the supply chain.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [19]

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Got it. And then I think you guys mentioned the total commitment being USD 100 million plus. Like, how much higher is it more than USD 100 million? Is that -- or should we just kind of think about USD 100 million as the purchase order size?

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Darren Driscoll, Alaris Royalty Corp. - CFO [20]

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It's not higher than 200 and closer to 100. Pretty close to 100, yes. There you go.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [21]

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Okay. Okay. And then maybe just staying with Federal Resources. Given that they're doing really, really well in this environment, is there a risk of them potential redeeming here with this partner?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [22]

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No. We don't think so. And this -- us stepping up like this has really established the value of having a partner like us. They're getting bigger and bigger contracts. And this is a company that is now sitting at more than triple what they would have been last year in terms of both revenue and EBITDA. So if you look at it from a few different angles, one is having a close partner that can act as quickly as we have for unusual circumstances. The other one is if they would have had a common equity partner in play and they have this kind of growth, that capital would have been enormously expensive for them as they would have grown with everything. We're going to grow by a modest amount this year with Federal Resources. So yes, if anything, this has really shown them the value of our partnership. And needless to say, they could not be happier with us right now.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [23]

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Okay. Perfect. And then, Steve, just on the capital deployment side, what -- are you seeing more opportunities? I know there's travel restrictions still in place, perhaps maybe follow-on opportunities. Any comment on this front?

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

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Yes. So follow-on opportunities, obviously, are preferred deployment right now because of what you mentioned with the travel restrictions. We'll never invest in a company that we don't spend time with face-to-face. So we're coming to grips with that right now. I'm trying to figure out probably who in the office is going to be the guinea pig to go down to the U.S. and then have to quarantine on the way back because there are new opportunities that are coming to us in this environment.

As I mentioned in my talk, if you're a company coming out of a time like this, you really don't want to value your business in a trough. Multiples are down. Sometimes the company's earnings have been muted by the pandemic. So it's just not a time that you want to issue common equity. But our prefs allow them to raise equity and pursue their opportunities without doing that. So it really is a great environment for us. We've got opportunities on the table that we can execute on, but we're going to need to put some people down in the states and have them quarantine on the way back because I don't see the order rules changing anytime soon.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [25]

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Okay. And these follow-on opportunities, should we think time line wise later this year? Or are they more kind of 2021 opportunities?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [26]

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No. They would be 2020, for sure.

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Gary Ho, Desjardins Securities Inc., Research Division - Analyst [27]

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Okay. And if I can sneak one more in. Darren, can you give us an update on that consolidated ECR that you guys published, I think, a quarter or 2 quarters ago?

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Darren Driscoll, Alaris Royalty Corp. - CFO [28]

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Yes. We're still above 1.5, Gary. It's improved over last quarter, but there are some, like the FR, Federal Resources, LMS, a couple have gone through the roof. And so we try to cap the big ones at a certain amount when we're -- because it can't skew the information. So it's a little bit better and still above 1.5.

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Operator [29]

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Your next question comes from Anthony Sandler from the company Mackie Research.

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Anthony Sandler, [30]

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First one is your G&A is up fairly significantly over last year for 3 months and 6 months. So if you can comment on that, please.

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Darren Driscoll, Alaris Royalty Corp. - CFO [31]

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Yes, you bet. As I mentioned on the call in the MD&A, $1.5 million has gone in this quarter alone to the trust conversion. And so that's legal and accounting. It's a very expensive transaction that you need to make sure you do it right. So that is absolutely onetime. Regular G&A is actually well off where it is as far as corporate and office, I think, was $400,000 compared to $1 million. It's all really on that legal and accounting line related to the trust conversion from the most part.

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Anthony Sandler, [32]

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Excellent. I just wanted to confirm that. And just -- you seem to have the double hit of tax issues with both the U.S. IRS and CRA. How strongly do you feel that those appeal is going to work for CRA? Is there any sense of changing the decision from the IRS?

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

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They are 2 very different deals, Anthony. The CRA is one that -- I mean, we were audited, gosh, got to be 6, 7 years ago now. It's been held in advance. There's a whole bunch of other people ahead of us. There's a couple of cases in particular that are at -- in appeals court at the moment that I think CRA is waiting to see how those go before they will deal with the rest of us that are in advance. We remain very confident that we've done everything correctly and will be successful, but we haven't heard from the CRA in a very long time on that, and I really don't expect to until those other deals are sorted out.

From the IRR standpoint, it's our view that we can go ahead and file based on using the interest deductibility under the guidelines in 2019. KPMG did require us to make a provision. And so -- hence that big accounting entry in Q2, again, it's our view, will be -- we will be successful with that application or with that filing. Having said that, on the IRS standpoint, the downside is we go an extra $1.8 million in tax. And so it's really not a significant deal. We've paid through installments and have other opportunities at hand that minimize the exposure on the IRS side of things.

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Operator [34]

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(Operator Instructions) Your next question comes from Zachary Evershed from the company National Bank Financial.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [35]

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Congrats on the quarter. Most of my questions have been answered. So just a couple of housekeeping issues. First off, if all goes well with the trust conversion given the timing there, how should we approach your tax rate in the third quarter?

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

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I'd say be back to where we were. So in the low 20s, I would say, effective September 1. We will have a couple of months for Q3. We're operating at a higher tax rate for July and August. But assuming the trust conversion goes through on the 1st of September, our go-forward tax rate will be overall in the, say, 22%, 23% range.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [37]

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Perfect. And then one last one. Your office costs, as you mentioned, are way down due to COVID with no partners conference, for example. Do you see some of those costs coming back on the other side of COVID? Or are they out for good?

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

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No. That partner conference we have is a really important and valuable event that we hold each year where all of our top couple of people, executives of each of our partners come, and we all assemble somewhere fun, and Steve sets it up like a wedding planner, and we put groups together that have common business issues or opportunities or maybe just the same personal hobbies. And it's a really valuable event. So that will certainly come back in 2021, but we obviously pulled the pin this year.

As far as our ongoing travel costs, I do think it will be less going forward. We've done a ton of our marketing with institutional and retail investors by Zoom meetings. And I think we still will get out and see people face-to-face in Montreal and Toronto and Vancouver and New York. But I think companies will probably save a little cash on travel by doing more of these just for the Zoom or Microsoft Teams meeting.

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Operator [39]

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Your next question comes from Anoop Prihar calling from the company Stifel.

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Anoop Prihar, Stifel GMP Research - MD & Special Situations Analyst [40]

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Just 2 quick ones for me. Do you expect a more common dividend again in Q3?

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Darren Driscoll, Alaris Royalty Corp. - CFO [41]

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We haven't put it into our run rate. We do expect it, but we just -- because we missed Q1, we thought we wouldn't put it into the run rate until we had a regular track -- a trend again. So while we do expect -- it's not a big amount, it's their intention to pay one, but we'll put it in once they've had 3 or 4 more in a row.

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

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Yes. They've asked us to be cautious in our expectations. They're feeling good about things. But just like everybody in the world, I think right now, everybody wants to just be cautious.

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Anoop Prihar, Stifel GMP Research - MD & Special Situations Analyst [43]

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Okay. Fair enough. And then just on the proposed increase in the dividend from $0.29 to $0.31 subsequent to the approval of the conversion, can you just talk a little bit about the rationale behind that?

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

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So -- sure. It really comes down -- the makeup of the distribution of shareholder is going to get in September -- well, I guess, October when we pay it, is going to be different than the one they got last time. This one is 100% dividend, while the future ones will be a combination of dividends, trust distributions and return of capital. So it'll have a different tax profile, I suppose. And so this increase is basically to make shareholders -- even Stephen, at the end of the day, it allows us to -- even with that increased distribution and keeping shareholders whole, it allows us to retain more capital in the business and lower our payout ratio because of the decrease in the U.S. tax rate.

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Operator [45]

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Your next question comes from Ace Mirali calling from CIBC.

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Ace Mirali, CIBC Capital Markets, Research Division - Research Analyst [46]

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Just a quick one for me. I think most them have already been covered. In terms of the deal flow, what are some of the sectors that are showing the most promise that you're looking at in terms of the yield pipeline?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [47]

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As usual, it's completely all over the map. We've got a deal that we're looking at in an industry that we've never seen before, in our 16 years. We've got some that would be similar to Carey Electric kind of required service type businesses, others in the health care services space. So yes, it's a very diverse pool of opportunities right now.

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Operator [48]

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Your next question comes from Trevor Reynolds from Acumen Capital.

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Trevor Reynolds, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Research Analyst [49]

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Most of my questions have been answered, but just quickly on this Federal Resources deal. When do you expect to realize the revenue from that? Is it all going to be in Q3? Or does that spill into Q4? Just a little bit of commentary on that.

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Darren Driscoll, Alaris Royalty Corp. - CFO [50]

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It will be mostly Q3 -- end of Q3, early Q4 is the timing. So -- yes, we -- it's all the way throughout. It'll start shortly, but I think it ends middle of October, I think, is the end of our horizon on that one.

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Trevor Reynolds, Acumen Capital Finance Partners Limited, Research Division - VP of Research & Equity Research Analyst [51]

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And then like do you expect to be able to release any more details on that? Or is it something that we're just going to have to wait and see what pops out in the MD&A and financials in Q3?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [52]

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Yes, I think that probably is going to be the case. Obviously, it's very sensitive, especially when you're dealing with PPE equipment. I don't think anybody wants to brag about profits with something like that.

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Operator [53]

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(Operator Instructions) Your next question comes from Zachary Evershed from National Bank Financial.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [54]

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Quick follow-up on the Fed deal. I was under the impression that the payment would be onetime 15 days following the final delivery. So will that actually be payment received throughout the 10-week contract?

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [55]

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Yes. So the order is so large, there's multiple orders and multiple shipments basically every week between now and then. So our -- that's why our cash outlay at any given time is much smaller than the total because we're getting cash in almost on a weekly basis. So yes, it's -- I think there's 10 different orders in total.

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Operator [56]

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Steve King, there are no further question at this time. Please proceed.

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Stephen Walter King, Alaris Royalty Corp. - CEO, President & Director [57]

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Great. Thank you, Veronica. Thanks, everybody, for tuning in. And obviously, for those of you who have any follow-up questions, we'd be happy to take them directly, and we look forward to coming back with more updates throughout the quarter and after our Q3. So thank you very much.

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Operator [58]

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