Alaris Royalty Corp (AD.TO)

Results came out and they had a slight miss. There was concern about the dividend not being sustainable, and management gave reasons why they thought it was okay. The plan for next year is to see a reinstatement of some of the royalty payments that have been sort of shut off. They expect to see a resetting of some of the royalty payments with some of their good partners, where the rates are going to go up and they are going to get some more money. They also expect to get proceeds from monetization of some of their investments. These things are going to help the company, but his view is that he would like to see one or 2 of these things actually happen before he looks at the stock.

A private equity where they invest in a number of companies and get royalty payments. In the last year, they have companies that failed to pay their royalties stream, historically more than they have ever had. There are 5 right now that are unresolved and are working through on different stages. The market got a little concerned on the length of time it has taken to get worked out. Payout ratio has crept up from 80% area and is around 100% now. If they can get the royalties worked out and get the royalties paying again, they’ll be fine from a payout ratio standpoint. If not, the market is concerned they will have to cut their payout ratio.

(A Top Pick Oct 14/15. Down 28.98%.) This invests in a number of different companies. They have had some problems over the last year with 4 or 5 of those. A couple have been exited. A couple are in work-out. One is in the process of being worked through, and they’ve been paid the most recent payment due. People have lost faith, particularly over the summer. They’ve recently declared their dividend for the quarter and it is going to be paid. They have been able to restructure their credit facility and it has been expanded. The yield has now been pushed up to 8%, which is usually a warning sign. He feels the downside risk from here is extremely limited, and has bought more recently.

An interesting company with an interesting scenario. They buy royalties of other businesses. He was really shocked that the stock broke down through $20, because it has had really good support in its history. They have a few problem investments. He doesn’t think anybody is going to be very interested in the company until they deal with these. They either have to solve the problem or take a write down. A good company with a great history, but investors are skittish. Reporting next week, so there may be some clarity. He would like to see them do a couple of other deals so they could dilute some of the current problems. Dividend yield of over 8%.

He sold his holdings at about $25 right after the last quarter. What has happened in the business recently isn’t really what he had signed on for. They deal in preferred investments, so that owners that wants some cash/liquidity for growth can go to this company, which will lend the money at a preferred return. A few of the companies have had a hard time and haven’t made their distribution payments, which resulted in a weak quarter. He wouldn’t buy at this 52 week low. Wait for 2 more quarters to see that those underlying businesses improve.

They invest in companies and take a royalty. They have about 16 businesses. Some have not worked out. His issue with a royalty company is that he wants to know the detailed financials for all of their companies in the portfolio and he does not get them.

It is hard to judge if the dividend is sustainable. They had a pretty good track record up to a certain point. He prefers a direct operating company.

They take money borrowed at 5% and invest it at 15%. They have a number of companies that are doing very well. Wait for a quarter where the negative news starts to turn. The yield is fairly safe. They are paying their dividend out of earnings. Their cash flow is sufficient to sustain it.

He likes management. Pretty lean and very good at what they do. The trouble with a royalty business is that as they get bigger, they find it harder to grow; harder to find good opportunities to deploy their capital, and there is pressure on them to do that. Payout ratio seems reasonable. Thinks management is smart enough and talented enough to make you some money.

Some of their partners have run into financial problems, which he thinks are temporary. It has now become a “show me” story and they have to demonstrate to the market that they can manage the situation. Had pretty high expectations for capital deployment to new partners this year and so far they haven’t instituted a lot. We need to see them do more deals for investors to feel more comfortable. The dividend is fairly safe and the yield is good. This is a good buy, but you need to be prudent.

(A Top Pick Sept 21/15. Down 20.42%.) This has a good business model, good management, and a demonstrated record of producing results over time. He is puzzled as to why the stock has come off. Has owned this for 10 years and recently added to his holdings. 7.5% dividend yield and a 10% PE and an almost 10% free cash flow yield. Still a strong Buy.

In the royalty business, you typically need a reasonably high valuation to do your deals so that they are accretive. This company did a very good job of that for a number of years, but has stumbled in the last few quarters. Had a pretty big earnings miss recently which took the stock down. Has this as a small Short, based on price momentum. This is expensive, even at 14X EB to EBITDA. Poor price momentum and an earnings miss is usually a warning sign for him.

This has been a problem. They have a few of their investee companies that are not making current payments, but most of them are working out fairly well. Their big company is KMH which they are seeking to exit on. If that happens, that will be a good catalyst. He would be leaning towards picking up more at this level. 7% dividend yield.

He has looked at royalty corps all together to see if there was an investment opportunity. Has just never been comfortable with the business model. Although you are getting a nice dividend, you have to deal with the volatility.

(Market Call Minute) They buy other companies and collect royalties. He likes to look at underlying investments so does not invest in this one.