Alaris Equity Partners has invested $70 million in D&M Leasing, a Fort Worth, Texas-based direct-to-consumer provider of vehicle sourcing and leasing services. The deal was funded by $12 million of cash generated by operations and $58 million of senior debt. Alaris is a Canadian alternative equity firm.
CALGARY, Alberta, June 28, 2021 (GLOBE NEWSWIRE) — (all numbers in this release are in Canadian dollars (CDN$) unless otherwise noted) Alaris Equity Partners Income Trust (the “Trust”) (TSX: AD.UN) is pleased to announce that its wholly-owned subsidiary, Alaris Equity Partners USA, Inc. (collectively with the Trust and its other subsidiaries, “Alaris”) has made an investment of US$70.0 million (the “D&M Investment”) into its twenty-first active Partner, Vehicle Leasing Holdings, LLC doing business as D&M Leasing (“D&M”). The D&M Investment adds approximately $0.24 of revenue per unit (8% increase) and $0.11 of distributable cash per unit (6.2% increase). The D&M Investment was funded with US$12 million of cash generated by operations and US$58 million of senior debt and brings year to date capital deployment to over $260 million with $400 million of capital deployment over the last twelve months.
“Alaris is very pleased to have formed a partnership with D&M’s owner Mike Hernandez and his management team. D&M has a wonderful track record of cash flow and growth over the last 45 years and fits our model perfectly with a multi-generational management team. We are also proud to add our ninth minority or woman owned partner out of twenty-one in our portfolio,” said Steve King, President and Chief Executive Officer, Alaris.
The D&M Investment consists of: (i) US$62.5 million (the “D&M Preferred Contribution”) of preferred equity, entitling Alaris to an initial annualized distribution of US$8.75 million (the “D&M Distribution”); and (ii) US$7.5 million for a minority common equity ownership in D&M. The D&M Distribution is equivalent to a pre-tax yield of 14% in the first full year after the D&M Contribution. D&M can elect to defer the D&M Distribution up to 4% ($2.5 million in the first full year) of the D&M Preferred Contribution with any such deferred distributions compounding at the current yield of the D&M Distribution. It is estimated that the cash flows associated with the D&M Preferred Contribution will decrease the Trust’s Run Rate Payout Ratio to between 60 and 65%.
Commencing on January 1, 2023, the D&M Distribution will be adjusted annually based on the percentage change in gross profit over the most recently completed 12-month period versus the prior 12-month period (January 1, 2023 adjustment will be based on fiscal 2022 vs fiscal 2021), subject to a collar of 7%.
Based on Alaris’ review of D&M’s internal pro forma financial results for the most recent trailing twelve-month period in 2021 and giving effect to the D&M Investment, certain other changes to D&M’s capital structure and the D&M Distribution payable to Alaris, management of Alaris believes that D&M would have an earnings coverage ratio between 1.5x and 2.0x. Proceeds of the D&M Contribution were used to provide a partial liquidity event to equity holders.
Founded in 1976, D&M is the largest independent direct-to-consumer provider of vehicle sourcing and leasing services in the United States. D&M is a fixture in the Texas market, with operations in Fort-Worth, Dallas, Grand Prairie, and Austin as well as an operating partnership in Houston and a prevalent online business.
D&M has invested heavily in its online presence and has been providing online leasing and sales for over 25 years. Mike Hernandez started with D&M in 1984, and became president in 1990. In 2005 he bought out ownership. Mike is supported by a strong executive management team, most of whom have been with D&M for over 10 years.
D&M has grown to a highly regarded consumer brand with an innovative platform for arranging vehicle leases regardless of make and model, in a process that is efficient and enjoyable for clients. D&M’s premium, service-intensive value proposition has generated high client-renewals into new leases with over 70% of its business coming from repeat customers. The service takes the hassle out of the traditional new car experience and enables clients to enhance their experience versus the traditional dealership sales process. D&M’s business is focussed on leasing new and high quality pre-owned vehicles as well as financing used lease returns and provide ancillary services. D&M uses a network of lenders and credit unions to finance the leases it originates.
Other Corporate Items
Consistent with previous guidance, we continue to expect a couple of partner redemptions in 2021 which will bring down our outstanding senior debt. We also continue to expect the restart of full PF Growth Partners, LP (“PFGP”) distributions in July and will confirm once that occurs.
The Trust, through its subsidiaries, indirectly provides alternative financing to private companies (“Partners”) in exchange for distributions with the principal objective of generating stable and predictable cash flows for payment of distributions to unitholders of the Trust. Distributions from the Partners are adjusted each year based on the percentage change of a “top line” financial performance measure such as gross margin and same-store sales and rank in priority to the owners’ common equity position