Diversified Royalty Corp. (TSX: DIV and DIV.DB) (the
“Corporation” or “DIV”) is pleased to announce its financial
results for the three months ended December 31, 2019 (“Q4 2019”)
and year ended December 31, 2019.
Highlights
- Revenues of $8.4 million for Q4 2019 and $30.5 million for the
year ended December 31, 2019.
- Adjusted revenues of $9.0 million for Q4 2019 and $31.1 million
for the year ended December 31, 2019.
- Mr. Lube Canada Limited Partnership (“Mr. Lube”) added four new
stores to the Mr. Lube royalty pool, which increased from 118 to
122 locations on May 1, 2019.
- Acquired the Mr. Mikes Restaurants Corporation (“Mr. Mikes”)
trademarks and certain other intellectual property rights (the “MRM
Rights”) on May 20, 2019.
- Acquired the Nurse Next Door Professional Homecare Services
Inc. (“Nurse Next Door”) trademarks and certain other intellectual
property rights (the “NND Rights”) on November 15, 2019.
- Annual dividend on DIV’s common shares increased 3.4% from
22.25 cents per share to 23 cents per share on December 1,
2019.
- $50 million senior secured credit facility to fund future
trademark and royalty acquisitions (the “Acquisition Facility”)
completed on December 5, 2019.
Fourth Quarter and Year Results
In Q4 2019, DIV generated $8.4 million of
revenue compared to $7.2 million in the three months ended December
31, 2018 (“Q4 2018”). The increase in revenue was primarily driven
by the acquisition of MRM Rights, the addition of four locations to
the Mr. Lube royalty pool, positive same-store-sales growth
(“SSSG”) at Mr. Lube and the annual contractual 2.0% increase in
the Sutton Group Realty Services Ltd. (“Sutton”) royalty rate,
effective as of July 1st of each year. After taking into account
the DIV Royalty Entitlement (defined below) of $0.6 million related
to DIV’s royalty arrangements with Nurse Next Door, DIV’s adjusted
revenue (defined below) was $9.0 million for Q4 2019.
For the year ended December 31, 2019, DIV
generated $30.5 million of revenue compared to $26.7 million in the
year ended December 31, 2018. The growth in revenues was due to the
items noted above, as well as the increase in the Mr. Lube royalty
rate and the net addition of one store to the Mr. Lube royalty pool
on May 1, 2018. After taking into account the DIV Royalty
Entitlement of $0.6 million related to DIV’s royalty arrangements
with Nurse Next Door, DIV’s adjusted revenue was $31.1 million for
the year ended December 31, 2019.
SSSG for the Mr. Lube stores in the royalty pool
was 2.1% in Q4 2019 and 4.1% for the year ended December 31, 2019.
Sutton’s royalty increases at a contractual rate of 2% per year,
which effectively represents 2% SSSG. According to Alliance Data
Systems Inc.’s (“ADS”) news release dated January 30, 2020, the
number of AIR MILES® reward miles issued increased by 1% in Q4 2019
and was flat for the year ended December 31, 2019. ADS also
disclosed that AIR MILES® reward miles redeemed increased by 3% in
Q4 2019 and decreased by 1% for the year ended December 31,
2019.
Fourth Quarter Commentary
Sean Morrison, President and Chief Executive
Officer of DIV stated, “The Company met several of its objectives
in 2019 with the completion of two royalty transactions, Mr. Mikes
and Nurse Next Door, the deployment of excess cash on our balance
sheet, and the increase in the annual dividend from 22.25 cents to
23 cents, while decreasing our pro forma payout ratio to less than
100%. In addition, we secured a $50 million Acquisition Facility to
minimize the amount of excess capital on our balance sheet, while
providing DIV with additional capital to fund future royalty
acquisitions. 2020 is off to a strong start as we further
diversified our royalty portfolio with the completion of the
transaction with Oxford Learning Centres and the increase in the
annual dividend to 23.5 cents.”
Mr. Morrison continued, “These recent
transactions demonstrate DIV’s ability to execute on its business
plan of acquiring high quality trademarks and royalty streams on an
accretive basis, resulting in greater royalty portfolio
diversification and dividend increases.”
COVID-19 Commentary
Sean Morrison stated, “DIV has partnered with
businesses with proven established track records: Mr. Lube (44
years), Sutton Realty (37 years), Nurse Next Door (19 years),
Oxford Learning (36 years), Mr. Mikes (60 years) and Air Miles
Canada (28 years). The system sales reported by our royalty
partners for the first two months of 2020 were not negatively
impacted by the COVID-19 outbreak (excluding Air Miles for which
DIV does not receive sales data or other monthly reports). However,
on March 11, 2020, the World Health Organization expanded its
classification of COVID-19 to a worldwide pandemic and federal,
state, provincial and municipal governments in North America have
now begun legislating measures to combat the spread of COVID-19.
DIV and its royalty partners may experience some short/medium term
negative impacts from the COVID-19 outbreak; however, the extent of
such impacts is currently unquantifiable.”
Mr. Morrison continued, “In a world of dynamic
social, economic and financial instability, we believe liquidity is
very important to weathering potentially challenging periods. In
this regard, DIV is well capitalized. DIV has modest leverage with
no debt maturities over the next 24 months, positive working
capital of approximately $15M, and is generating significant
positive cash flow from operations. Our royalty partners have
minimal to no senior debt on their balance sheets and have minimal
capital expenditure obligations. We are actively managing this
challenge and have been in communication with our royalty partners.
DIV’s management and its board of directors will be working
together to monitor the situation with a focus on DIV’s long term
success. Our royalty partners have been in business for 19 to 60
years and have encountered many challenges along the way. COVID-19
is the latest, significant challenge and we will work with, and
support our royalty partners throughout these uncertain times.”
Distributable Cash
In Q4 2019, distributable cash was $6.6 million
($0.0603 per share), an increase of $1.0 million ($0.0086 per
share) compared to Q4 2018. The increase was primarily due to the
increase in adjusted revenues on account of the reasons discussed
above, partially offset by lower interest income, higher current
tax expense and higher interest expense.
For the year ended December 31, 2019,
distributable cash was $22.3 million ($0.2057 per share), an
increase of $1.8 million ($0.0146 per share) compared to the year
ended December 31, 2018. The increase was primarily due to the
increase in adjusted revenues on account of the reasons discussed
above, partially offset by higher current tax and interest expense,
as well as lower interest income.
In Q4 2019, distributable cash exceeded
dividends by $0.4 million, and the payout ratio was 93.2%. For the
year ended December 31, 2019, dividends declared exceeded
distributable cash by $1.9 million, and the Company’s payout ratio
was 108.5%. The Corporation has a dividend reinvestment plan that
allows the dividends to be settled through a reinvestment in the
Corporation’s shares at the election of the shareholder. On a cash
basis, the payout ratio was 89.4% for the year ended December 31,
2019. As a result, there was no cash shortfall in making dividend
payments for the year ended December 31, 2019.
Net Income
Net income for Q4 2019 was $4.3 million,
compared to net income of $1.1 million in Q4 2018. Net income for
the year ended December 31, 2019 was $14.2 million compared to net
income of $10.1 million for the year ended December 31, 2019. The
increase in net income was primarily due to the growth in revenues
and the fair value adjustment on financial instruments, partially
offset by higher interest expense, finance costs and income tax
expense. In addition, the three months and year ended December 31,
2018 included non-recurring litigation expenses.
About Diversified Royalty Corp.
DIV is a multi-royalty corporation, engaged in
the business of acquiring top-line royalties from well-managed
multi-location businesses and franchisors in North America. DIV’s
objective is to acquire predictable, growing royalty streams from a
diverse group of multi-location businesses and franchisors.
DIV currently owns the Mr. Lube, AIR MILES®,
Sutton, Mr. Mikes, Nurse Next Door and Oxford Learning Centres
trademarks. Mr. Lube is the leading quick lube service business in
Canada, with locations across Canada. AIR MILES® is Canada’s
largest coalition loyalty program with approximately two-thirds of
Canadian households actively participating in the AIR MILES®
Program. Sutton is among the leading residential real estate
brokerage franchisor businesses in Canada. Mr. Mikes currently
operates casual steakhouse restaurants primarily in western
Canadian communities. Nurse Next Door is one of North America’s
fastest growing home care providers with locations across Canada
and the United States as well as in Australia. Oxford Learning
Centres is one of Canada’s leading franchised supplemental
education services in Canada and the United States.
DIV expects to increase cash flow per share by
making accretive royalty purchases and through the growth of
purchased royalties. DIV expects to pay a predictable and stable
dividend to shareholders and increase the dividend as cash flow per
share increases allow.
Forward-Looking Statements
Certain statements contained in this news
release may constitute “forward-looking information” within the
meaning of applicable securities laws that involves known and
unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking information. The use
of any of the words “anticipate”, “continue”, “estimate”, “expect”,
“intend”, “may”, “will”, ”project”, “should”, “believe”,
“confident”, “plan” and “intends” and similar expressions are
intended to identify forward-looking information, although not all
forward-looking information contains these identifying words.
Specifically, forward-looking information in this news release
includes, but is not limited to, statements made in relation to:
DIV’s expectation that it and its royalty partners may experience
some short/medium term negative impacts from the COVID-19 outbreak,
and the extent of such impacts being unquantifiable; DIV management
and its board working together to monitor the impact of the
COVID-19 outbreak on DIV and its royalty partners with a focus on
DIV’s long-term success; DIV’s intention to work with and support
its royalty partners during uncertain times; DIV pursuing
opportunities to acquire trademarks and royalties from a diverse
group of high-quality businesses; DIV’s ability to pay a
predictable and stable dividend to shareholders, and DIV’s
corporate objectives. These statements involve known and unknown
risks, uncertainties and other factors that may cause actual
results or events, performance, or achievements of DIV to differ
materially from those anticipated or implied in such
forward-looking information. DIV believes that the expectations
reflected in the forward-looking information are reasonable, but no
assurance can be given that these expectations will prove to be
correct. In particular there can be no assurance that: DIV will be
successful in identifying or completing any royalty acquisition
opportunities; DIV will be able to make monthly dividend payments
to the holders of its common shares; DIV will achieve any of its
corporate objectives; or DIV and its royalty partners will not be
adversely impacted directly, or indirectly, by economic or
socioeconomic conditions related to the spread or perceived risk of
the spread of COVID-19, which impacts could include, without
limitation, reduced willingness of the general population to
travel, government restrictions on travel and hours of store
operations and other increased government regulations, reduced
customer traffic and sales, supply shortages, staff shortages, all
of which may negatively impact the business, financial condition
and results of operations of DIV and its royalty partners and thus
the ability of the royalty partners to satisfy their financial
obligations including their obligations to make royalty and other
payments to DIV, which in turn may adversely impact DIV’s ability
to satisfy its financial obligations to its lenders and trade
creditors and its ability to pay dividends to shareholders and make
interest and principal payments to holders of DIV’s convertible
debentures. Given these uncertainties, readers are cautioned that
forward-looking information included in this news release are not
guarantees of future performance, and such forward-looking
information should not be unduly relied upon. More
information about the risks and uncertainties affecting DIV’s
business and the businesses of its royalty partners can be found in
the “Risk Factors” section of its Annual Information Form dated
March 11, 2019, the “Risk Factors” section of its management’s
discussion and analysis for the three and nine months ended
September 30, 2019, and the “Risk Factors” section of its final
short form prospectus dated March 2, 2020, each of which is
available under DIV’s profile on SEDAR at www.sedar.com.
In formulating the forward-looking information
contained herein, management has assumed that business and economic
conditions affecting DIV and its royalty partners will continue
substantially in the ordinary course, including without limitation
with respect to general industry conditions, general levels of
economic activity and regulations, that DIV will be successful in
identifying and completing additional royalty acquisitions; DIV and
its royalty partners will be able to reasonably manage the impacts
of the COVID-19 outbreak on their respective businesses. These
assumptions, although considered reasonable by management at the
time of preparation, may prove to be incorrect.
All of the forward-looking information in this
news release is qualified by these cautionary statements and other
cautionary statements or factors contained herein, and there can be
no assurance that the actual results or developments will be
realized or, even if substantially realized, that it will have the
expected consequences to, or effects on, DIV. The forward-looking
information in this news release is made as of the date of this
news release and DIV assumes no obligation to publicly update or
revise such information to reflect new events or circumstances,
except as may be required by applicable law.
DIV notes that the financial results reported in
this news release for the three months and year ended December 31,
2019 are consistent with the preliminary results for such period
reported in DIV’s news releases dated January 30, 2020.
Non-IFRS Financial Measures
Management believes that disclosing certain
non-IFRS financial measures provides readers with important
information regarding the Corporation’s financial performance and
its ability to pay dividends. By considering these measures in
combination with the most closely comparable IFRS measure,
management believes that investors are provided with additional and
more useful information about the Corporation than investors would
have if they simply considered IFRS measures alone. The non-IFRS
financial measures do not have standardized meanings prescribed by
IFRS and therefore are unlikely to be comparable to similar
measures presented by other issuers. Investors are cautioned that
non-IFRS measures should not be construed as a substitute or an
alternative to cash flows from operating activities as determined
in accordance with IFRS.
“Adjusted Revenues”, “DIV Royalty Entitlement”,
“Distributable Cash”, “Same Store Sales Growth”, and “payout ratio”
are used as non-IFRS measures in this news release. Adjusted
Revenues and DIV Royalty Entitlement have not previously been
reported by DIV and are being reported to allow readers to assess
the performance of DIV’s royalty arrangements with Nurse Next Door
on a basis consistent with the royalties received from DIV’s other
royalty partners. Under IFRS, DIV is required to record its
investment in the Nurse Next Door trademarks and other intellectual
property as a financial instrument and the income earned from this
investment as finance income, which does not allow for a direct
comparison of the income received from this investment to the
royalties received from DIV’s other royalty partners, which attract
different treatment under IFRS. The most closely comparable IFRS
measures to Adjusted Revenues and DIV Royalty Entitlement are
revenues and royalty income; however, Adjusted Revenues and DIV
Royalty Entitlement should not be considered substitute for those
IFRS measures. For further details, see the “Description of
Non-IFRS and Additional IFRS Measures” in the Corporation’s
management’s discussion and analysis for the three months and year
ended December 31, 2019, a copy of each of which is available on
SEDAR at www.sedar.com.
Third Party Information
This news release includes information obtained
from third party company filings and reports and other publicly
available sources. Although DIV believes these sources to be
generally reliable, such information cannot be verified with
complete certainty. Accordingly, the accuracy and completeness of
this information is not guaranteed. DIV has not independently
verified any of the information from third party sources referred
to in this news release nor ascertained the underlying assumptions
relied upon by such sources.
THE TORONTO STOCK EXCHANGE HAS NOT
REVIEWED AND DOES NOT ACCEPT RESPONSIBILITY FOR THE ADEQUACY OR THE
ACCURACY OF THIS RELEASE.
Additional Information
The information in this news release should be read in
conjunction with DIV’s audited consolidated financial statements
and management’s discussion and analysis (“MD&A”) for the three
months and year ended December 31, 2019, which are available on
SEDAR at www.sedar.com.
Additional information relating to the
Corporation and other public filings, is available on SEDAR at
www.sedar.com.
Contact:Sean Morrison, President and Chief
Executive OfficerDiversified Royalty Corp. (604) 235-3146
Greg Gutmanis, Chief Financial Officer and VP
Acquisitions Diversified Royalty Corp. (604) 235-3146
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