Diversified Royalty Corp. (TSX: DIV and DIV.DB) (the
“Corporation” or “DIV”) is pleased to announce its financial
results for the three months ended March 31, 2020 (“Q1 2020”).
Highlights
- Revenues of $7.3 million and
adjusted revenues of $8.5 million for Q1 2020.
- Acquired the trademarks and certain
other intellectual property rights (collectively, the “Oxford
Rights”) related to franchised supplemental education business of
Oxford Learning Centres, Inc. (“Oxford”) on February 20, 2020.
- Completed bought-deal public
offering of 10,810,000 common shares at $3.20 per share on March 5,
2020 for gross proceeds of $34.6 million.
First Quarter Results
In Q1 2020, DIV generated $7.3 million of
revenue compared to $6.4 million in the three months ended March
31, 2019 (“Q1 2019”). The increase in revenue between periods was
primarily driven by the acquisition of the trademarks and certain
other intellectual property rights (collectively, the “MRM Rights”)
used in the business of Mr. Mikes Restaurants Corporation (“Mr.
Mikes”) in May 2019, the acquisition of the Oxford Rights in
February 2020, and the increase in royalty income from the AIR
MILES® licenses. These items were partially offset by the impact of
the COVID-19 pandemic and related government restrictions, which
included negative same-store-sales-growth (“SSSG”) at Mr. Lube
Canada Limited Partnership (“Mr. Lube”) as well as royalty and
management fee waivers for Sutton Group Realty Services Ltd.
(“Sutton”) and Mr. Mikes for certain portions of Q1 2020.
After taking into account the DIV Royalty
Entitlement (defined below) of $1.2 million related to DIV’s
royalty arrangements with Nurse Next Door Homecare Professional
Services Inc. (“Nurse Next Door”), DIV’s adjusted revenue (defined
below) was $8.5 million for Q1 2020.
Royalty Partner Business Updates
Mr. Lube: SSSG for the Mr. Lube
stores in the royalty pool was -7.2% in Q1 2020, and was negatively
impacted by the COVID-19 pandemic, which resulted in a slow-down in
consumer activity across the country and recommendations from all
levels of government for people to work from home and self-isolate.
SSSG for the 133 Mr. Lube flagship locations (122 of which are in
the Mr. Lube royalty pool) was -26% in April 2020 year-over-year
and has begun to trend positively in recent weeks.
AIR
MILES®: According to
Alliance Data Systems Inc.’s (“ADS”) news release dated April 23,
2020, the number of AIR MILES® reward miles issued increased by
4.6% in Q1 2020 due to increased sponsor promotions early in Q1
2020 and that the number of AIR MILES® reward miles redeemed
decreased by 8.7% in Q1 2020 reflecting the impact of COVID-19 on
travel related redemptions in March. The AIR MILES payment received
in Q1 2020 was 7.9% higher than Q1 2019.
Nurse Next Door: Nurse Next
Door’s home health care services were considered an essential
service across all its markets where such determinations were made
by government authorities and all of Nurse Next Door’s franchisees
were open for business. Nurse Next Door management has noted that
certain clients are requesting to hold or cancel services as a
result of COVID-19. However, they are also seeing increases in
demand in other areas such as government contracts or facilities.
In addition, its first quarter year-over-year new franchise sales
were lower, as anticipated.
Sutton: As disclosed in DIV’s
news release dated April 23, 2020, DIV has waived 50% of Sutton’s
March 2020 royalty and management fees (that were payable in April
2020) and 75% of Sutton’s April and May royalty and management fee
obligations (that are payable in May and June 2020, respectively)
in connection with the impact on Sutton’s business of the dramatic
slow-down of residential real estate activity due to COVID-19.
Sutton has likewise provided its franchisees with a similar waiver
over three months to help them manage through this difficult
period. In April 2020, Sutton’s business was negatively impacted by
the decline in sales volumes. According to the Real Estate Board of
Greater Vancouver and the Toronto Regional Real Estate Board, sales
volumes were down 39% and 67%, respectively, in Vancouver and
Toronto in the month of April. DIV will continue to assess the
impact of COVID-19 on Sutton’s business and liquidity to determine
if any further royalty relief is necessary.
Oxford: SSSG for Oxford
locations in the royalty pool on a constant currency basis was
-2.4% for the period from February 20, 2020 to March 31, 2020
(after the impact of foreign currency translation, SSSG was -2.2%).
Although Oxford has suspended in-person tutoring services for all
its locations due to COVID-19, Oxford management has pivoted its
business over the last two weeks of March to provide online
tutoring with over 95% of its locations able to provide this
service. With the quick pivot to online tutoring in its early
stages of implementation, Oxford reported materially weaker system
sales in April 2020 compared to April 2019 with SSSG for Oxford
locations in the royalty pool on a constant currency basis of -47%
(after the impact of foreign currency translation, SSSG was
-46%).
Mr. Mikes: With all Mr. Mikes
restaurants temporarily closed for in-restaurant dining and only a
few locations providing take-out, Mr. Mikes is generating minimal
revenue and advised DIV that Mr. Mikes will be unable to pay its
fixed royalty payments to DIV commencing with the fixed royalty and
management fee payment for the February 24, 2020 to March 22, 2020
period. As a result, DIV waived the Mr. Mikes royalty and
management fees for such period, and has waived the fixed royalty
and management fee payment for the March 23, 2020 to April 19, 2020
period. DIV will continue its discussions with its lenders and Mr.
Mikes about whether additional royalty relief is required for
subsequent periods, given that Mr. Mikes is currently generating
minimal revenue, and when in-restaurant dining resumes, a slow
recovery and constrained cash flow is likely. It is anticipated
that Mr. Mikes will require additional royalty relief for an
extended period of time.
First Quarter Commentary
Sean Morrison, President and Chief Executive
Officer of DIV stated, “DIV had a strong start to 2020 with the
acquisition of the Oxford Rights in February and the completion of
a bought deal public offering in early March. However, in
mid-March, governments in North America began enacting emergency
measures to combat the spread of COVID-19, which triggered
significant disruptions to businesses. While our royalty partners
have had, and are generally expecting to have significant business
interruption in the months ahead, the full extent of such
disruptions going forward or the timeline for returning to normal
operations cannot be predicted at this time. With a strong balance
sheet in place, we are focused on navigating this challenging
period to preserve shareholder value and best position the
Corporation and its royalty partners for success in the long
term.”
Distributable Cash and Dividends Declared
In Q1 2020, distributable cash was $5.5 million
($0.0486 per share), an increase of $0.7 million ($0.004 per share)
compared to Q1 2019. The increase was primarily due to the increase
in adjusted revenues on account of the reasons discussed above,
partially offset by the impacts of COVID-19 on the performance of
DIV’s royalty partners, higher current tax expense, lower interest
income and higher interest expense.
In Q1 2020, dividends declared exceeded
distributable cash by $1.1 million, and the Corporation’s payout
ratio was 119.2%. 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 101.5% in Q1 2020. The shortfall
in distributable cash was funded by $3.8 million GST refund related
to the acquisition of the Nurse Next Door trademarks.
As announced on March 31, 2020, given the
economic uncertainty facing DIV and its royalty partners as a
result of the COVID-19 pandemic, the Board of Directors of the
Corporation approved changing the monthly dividend from $0.01958
per share per month ($0.2350 per share on an annualized basis) to
$0.01667 per share per month ($0.20 per share on an annualized
basis) effective with the dividend declared in the month of April
2020. The Board of Directors believes the reduction of the monthly
dividend is a prudent measure to preserve capital and maintain
liquidity in the current market environment. In addition, starting
with the April 2020 monthly dividend, the Board approved the
temporary suspension of the dividend reinvestment plan (“DRIP”)
until further notice as the Board does not believe it is in the
best interests of the Company or its shareholders to issue shares
at current prices.
Net Loss
Net loss for Q1 2020 was $11.7 million, compared
to net income of $2.5 million in Q1 2019. The net loss in Q1 2020
was primarily due to a non-cash impairment related to the MRM
Rights. In connection with the COVID-19 pandemic, Mr. Mikes is
generating minimal revenue and has advised DIV that they will
likely be unable to pay its fixed royalty payments to DIV. In light
of these developments, the Corporation recorded a non-cash
impairment of $19.8 million ($14.5 million net of tax) related to
the Mr. Mikes trademarks, which is discussed in more detail in the
notes to the Corporation’s consolidated financial statements for Q1
2020. The net loss in Q1 2020 was also due to the fair value
adjustment on financial instruments, higher interest expense, which
were slightly offset by an increase in other finance income and a
tax recovery.
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 will have
significant business interruption in the months ahead, the full
extent of such disruptions going forward or the timeline for
returning to normal operations cannot be predicted at this time;
DIV being focussed on navigating this challenging period to
preserve shareholder value and best position the Corporation and
its royalty partners for success in the long term; DIV continuing
to assess the impact of COVID-19 on Sutton’s business to determine
if any further royalty relief is necessary; Mr. Mikes having
advised DIV that Mr. Mikes will be unable to pay its fixed royalty
payments to DIV commencing with the fixed royalty and management
fee payment for the February 24, 2020 to March 22, 2020 period; DIV
continuing its discussions with its lenders and Mr. Mikes about
whether additional royalty relief is required in subsequent
periods, given the expectation that Mr. Mikes will experience a
slow recovery and constrained cash flow when in-restaurant dining
resumes; DIV currently anticipating that Mr. Mikes will require
additional royalty relief for an extended period of time 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; the timing of the re-opening of Mr. Mikes
restaurants for in-restaurant dining is unknown and certain
restaurants may not re-open at all; Mr. Mikes may not make its
fixed royalty payments to DIV, in whole or in part, while its
restaurants remain temporarily closed for in-restaurant dining and
some remain fully closed temporarily, and potentially thereafter;
that DIV’s royalty partners will not request further royalty
relief; DIV’s lenders may not agree to provide covenant relief, at
all or only on terms that are disadvantageous to DIV; the royalty
partners; respective lenders may not agree to provide covenant
relief, at all or only on terms that are disadvantageous to the
royalty partners; COVID-19 may have a more significant negative
impact on DIV and its royalty partners than currently expected and
the businesses of DIV’s royalty partners may not fully recover post
COVID-19; or DIV and its royalty partners will not continue to be
adversely impacted directly, or indirectly, by economic or
socioeconomic conditions related to the COVID-19 pandemic, which
impacts include, without limitation, reduced willingness of the
general population to travel, government restrictions on travel and
hours and manner of store operations (including required closures
in certain jurisdictions) and other increased government
regulations, reduced customer traffic and sales, supply shortages,
staff shortages, all of which may, and in certain cases have, and
may continue to, negatively impact the business, financial
condition and results of operations of DIV and its royalty partners
(including their respective franchisees) 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, and
may cause DIV and its royalty partners to be in non-compliance with
one or more of their covenants under their respective credit
facilities. 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 18, 2020, 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 DIV will generate
sufficient cash flows from its royalties to service its debt and
pay dividends to shareholders; lenders will provide any necessary
waivers required in order to allow DIV to continue to pay
dividends; lenders will provide any necessary covenant waivers to
DIV and its royalty partners; the impacts of COVID-19 on DIV and
its royalty partners will be consistent with DIV’s expectations and
the expectations of management of each of its royalty partners,
both in extent and duration; and DIV and its royalty partners will
be able to reasonably manage the impacts of the COVID-19 pandemic
and related government regulations 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 ended March 31, 2020 are
consistent with the preliminary results for such period reported in
DIV’s news release dated April 23, 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 ended
March 31, 2020, 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 ended March 31, 2020, 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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