Diversified Royalty Corp. (TSX: DIV and DIV.DB) (the
“Corporation” or “DIV”) is pleased to announce a 5% increase to its
monthly dividend and the preliminary results for its royalty
partners for the three months ended June 30, 2021 (“Q2 2021”).
Increase to the Monthly Dividend
DIV’s royalty partners are experiencing positive
trends, driven primarily by the relaxing of COVID-19 restrictions
across Canada. As a result, the Board of Directors of the
Corporation (the “Board”) has approved an increase to the monthly
dividend from $0.01667 per share per month ($0.20 per share on an
annualized basis) to $0.0175 per share per month ($0.21 per share
on an annualized basis) effective August 2021.
On March 31, 2020, DIV reduced its annual
dividend by 15% from $0.235 per share to $0.20 per share due to the
impacts of COVID-19 on DIV and its Royalty Partners. As a result of
the reduced dividend and improvements in the performance of DIV’s
royalties, DIV’s average payout ratio in Q3 2020, Q4 2020 and Q1
2021 (all quarters directly impacted by COVID) was approximately
95%, while DIV’s Q2 2021 payout ratio is expected to be
approximately 90%. In addition, on May 1, 2021, DIV completed the
purchase of incremental royalties from its largest royalty partner,
Mr. Lube Canada Limited Partnership (“Mr. Lube”) through the
addition of 13 new stores to the Mr. Lube Royalty pool and an
incremental 0.5% increase to the royalty rate paid by Mr. Lube on
non-tire sales, which transactions are expected to increase
distributable cash by approximately $0.01 per share (on an
annualized basis) and further reduce DIV’s payout ratio.
Sean Morrison, President and Chief Executive
Officer of DIV stated, “The combination of positive trends in our
royalty partners (especially our largest partner, Mr. Lube) and our
recent accretive incremental royalty purchases from Mr. Lube have
resulted in an increase to DIV’s distributable cash and provided
DIV with the ability to increase its dividend. We remain cautiously
optimistic that the positive trends being experienced by our
royalty partners will lead to a meaningful recovery of their
respective businesses. Our Board, in consultation with management,
regularly reviews our dividend policy and will continue to do so
going forward. If our royalty partners continue to experience
positive trends, DIV will consider further increases to its
dividend while maintaining a target annual payout ratio below
100%.”
Mr. Lube Second Quarter Results
Mr. Lube generated same-store-sales-growth
(“SSSG”) of 21.8% for the Mr. Lube stores in the royalty pool for
Q2 2021, an improvement compared to SSSG of -12.5% for the three
months ended June 30, 2020 (“Q2 2020”). Mr. Lube generated SSSG of
13.2% for the six months ended June 30, 2021 compared to SSSG of
-10.0% for the six months ended June 30, 2020. Mr. Lube’s SSSG for
the three and six months ended June 30, 2020 were more
significantly negatively impacted by the COVID-19 pandemic, and the
ensuing restrictions and lockdown measures implemented by various
levels of government than in the current period. As provinces relax
the restrictions put in place to fight the COVID-19 pandemic and
Canadians drive more, Mr. Lube is experiencing favorable trends in
its business.
The SSSG for Mr. Lube’s flagship stores was 2.7%
for the six months ended June 30, 2021 compared to the same period
in 2019. Mr. Lube’s SSSG consists of two main components: store
visits and average ticket sales. Although same store visits for Mr.
Lube’s flagship stores increased by 7.6% for the six months ended
June 30, 2021 compared to the six months ended June 30, 2020, they
remain -11.8% below 2019 visits. Average ticket sales for Mr.
Lube’s flagship stores grew by approximately 6.2% for the six
months ended June 30, 2021 compared to the six months ended June
30, 2020 and by 16.4% compared to the same period in 2019. The vast
majority of the growth in average ticket sales is due to
incremental maintenance services (e.g. spark plugs, power steering
fluid replacement and light mechanical) and tire services. As store
visits recover to the same levels experienced in 2019, Mr. Lube,
with its much higher average ticket sales, is well positioned to
generate positive SSSG.
DIV expects to report that aggregate royalty
income and management fees of $4.8 million were generated from Mr.
Lube in Q2 2021, an increase of 33% compared to Q2 2020. The
increase in royalty income and management fees was primarily due to
SSSG of 21.8% in Q2 2021, as well as the addition of 13 new stores
to the Mr. Lube royalty pool and the 0.5% increase to the Mr. Lube
royalty rate on May 1, 2021.
AIR MILES® Second Quarter Results
DIV expects to report that royalty income of
$1.6 million was generated from the AIR MILES® licenses in Q2 2021,
an increase of $0.1 million (6.1%) compared to Q2 2020. For the six
months ended June 30, 2021, DIV expects to report royalty income of
$3.1 million, a decrease of $0.2 million (-6.3%) compared to the
six months ended June 30, 2020. DIV’s royalty payment is derived
from several AIR MILES® metrics, with AIR MILES® reward miles
issued being the primary metric, and other metrics including AIR
MILES® reward miles redeemed, service revenue, commissions and
promotional items, all of which affect quarterly variability.
Alliance Data Systems Inc. (“ADS”) issued a news
release earlier today announcing that: (i) AIR MILES® reward miles
issued increased by 8.2% in Q2 2021, reflecting an increase in
discretionary spending, including credit card spend, and (ii) AIR
MILES® reward miles redeemed increased by 31.6% in Q2 2021,
reflecting an improvement in travel-related categories and
continued strength from merchandise redemptions (including a
significant increase in redemptions and average flight bookings per
day in June 2021). ADS also noted that AIR MILES® is working with
travel partners to offer promotions and redemptions to drive
increased collector travel and tourism as appropriate, leading to
optimism in the latter half of 2021. ADS went on to note that July
2021 to-date average daily flight bookings are currently ten times
the Q1 2021 level, yet remain at 60% - 70% of the pre-pandemic
level.
ADS previously announced its intention to spin
off its LoyaltyOne segment (comprising the Canadian AIR MILES
reward program and the Netherlands-based BrandLoyalty business)
into an new independent US-based, publicly traded company by the
end of 2021. DIV believes that this spin-off could place renewed
management focus on top-line growth at LoyaltyOne, which could be
beneficial to DIV’s royalty.
Sutton Second Quarter Results
DIV expects to report royalty income and
management fees of $1.0 million were generated from Sutton Group
Realty Services Ltd. (“Sutton”) in Q2 2021, compared to $0.5
million in Q2 2020. DIV waived 50% of Sutton’s March 2020 royalty
and management fees and 75% of Sutton’s April and May 2020 royalty
and management fees in connection with the dramatic slow-down of
residential real estate activity that occurred following the
initial onset of the COVID-19 pandemic, and the related impact on
Sutton’s business. The Canadian residential real estate market has
experienced a strong recovery following a period of low
transactional activity in April and May 2020.
Since June 2020, DIV has been collecting 100% of
the fixed royalty and management fee payments from Sutton. The
fixed royalty payable by Sutton increases at a rate of 2.0% per
year, with the most recent increase effective July 1, 2021.
Oxford Learning Centres Second Quarter
Results
DIV expects to report that royalty income and
management fees of $0.9 million were generated from Oxford Learning
Centres, Inc. (“Oxford”) in Q2 2021, compared to $0.7 million in Q2
2020.
Oxford locations in the Oxford royalty pool
generated SSSG (on a constant currency basis) of 41% in Q2 2021,
compared to SSSG of -41% in Q2 2020. Oxford’s SSSG for the six
months ended June 30, 2021 was 3.4%, compared to -30% for the
period from February 20, 2020, the acquisition date of the Oxford
Rights, to June 30, 2020. In 2020, Oxford’s SSSG was negatively
impacted by the COVID-19 pandemic, which has resulted in the
temporary suspension of in-centre services at the majority of its
locations. As government restrictions in Ontario for in-person
tutoring were relaxed in mid-July 2021, and the new school year
will be starting in September, Oxford is optimistic about the
second half of 2021.
Mr. Mikes Second Quarter Results
The majority of Mr. Mikes Restaurants
Corporation (“Mr. Mikes”) restaurants were open for in-restaurant
dining at a reduced capacity in mid-June 2021. Overall, SSSG in Q2
2021 for the Mr. Mikes restaurants in the royalty pool, including
stores that were temporarily closed due to the COVID-19 pandemic
was 77% compared to Q2 2020 and -50% compared to Q2 2019. SSSG for
the six months ended June 30, 2021 for the Mr. Mikes restaurants in
the royalty pool was flat compared to the six months ended June 30,
2020 and -43% compared to the six months ended June 30, 2019. Mr.
Mikes restaurants were closed for in-restaurant dining for most of
Q2 2020, which negatively impacted Mr. Mikes’ system sales in that
quarter.
The management team at Mr. Mikes continues to
expect a protracted recovery. DIV expects to report that royalty
income and management fees of $0.8 million were generated from Mr.
Mikes in Q2 2021, compared to $nil in Q2 2020. In Q2 2020, DIV
waived 100% of Mr. Mikes’ fixed royalty and management fee in
response to the impact of the COVID-19 pandemic on Mr. Mikes’
business. DIV expects continued royalty and management fee relief
will be required by Mr. Mikes until such time as all government
restrictions impacting the operation of Mr. Mikes restaurants are
lifted and the business stabilizes.
Nurse Next Door Second Quarter Results
DIV expects to report that the royalty
entitlement to DIV (the “DIV Royalty Entitlement”) from Nurse Next
Door Professional Homecare Services Inc. (“Nurse Next Door”) was
$1.2 million in Q2 2021. The DIV Royalty Entitlement from Nurse
Next Door grows at a fixed rate of 2.0% per annum during the term
of the license, with the most recent increase effective October 1,
2020.
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 intends 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” or “financial
outlook” within the meaning of applicable securities laws that
involve 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 or financial outlook. The use of any of the words
“anticipate”, “continue”, “estimate”, “expect”, “intend”, “may”,
“will”, ”project”, “should”, “believe”, “confident”, “plan” and
“intend” and similar expressions are intended to identify
forward-looking information and financial outlook, although not all
forward-looking information and financial outlook contain these
identifying words. Specifically, forward-looking information and
financial outlook in this news release includes, but is not limited
to, statements made in relation to: the increase to DIV’s monthly
dividend effective August 2021; DIV’s expectation that its Q2 2021
payout ratio will be approximately 90%; DIV’s expectation that the
incremental royalties acquired from Mr. Lube in May 2021 will
increase DIV’s distributable cash and reduce DIV’s payout ratio;
DIV remaining cautiously optimistic that the positive trends being
experienced by its royalty partners will lead to a meaningful
recovery of their respective businesses; DIV continuing to review
its dividend policy and that it will consider further dividend
increases if DIV’s royalty partners continue to experience positive
trends; DIV maintaining a target annual payout ratio below 100%;
the expected financial results of Mr. Lube, Nurse Next Door,
Sutton, Mr. Mikes and Oxford for Q2 2021 and the amount of royalty
income expected to be reported by DIV as having been generated from
the AIR MILES licenses during this period; Mr. Lube being well
positioned to generate positive SSSG; ADS noting that AIR MILES® is
working with travel partners to offer promotions and redemptions to
drive increased collector travel and tourism as appropriate,
leading to optimism in the latter half of 2021; DIV’s belief that
the spin-off by ADS of its LoyaltyOne segment could place renewed
management focus on top-line growth at LoyaltyOne, which could be
beneficial to DIV’s royalty; Oxford being optimistic about the
second half of 2021 as government restrictions in Ontario were
relaxed-mid July 2021 and with the new school year starting in
September; DIV’s expectation that Mr. Mikes will require royalty
and management fee relief until such time as all government
restrictions impacting the operation of Mr. Mikes restaurants are
lifted and the business stabilizes; Mr. Mikes’ expectation that it
will continue to experience a protracted recovery; DIV’s intention
to pay monthly dividends 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 by such forward-looking
information and financial outlook. DIV believes that the
expectations reflected in the forward-looking information and
financial outlook included in this news release are reasonable but
no assurance can be given that these expectations will prove to be
correct. In particular, risks and uncertainties include: the
financial results of DIV and its royalty partners may not be
consistent with the preliminary results set forth herein; DIV’s
royalty partners may not make their respective royalty payments to
DIV, in whole or in part; DIV’s royalty partners may request
further royalty relief; COVID-19 may have a more significant
negative impact on DIV and its royalty partners (including their
respective franchisees) than currently expected and the businesses
of DIV’s royalty partners (and their respective franchisees) may
not fully recover following the relaxation of government
restrictions or post vaccinations; current improvement trends being
experienced by certain of DIV’s royalty partners (and their
respective franchisees) may not continue and may regress; royalty
partner locations that are temporarily closed may not reopen; the
rates of recovery for DIV’s royalty partners will be dependent
upon, among other things, the availability and effectiveness of
vaccines for the COVID-19 virus, government responses, rates of
economic recovery, precautionary measures taken by consumers and
the rate at which government restrictions will be lifted or
meaningfully relaxed; the incremental royalties acquired from Mr.
Lube may not be accretive to DIV shareholders and may not increase
distributable cash or reduce DIV’s payout ratio; DIV’s payout ratio
for Q2 2021 may be greater than 90%; DIV’s payout ratio may from
time to time exceed 100% notwithstanding DIV’s target is a payout
ratio below 100%; the performance of AIR MILES® may not improve in
the second half of 2021 as currently expected by ADS; the spinoff
of ADS’ LoyaltyOne segment may not be beneficial to LoyaltyOne’s
top-line or DIV’s royalty; Oxford’s performance may not improve in
the second half of 2021 as currently expected; DIV may not increase
its dividend in accordance with the currently expected timing or
amounts; there may be no future increases to DIV’s dividend; DIV
may not be able to make monthly dividend payments to the holders of
its common shares; dividends are not guaranteed and may be reduced,
suspended or terminated at any time; or DIV may not achieve any of
its corporate objectives. Given these uncertainties, readers are
cautioned that forward-looking information and financial outlook
included in this news release are not guarantees of future
performance, and such forward-looking information and financial
outlook 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,
2021 and in DIV’s most recently filed management’s discussion and
analysis, copies of which are available under DIV’s profile on
SEDAR at www.sedar.com.
In formulating the forward-looking information
and financial outlook 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; the impacts of COVID-19 on DIV and its
royalty partners (including their respective franchisees) will be
consistent with DIV’s expectations and the expectations of
management of each of its Royalty Partners, both in extent and
duration; DIV and its royalty partners (including their respective
franchisees) will be able to reasonably manage the impacts of the
COVID-19 pandemic on their respective businesses; vaccination
programs will be successful and vaccines effective, and the
expected positive impacts thereof on DIV and the businesses of its
royalty partners (including their respective franchisees) will be
consistent with DIV’s expectations; the performance of DIV’s
royalty partners will be consistent with DIV’s and its royalty
partners’ respective expectations; and recent positive trends for
certain of DIV’s royalty partners (including their respective
franchisees) will continue and not regress. These assumptions,
although considered reasonable by management at the time of
preparation, may prove to be incorrect.
To the extent any forward-looking information or
statements in this news release constitute a “financial outlook”
within the meaning of applicable securities laws, such information
is being provided to investors to ensure they receive timely
disclosure of material financial information with respect to the
financial performance of the Corporation and its royalty partners
prior to the completion of year end audits and to provide an
estimate of the financial impact to DIV of certain recent
transactions described above.
All of the forward-looking information and
financial outlook in this news release is qualified in its entirety
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 they will have the expected
consequences to, or effects on, DIV. The forward-looking
information and financial outlook included in this news release is
presented 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.
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 and the performance of its royalty
partners. 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 and its royalty partners 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.
“DIV Royalty Entitlement”, “Same Store Sales
Growth” or “SSSG”, “distributable cash” and “payout ratio” are used
as non-IFRS measures in this news release. The DIV Royalty
Entitlement is 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
measure to DIV Royalty Entitlement is royalty income; however, DIV
Royalty Entitlement should not be considered a substitute for IFRS
measures. References to “same store sales growth” or “SSSG” in this
news release are to the percentage increase in store sales over the
prior comparable period that were open in both the current and
prior periods, excluding stores that were permanently closed. Same
store sales growth is a non-IFRS financial measure and does not
have a standardized meaning prescribed by IFRS. However, the
Corporation believes that same store sales growth is a useful
measure as it provides investors with an indication of the change
in year-over-year sales of Mr. Lube locations, Mr. Mikes
restaurants and Oxford locations. The Corporation’s method of
calculating same store sales growth may differ from those of other
issuers or companies and, accordingly, same store sales growth may
not be comparable to similar measures used by other issuers or
companies. Distributable cash is a non-IFRS financial measure that
does not have a standardized meaning prescribed by IFRS. Management
believes that distributable cash provides investors with useful
information about the amount of cash the Corporation has generated
to cover dividends on its common shares during the applicable
period. Readers should be cautioned, however, that distributable
cash should not be construed as an alternative to the statement of
cash flows as a measure of liquidity and cash flows of the
Corporation. The Corporation’s method of calculating distributable
cash may differ from that of other issuers and companies and,
accordingly, distributable cash may not be comparable to similar
measures used by other issuers or companies. The payout ratio is
calculated by dividing the total dividends declared during the
period by the distributable cash generated in that period. The
payout ratio is not a recognized measure under IFRS, however,
management of the Corporation believes that it provides
supplemental information regarding the extent to which the
Corporation distributes cash as dividends, when compared to its
cash flow capacity. The Corporation’s method of calculating payout
ratio may differ from those of other issuers or companies and,
accordingly, payout ratio may not be comparable to similar measures
used by other issuers or companies. In addition, see the
“Description of Non-IFRS and Additional IFRS Measures” in DIV’s
most recently filed management’s discussion and analysis, a copy 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
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 Officer Diversified Royalty Corp. (236) 521-8470
Greg Gutmanis, Chief Financial Officer and VP
Acquisitions Diversified Royalty Corp. (236) 521-8471
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