Diversified Royalty Corp (“
DIV” or the
“
Corporation”) (TSX: DIV and DIV.DB) is providing
an update on its business and the businesses of its royalty
partners in light of the rapidly evolving global social, health and
economic response to the coronavirus disease
(“
COVID-19”), which has had a significant impact
on the financial markets, the global economy, DIV’s royalty
partners and DIV.
Adjustment to Dividend
Policy
DIV expects that COVID-19 will have a material
impact on DIV’s royalty partners in the short to medium term. 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 (the “Board”) has 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 expected to be declared in the month of April 2020. The
Board may consider approving a special dividend to shareholders
following the completion of fiscal 2020 if DIV has generated more
distributable cash than it has paid out in dividends during the
year and the businesses of DIV’s royalty partners have stabilized.
The dividend of $0.01958 per share previously declared on March 4,
2020, will be paid on March 31, 2020 to shareholders of record as
of March 16, 2020 and will not be affected by the adjustment to
DIV’s dividend policy.
All royalty payments required to be paid by
DIV’s royalty partners in March 2020 have been received by DIV in
full. However, DIV is aware that some of its royalty partners
have had, or are expecting to have, significant business
interruption in the months ahead (see “Other Corporate Updates”
below for further details). This will no doubt lead to Q2 2020
royalty payments received by DIV being materially less than
anticipated prior to the COVID-19 outbreak. At this time, DIV does
not know the full extent of the financial impact of such
interruptions or what the timeline will be for restoring normal
operations for its royalty partners. Accordingly, the Board
believes the reduction of the monthly dividend is a prudent measure
to preserve capital and maintain liquidity in the current market
environment.
Sean Morrison, President and Chief Executive
Officer of DIV stated, “Our focus during this unprecedented time is
to preserve long-term value for shareholders. The change to a
$0.01667 monthly dividend acknowledges that we will be operating in
a new business environment for an uncertain period. At this reduced
monthly dividend we expect our payout ratio to be in excess of 100%
for the second quarter, likely the third quarter and potentially
the fiscal year. Our Board, in consultation with management,
regularly reviews our dividend policy and will continue to do so
going forward. We expect the long-term proven business models
of our royalty partners and our strong balance sheet will allow us
to work through this challenging period.”
Suspension of Dividend Reinvestment Plan
(“DRIP”)
DIV also announced today that the Board has
approved the temporary suspension of the DRIP until further notice
as the Board does not believe it is in the best interests of the
Corporation or its shareholders to issue shares at current prices.
Shareholders enrolled in the DRIP will receive dividend payments in
cash, instead of common shares, starting with the dividend payable
to shareholders in respect of the month of April, 2020. At such
time as DIV elects to reinstate the DRIP, shareholders that were
enrolled in the DRIP at the time of suspension and remain enrolled
at the time of reinstatement will automatically resume
participation in the DRIP. The DRIP is subject to reinstatement at
the discretion of the Board.
Other Corporate Updates
Mr. Morrison stated, “DIV’s business model is
predicated on diversification (it’s in our name), which we expect
to be important in mitigating the impacts of COVID-19. Our
royalty partners are diverse both by geography and industry and
while several of our royalty partners will be materially impacted
by the unprecedented measures taken by businesses and governments
in response to COVID-19, as well as the overall slow down in
economic activity, we expect that the extent will vary
substantially across our portfolio.”
As of the date of this release, DIV has the
following updates regarding its business and that of its royalty
partners:
DIV: DIV has a strong balance
sheet and is well capitalized:
- Approximately $9.5 million of
cash;
- $4 million of undrawn operating
lines;
- Approximately $40 million in
available capital on our acquisition facility (solely to fund new
acquisitions);
- Total senior debt of $9 million
outstanding under the acquisition facility and total unsecured
convertible debentures outstanding of $57.5 million. DIV is working
with the lender of the acquisition facility to move the $9 million
of outstanding senior debt under the acquisition facility into a
credit facility for OX Royalties Limited Partnership (“OX
LP”); and
- Total senior debt of $90 million in
our subsidiaries. Each subsidiary is separately financed with
limited recourse to DIV through a separate pledge by DIV of its
interest in each subsidiary.
DIV has had preliminary discussions with each of
DIV's lending partners with respect to the strategies DIV may
employ to assist its royalty partners through the current period of
economic weakness. In addition, DIV expects to have discussions
with each of DIV’s lending partners with respect to covenant
relief, which is anticipated to be required in the months ahead due
to the very weak outlook for the second quarter results of several
of DIV’s royalty partners.
Mr. Lube Canada Limited Partnership
(“Mr. Lube”): Mr. Lube is DIV’s largest royalty partner
and represented pre-COVID-19 pro-forma annual adjusted revenues of
$16.6 million or ~40% of pro-forma annual adjusted revenue. Mr.
Lube’s business model is relatively COVID-19 safe, with the
customer staying in their car throughout the service. In addition,
Mr. Lube’s car maintenance services have been classified as
essential in British Columbia, Ontario and Quebec and its goal is
to remain open throughout the COVID-19 outbreak, albeit at reduced
hours. The current slow down in consumer activity across the entire
country and recommendations from all levels of government for
people to work from home and self-isolate has resulted in a
significant decrease in customer visits since mid-March. Based on
preliminary feedback from Mr. Lube management, the back half of
March is trending negatively with store-level revenue decreases of
40% to 50%. Mr. Lube management has been actively working with its
franchisees to negotiate more flexible terms with landlords, banks
and suppliers as well as to reduce its head office expense. Mr.
Lube management believes its business is generally counter-cyclical
and expects to be positively impacted in the medium term, following
an initial short-term period of weakness.
AIR
MILES®: AIR MILES®,
operated by Loyalty One, Inc., is DIV’s second largest royalty
partner, represented pre-COVID-19 pro-forma annual adjusted
revenues of $7.8 million or ~18% of pro-forma annual adjusted
revenue. AIR MILES® two largest sponsors are the Bank of Montreal,
and Sobey’s representing approximately 31% of LoyaltyOne, Inc.’s
revenues in aggregate. Gross billings for the AIR MILES® Reward
Program is derived from several AIR MILES® metrics, primarily from
the issuance of AIR MILES as well as redemption of AIR MILES,
service revenue, commissions and promotional items. AIR MILES® has
approximately 140 sponsors and we expect AIR MILES issued to
generally track total Canadian consumer spending during COVID-19
and thereafter. Accordingly, we are expecting a short-term decline
in AIR MILES®’s performance.
Nurse Next Door Professional Homecare
Service Inc. (“Nurse Next Door”): Nurse Next Door,
represented pre-COVID-19 pro-forma annual adjusted revenues of $4.9
million or ~12% of pro-forma annual adjusted revenue. Nurse Next
Door’s home health care services are expected to be considered an
essential service across all its markets and all of Nurse Next
Door’s franchisees are currently open for business. Nurse Next Door
management is seeing steady business across the network and expects
the COVID-19 outbreak will have a positive impact on its business
(home health care versus senior care facilities) in the medium to
long-term.
Sutton Group Realty Services Ltd.
(“Sutton”): Sutton represented pre-COVID-19 pro-forma
annual adjusted revenues of $4.0 million or ~10% of pro-forma
annual adjusted revenue. Sutton’s business was very strong to start
2020 with February year-to-date sales volumes in Vancouver and
Toronto up 45% and 32%, respectively, according to the Real Estate
Board of Greater Vancouver and the Toronto Regional Real Estate
Board. During that period, the combination of relaxed mortgage
rules and lower interest rates were driving first time home buyer
demand. COVID-19 has greatly curtailed the holding of open houses,
which has had an immediate negative effect on the signing of new
home sale/purchase agreements. With the dramatic slow down of
residential real estate activity due to COVID-19, Sutton has agreed
to give all Sutton franchisees a 50% waiver of their April
franchise fees, 75% of their May franchise fees and 75% of their
June franchise fees to help them manage through this difficult
period. DIV has also agreed to waive 50% of Sutton’s fixed royalty
payment obligation in April, 75% in May and 75% in June. Sutton
management believes the relaxed mortgage rules and lower interest
rates will provide support for the residential housing market
post-COVID-19.
Oxford Learning Centres, Inc.
(“Oxford”): Oxford represented pre-COVID-19 pro-forma
annual adjusted revenues of $4.3 million or ~10% of pro-forma
annual adjusted revenue. Oxford had a very strong start to 2020
with same store sales growth (SSSG) in January/February of over
7.5%. School closures in Oxford’s largest market, Ontario, started
in mid-March ahead of spring break. The primary impact of COVID-19
on Oxford’s business is that children are unable to visit Oxford
locations for tutoring services. In the past two weeks, Oxford
management has pivoted its business to provide online tutoring,
with 149 out of 155 locations able to provide this service.
Oxford’s revenue will be negatively affected during this transition
phase but is well positioned to recover and grow post-COVID-19 with
both online and in-person tutoring services.
Mr. Mikes Restaurants Corporation (“Mr.
Mikes”): Mr. Mikes represented pre-COVID-19 pro-forma
annual adjusted revenues of $4.0 million or ~10% of pro-forma
annual adjusted revenue. As stated in our March 18, 2020 press
release, Mr. Mikes temporarily closed all its locations for
in-restaurant dining on March 18, 2020, subsequent to which certain
restaurants have temporarily fully closed. Mr. Mikes’ management
has been actively working with its franchisees to negotiate more
flexible terms with landlords, banks and suppliers as well as
reduce its head office expense. Currently, it is unknown when Mr.
Mikes restaurants will be allowed to re-open for in-restaurant
dining and until they do, Mr. Mikes will be generating minimal
revenue and therefore will likely be unable to pay its fixed
royalty payments to DIV. DIV is in discussions with its lenders and
Mr. Mikes with respect to potential royalty relief that may be
provided to Mr. Mikes by DIV.
As stated previously, the impact of COVID-19 is
evolving rapidly and management, in consultation with the Board,
continues to monitor developments and the impact on DIV and its
royalty partners’ businesses. Management believes that the
diversity of DIV’s portfolio of royalty partners, DIV’s strong
balance sheet and its relationships with its lending partners will
allow DIV to manage the impacts of the COVID-19 crisis and to
continue to perform positively over the long-term upon a return to
normal operating levels post COVID-19.
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 intends to pay a monthly 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 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. 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 COVID-19 will have a material impact on
DIV’s royalty partners in the short to medium term; the adjustment
of DIV’s dividend policy effective with the dividend expected to be
declared and paid in April 2020, and the details thereof and the
reasons underlying such change; the possibility that a special
dividend may be declared following the completion of fiscal 2020;
the payment on March 31, 2020 of the dividend declared on March 4,
2020 will be unaffected by the change in DIV’s dividend policy; the
expectation that DIV’s payout ratio will be in excess of 100% for
the second quarter, likely third quarter and potentially the 2020
fiscal year; the Board, in consultation with management, will
continue to regularly review DIV’s dividend policy going forward;
the suspension of the DRIP, the timing and other details thereof
and the means by which it may be reinstated; Q2 2020 royalty
payments received by DIV are expected to be materially less than
anticipated; DIV’s expectation that the long-term proven business
models of our royalty partners and our strong balance sheet will
allow us to work through this challenging period and continue to
perform positively over the long-term upon a return to normal
operating levels post COVID-19; DIV’s expectation that the extent
of impacts of COVID-19 will vary substantially across its portfolio
of royalty partners; the potential to move $9 million of
outstanding debt under the acquisition facility into a new credit
facility for OX LP; DIV’s expectation that it will have discussions
with its lenders with respect to covenant relief; the expected
continued impacts of COVID-19 on Mr. Lube’s business, and Mr. Lube
management’s belief that its business is counter-cyclical and that
it will be positively impacted in the medium term, following an
initial short-term period of weakness; DIV’s expectation that there
will be a short term decline in AIR MILES®’s performance due to
reduced consumer spending as a result of COVID-19; the expectation
that Nurse Next Door’s services will be considered essential in all
of its markets; Nurse Next Door management’s expectation that
COVID-19 will have a positive impact on its business in the medium
to long-term; the royalty relief provided by Sutton to its
franchisees and by DIV to Sutton; Sutton’s belief that relaxed
mortgage rules and lower interest rates will provide support for
the residential housing market post-COVID-19; Oxford’s revenue will
be negatively affected during its transition to providing online
services, and the related belief that Oxford is well positioned to
recover and grow post COVID-19; the timing for the re-opening of
Mr. Mikes’ restaurants for in-restaurant dining, or otherwise for
those that are temporarily fully closed, being unknown; the
expectation that Mr. Mikes will generate minimal revenue until its
restaurants re-open for in-restaurant dining and that Mr. Mikes
will likely be unable to pay its fixed royalty payments to DIV
until such time; DIV is in discussions with its lenders and Mr.
Mikes respect to the potential royalty relief to be provided to Mr.
Mikes; and DIV’s intention to pay monthly dividends to
shareholders, and DIV’s other 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: 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;
dividends are not guaranteed and may be further reduced, suspended
or terminated; the reduction in the dividend may negatively impact
the price of DIV’s shares; DIV’s payout ratio may be greater than
100% in the second and third quarters of 2020, for fiscal 2020 and
beyond; the DRIP may not be reinstated; a special dividend may not
be declared after fiscal 2020 regardless of the amount of
distributable cash generated by DIV; DIV’s lenders may not agree to
provide covenant relief, at all or only on terms that are
disadvantageous to DIV; the lender of the acquisition facility may
not agree to transfer the outstanding amounts under the acquisition
facility into a new facility for OX LP; 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; and 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. 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 a copy 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 COVID-19 will have a
material impact on DIV’s royalty partners in the short to medium
term; 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 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 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.
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.
Pro-forma annual adjusted revenue is calculated
as DIV’s annualized adjusted revenues for the three months ended
September 30, 2019, adjusted to give effect to the November 15,
2019 Nurse Next Door trademarks acquisition and the February 21,
2020 Oxford trademarks acquisition. Pro-forma annual adjusted
revenue is not a recognized measure under IFRS; however, management
of the Corporation believes it provides supplemental information
regarding the extent to which DIV shareholders have an interest in
the consolidated revenues earned by DIV. Pro-forma annual adjusted
revenue as used in this news release may not be comparable to
similar measures used by other issuers.
In addition to “pro-forma annual adjusted
revenues”, “distributable cash”, “same store sales growth”, and
“payout ratio” are used as non-IFRS measures in this news release.
For further details with respect to these Non-IFRS Measures, 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.
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 OfficerDiversified Royalty Corp. (604) 235-3146
Greg Gutmanis, Chief Financial Officer and VP
Acquisitions Diversified Royalty Corp. (604) 235-3146
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