Diversified Royalty Corp. (TSX: DIV and DIV.DB) (the
“Corporation” or “DIV”) is pleased to announce preliminary results
for its royalty partners for the three months ended March 31, 2020
(“Q1 2020”).
Mr. Lube First Quarter Results
Mr. Lube Canada Limited Partnership (“Mr. Lube”)
generated same-store-sales-growth (“SSSG”) of -7.2% for the Mr.
Lube stores in the royalty pool for Q1 2020, compared to SSSG of
4.5% for the three months ended March 31, 2019 (“Q1 2019”). Mr.
Lube’s SSSG was 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. Although the business of Mr. Lube’s
franchisees was classified as an essential service in British
Columbia, Ontario and Quebec, a significant decrease in customer
visits since mid-March has resulted in negative SSSG for Mr. Lube
in Q1 2020.
DIV expects to report that aggregate royalty
income and management fees of $3.5 million were generated from Mr.
Lube in Q1 2020, a decrease of $0.2 million from Q1 2019.
AIR MILES® First Quarter Results
Alliance Data Systems Inc. (“ADS”) issued a news
release earlier today announcing that AIR MILES® reward miles
issued increased by 4.6% in Q1 2020 benefitting from increased
sponsor promotions early in Q1 2020. ADS also disclosed that AIR
MILES® reward miles redeemed decreased by 8.7% in Q1 2020
reflecting the impact of COVID-19 on travel related redemptions in
March. According to ADS, they are adjusting the timing of
significant coalition and sponsor-specific promotions and marketing
programs for the AIR MILES® Reward Program to better align with
collector needs/relevancy. Additionally, ADS is enhancing efforts
on redemption categories that focus on high-demand, non-travel
reward options, stay-at-home products and services, and AIR MILES®
cash (in-store, online and mobile) redemptions and providing
greater variety within those categories in order to simulate
collector engagement and drive redemptions.
DIV expects to report that royalty income of
$1.8 million was generated from the AIR MILES® licenses in Q1 2020,
an increase of 7.9% compared to Q1 2019. 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.
Nurse Next Door First 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 Q1 2020. The DIV Royalty Entitlement from Nurse
Next Door grows at a fixed rate of 2.0% per annum during the term
of the license.
Sutton First Quarter Results
As disclosed in DIV’s news release dated March
31, 2020, with the dramatic slow down of residential real estate
activity due to COVID-19, DIV has agreed to waive 50% of the March
2020 royalty and management fee payment obligation of Sutton Group
Realty Services Ltd. (“Sutton”), due in April. In addition, DIV has
agreed to waive 75% of Sutton’s April and May royalty payment and
management fee obligations (due in May and June, respectively).
DIV expects to report that royalty income and
management fees of $0.8 million were generated from Sutton in Q1
2020, compared to $1.0 million in Q1 2019. The decrease in Q1 2020
was due to the 50% waiver of the March 2020 royalty and management
fee.
Mr. Mikes Royalty Waiver and First Quarter
Results
As stated in our March 31, 2020 news release,
Mr. Mikes Restaurants Corporation (“Mr. Mikes”) temporarily closed
all its locations for in-restaurant dining on March 18, 2020, with
25 of 45 restaurants now providing takeout and delivery options.
With all Mr. Mikes restaurants temporarily closed for in-restaurant
dining and many temporarily fully closed, Mr. Mikes is generating
minimal revenue and has advised DIV that Mr. Mikes will likely 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. In response, DIV has agreed to waive Mr.
Mikes’ fixed royalty and management fee payment for such
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.
DIV expects to report that royalty income and
management fees of $0.6 million were generated from Mr. Mikes in Q1
2020. The revenue for Q1 2020 represents the amount from January 1,
2020 to February 23, 2020, given that the revenue for the remainder
of Q1 2020 was waived; as such, reported revenues from Mr. Mikes
were 41% lower than the $1.0 million of revenues expected.
Oxford Learning Centres First Quarter
Results
On February 21, 2020, DIV acquired the
trademarks and certain other intellectual property rights utilized
by Oxford Learning Centres, Inc. (“Oxford”) in its franchised
supplemental education service business (the “Oxford Rights”). DIV
expects to report that royalty income and management fees of $0.5
million were generated from Oxford from February 21, 2020, the date
of acquisition, to March 31, 2020.
Oxford locations in the Oxford royalty pool
generated SSSG on a constant currency basis of -2.4% for the period
from February 21, 2020 to March 31, 2020. After including the
impact of foreign currency translation, SSSG was -2.2% for the
period from February 21, 2020 to March 31, 2020. Oxford’s SSSG was
negatively impacted by the COVID-19 pandemic in mid-March. Had the
acquisition of the Oxford trademarks occurred on January 1, 2020,
SSSG from January 1, 2020 to March 31, 2020 on a constant currency
basis and after the impact of foreign currency translation would
have been +4.9%. Although Oxford has suspended in-person tutoring
services for all its locations, Oxford management has pivoted its
business to provide online tutoring with over 95% of its locations
able to provide this service.
First Quarter Commentary
Sean Morrison, President and Chief Executive
Officer of DIV stated, “The impact of COVID-19 on the daily lives
of Canadians and the Canadian economy is unprecedented. Without a
doubt, this is a difficult time for individuals and businesses
amidst the social, economic and financial instability ushered in by
the COVID-19 pandemic. The management teams of our royalty partners
have been doing an excellent job of managing their businesses
through these challenging times. DIV’s management is in regular
discussions with our royalty partners, and together with the board
of directors are monitoring developments with a focus on the
long-term success of DIV and its royalty partners.”
The financial information contained in this news
release is preliminary, is based upon the estimates and assumptions
of the respective management of DIV and its Royalty Partners as
applicable, has not yet been approved by their respective Audit
Committees or Boards of Directors, and has not been subject to a
review by their respective auditors. The final Q1 2020 financial
results could differ materially from the above preliminary
financial information.
Deferral of Holdback Payment to Mr. Lube
On May 1, 2019, the Mr. Lube royalty pool (the
“Mr. Lube Royalty Pool”) was adjusted to include royalties from
four new flagship Mr. Lube locations. The consideration previously
paid by DIV was $2.7 million, which represented 80% of the total
estimated consideration for those four locations, which estimate
was based on the forecast system sales of these four locations for
the 2019 fiscal year. The remaining consideration for the
additional royalty revenue of the four new flagship Mr. Lube
locations added to the Mr. Lube Royalty Pool on May 1, 2019 was
originally scheduled to be paid to Mr. Lube on May 1, 2020, based
on their actual system sales for the year ended December 31, 2019.
The impact of COVID-19 on Mr. Lube and DIV would create an
anomalous result in the determination of the remaining
consideration payable by DIV to Mr. Lube for the four new flagship
locations added to the Royalty Pool on May 1, 2019. Accordingly, at
Mr. Lube’s request, DIV has agreed in principle to defer the
payment of the remaining consideration owing to Mr. Lube to a
subsequent adjustment date being no earlier than May 1, 2021. The
deferral remains subject to the completion of binding legal
documentation.
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 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” 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
“intends” 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 expected financial results
of Mr. Lube, Nurse Next Door, Sutton, Mr. Mikes and Oxford for the
three months ended March 31, 2020, as applicable and the amount of
royalty income expected to be reported by DIV as having been
generated from the AIR MILES licenses during this period; ADS’
strategies to better align sponsor promotions with collector
needs/relevancy and providing greater variety of redemption
categories to simulate collector engagement and drive redemptions;
Mr. Mikes likely being unable to pay its fixed royalty payments to
DIV while the Mr. Mikes restaurants are temporarily closed for
in-restaurant dining and certain restaurants are temporarily fully
closed; DIV continuing its discussions with its lenders and Mr.
Mikes about whether additional royalty relief is required in
subsequent periods; the expectation that Mr. Mikes will experience
a slow recovery and constrained cash flow when in-restaurant dining
resumes; the deferral of the determination and payment of the
remaining consideration payable by DIV to Mr. Lube for the four Mr.
Lube flagship locations added to the Mr. Lube royalty pool on May
1, 2019 until a subsequent adjustment date being no earlier than
May 1, 2021, and that such deferral has been agreed in principle,
but remains subject to the completion of binding legal
documentation; 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 there can be no assurance
that: 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; the financial
results of DIV’s royalty partners will be consistent with the
preliminary results set forth herein; that DIV’s Royalty Partners
will not request further royalty relief; 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; ADS’ strategies to better align
sponsor promotions with collector needs/relevancy and providing
greater variety of redemption categories to simulate collector
engagement and drive redemptions may not be successful; the
deferral of the determination and payment of the remaining
consideration payable by DIV to Mr. Lube for the four Mr. Lube
flagship locations added to the Mr. Lube royalty pool on May 1,
2019 will be completed on May 1, 2021; DIV will be able to make
monthly dividend payments to the holders of its common shares;
dividends are not guaranteed and may be further reduced, suspended
or terminated; or DIV will 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 18, 2020 a copy of which is
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 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 pandemic on their
respective businesses. 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.
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. 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” and “Same Store Sales
Growth” or “SSSG” 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 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 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. 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
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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