Diversified Royalty Corp. (TSX: DIV and DIV.DB) (the
“Corporation” or “DIV”) and Mr. Lube Canada Limited Partnership
(“Mr. Lube”) announced today that effective May 1, 2021, the
royalty rate paid by Mr. Lube to the Corporation on non-tire sales
at flagship locations (the “Mr. Lube Royalty Rate”) has been
increased by 0.5% from 7.45% to 7.95%. In addition, the Mr. Lube
royalty pool (the “Mr. Lube Royalty Pool”) has been adjusted to
include the royalties from 13 new Mr. Lube locations. With the
adjustment for these 13 openings, the Mr. Lube Royalty Pool now
includes 135 flagship locations. As previously announced, on
November 9, 2020, DIV and Mr. Lube entered into an amendment (the
“LP Amendment”) to the amended and restated limited partnership
agreement of DIV’s direct subsidiary ML Royalties Limited
Partnership (“ML LP”) to confirm the terms on which the
aforementioned transactions would be completed.
Sean Morrison, President and Chief Executive
Officer of DIV, stated, “Mr. Lube continues to demonstrate growth
and strong performance despite the unprecedented challenges caused
by COVID-19. We believe that the experienced management team at Mr.
Lube and the strong store-level execution by its franchisees will
facilitate the growth of the Mr. Lube brand across Canada. The
increase in the Mr. Lube Royalty Rate and the additions to the Mr.
Lube Royalty Pool is expected to be over 1 cent accretive to
distributable cash per share.”
Stuart Suls, President and Chief Executive
Officer of Mr. Lube, stated, “As the pandemic evolved over the past
several months, we are proud of the resilience our franchisees
demonstrated in adapting to the constantly changing environment. We
look forward to continue strengthening the store level economics of
our franchisees, growing the Mr. Lube brand and the ongoing
mutually beneficial relationship with DIV.”
Mr. Lube Royalty Rate Increase
Mr. Lube has the option, subject to meeting
certain performance criteria (which were agreed to be satisfied
with respect to the current Mr. Lube Royalty Rate increase pursuant
to the LP Amendment), to increase the Mr. Lube Royalty Rate in
four, 0.5% increments during the life of the royalty. The increase
of the Mr. Lube Royalty Rate from 7.45% to 7.95% on non-tire sales
on May 1, 2021 represents the second such royalty rate increase.
The royalty rate on tire sales remains unchanged at 2.50%.
The Mr. Lube Royalty Rate increase is expected
to generate additional royalty revenue for the Corporation of
approximately $1.16 million per annum (previously estimated to be
$1.15 million). The total consideration paid to Mr. Lube for the
increase of the Mr. Lube Royalty Rate was $8.3 million (consistent
with prior estimates), which was paid to Mr. Lube on May 1, 2021 in
cash. The consideration paid to Mr. Lube for the increase to the
Mr. Lube Royalty Rate was partially financed by an increase in the
term loan facility of ML LP as described below.
For further details with respect to the manner
in which the Mr. Lube royalty rate increase occurs and the
agreements underlying the procedures therefor, see DIV’s Annual
Information Form dated March 11, 2021, a copy of which is available
on SEDAR at www.sedar.com.
Additions to the Mr. Lube Royalty Pool
Subject to certain performance criteria being
met, the Mr. Lube Royalty Pool is adjusted annually on May 1 (the
“Adjustment Date”) to include new Mr. Lube locations that have been
open since July 1 of the previous reporting period and to remove
Mr. Lube locations that have been permanently closed during the
previous year. Pursuant to the LP Amendment, such performance
criteria were agreed to be satisfied with respect to 13 Mr. Lube
locations added to the Mr. Lube Royalty Pool on May 1, 2021.
The initial consideration paid to Mr. Lube for
the estimated net additional royalty revenue is $7.7 million
(previously estimated to be $6.9 million), representing 80% of the
total estimated consideration of $9.6 million (previously estimated
to be $8.7 million), which was paid in cash. The consideration paid
to Mr. Lube was partially financed by an increase in the term loan
facility of ML LP as described below. The remaining consideration
payable for the net additional royalty revenue related to 7 of the
13 locations will be paid to Mr. Lube on May 1, 2022 and will be
adjusted to reflect the actual system sales of these locations for
the year ending December 31, 2021. The remaining consideration
payable for the net additional royalty revenue related to 6 of the
13 locations will be paid to Mr. Lube on May 1, 2023 and will be
adjusted to reflect the actual system sales of these locations for
the year ending December 31, 2022.
On May 1, 2019, the Mr. Lube Royalty Pool was
adjusted to include royalties from four new flagship Mr. Lube
locations. The initial 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 have created 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, as previously disclosed, at Mr. Lube’s
request, DIV agreed to defer the payment of the remaining
consideration owing to Mr. Lube to May 1, 2021. After taking into
account the $2.7 million previously paid by DIV to Mr. Lube on May
1, 2019, DIV paid Mr. Lube the remaining $0.9 million of cash
consideration for the additional royalty revenue of these four
locations on May 1, 2021.
For further details with respect to the manner
in which annual adjustments of the Mr. Lube Royalty Pool occur and
the agreements underlying the procedures therefor, see DIV’s Annual
Information Form dated March 11, 2021, a copy of which is available
on SEDAR at www.sedar.com.
Amendment of ML Royalties LP Credit Facility
On May 1, 2021, ML LP, the wholly owned
subsidiary of DIV that owns the ML Rights, amended its credit
agreement with a Canadian chartered bank to increase its
non-amortizing term loan facility from $41.6 million to $53.0
million. The increase in the term loan facility was used to
partially finance the consideration paid to Mr. Lube for the
increase in the Mr. Lube Royalty Rate and the additions to the Mr.
Lube Royalty Pool. Under the amended ML LP credit agreement, the
term loan facility bears interest at the banker’s acceptance rate
plus 2.5% per annum and matures on May 1, 2025. ML LP is required
to have in place, and expects to complete, an interest rate swap
arrangement for 75% of the $53.0 million term loan facility within
60 days following May 1, 2021.
May 2021 Cash Dividend
DIV is pleased to announce that its board of
directors has approved a cash dividend of $0.01667 per common share
for the period of May 1, 2021 to May 31, 2021, which is equal to
$0.20 per common share on an annualized basis. The dividend will be
paid on May 31, 2021 to shareholders of record on May 14, 2021.
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 amount of additional
royalty revenue that is expected to be generated from the 0.5%
increase to the Mr. Lube Royalty Rate; the amount of additional
royalty revenue that is expected to be generated from the net
addition to the Mr. Lube Royalty Pool; the amount and timing of the
payment for the remaining consideration payable to Mr. Lube for the
new royalty revenue from the 13 Mr. Lube locations added to the Mr.
Lube Royalty Pool; the expected impact of the increase to the Mr.
Lube Royalty Rate and additions to the Mr. Lube Royalty Pool on
DIV’s distributable cash; DIV’s belief that the experienced
management team at Mr. Lube and strong store-level execution by its
franchisees will facilitate the growth of the Mr. Lube brand across
Canada; Mr. Lube looking forward to continuing to strengthen the
store level economics of its franchisees, growing the Mr. Lube
Brand and the ongoing mutually beneficial relationship with DIV;
DIV’s expectation that ML LP will have an interest rate swap
arrangement in place for 75% of its $53.0 million term loan
facility within 60 days following May 1, 2021; the amount and
timing of the May 2021 dividend to be paid to DIV’s shareholders;
DIV’s ability to pay a predictable and stable dividend to
shareholders; or DIV may not achieve any of its 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 and financial outlook. DIV believes that the
expectations reflected in the forward-looking information and
financial outlook are reasonable but no assurance can be given that
these expectations will prove to be correct. In particular there
can be no assurance that: Mr. Lube will continue to make royalty
payments in the amounts and at the times required, or at all; the
amount of, or timing of the payment for, the additional
consideration payable to Mr. Lube for the 13 additional Mr. Lube
locations added to the Mr. Lube Royalty Pool will occur in the
amount or at the time estimated; that transactions completed with
Mr. Lube for the increase in the Mr. Lube Royalty Rate and the
additions to the Mr. Lube Royalty Pool will be accretive to DIV
shareholders; Mr. Lube will realize any of the intended benefits of
its growth strategy; Mr. Lube will continue opening new stores, or
that such stores will be successful if opened; that Mr. Lube will
succeed in improving store level economics of its franchisees; ML
LP will not further amend its credit facility in the future or have
in place the required interest rate swap arrangements for such
facility; DIV will be able to make monthly dividend payments to the
holders of its common shares; 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 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 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; the performance of the Mr. Lube flagship
locations in the Mr. Lube Royalty Pool will be consistent with
DIV’s expectations; and ML LP will complete the required interest
rate swap arrangements for its credit facility in accordance with
the required timing. These assumptions, although considered
reasonable by management at the time of preparation, may prove to
be incorrect.
To the extent any forward-looking information in
this news release constitutes a “financial outlook” within the
meaning of applicable securities laws, such information is being
provided to provide investors with an estimate of the financial
impact to DIV of the increase to the Mr. Lube Royalty Rate and the
addition of 13 Mr. Lube locations to the Mr. Lube Royalty Pool.
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.
“Distributable cash” is used as a non-IFRS
measure in this news release. For further details, 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.
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. (604) 235-3146
Greg Gutmanis, Chief Financial Officer and VP
Acquisitions Diversified Royalty Corp. (604) 235-3146
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