A&W Revenue resumes monthly distributions A&W Revenue Royalties Income Fund is resuming monthly distributions to its unitholders in the amount of 10 cents per trust unit. Accordingly, the fund has declared a cash distribution of 10 cents per trust unit for the month of June, 2020. This distribution will be paid on July 31, 2020, to unitholders of record at the close of business July 15, 2020. This distribution will be taxed as a non-eligible dividend, as the source of funds to pay the distribution is a dividend from A&W Trade Marks Inc. (Trade Marks).
The fund also announced that A&W Food Services of Canada Inc. (A&W Food Services) will be resuming regular royalty payments. The royalty of 3 per cent of system sales of the 971 A&W restaurants in the royalty pool is to be paid on July 10, 2020, based upon system sales of A&W restaurants in the royalty pool for the four-week period ended June 14, 2020.
The Trustees of the Fund determined to recommence monthly distributions to unitholders on the basis of the recent improvement in the performance of the A&W restaurants in the Royalty Pool and the resumption of royalty payments by A&W Food Services. In making that determination, the Trustees reviewed financial and other information regarding the recent performance of A&W Food Services and the A&W restaurants in the Royalty Pool and financial projections for the Fund and A&W Food Services for the remainder of 2020 and obtained advice from their independent financial advisors and legal counsel.
A&W Food Services has deferred royalty payments payable to the Fund for three four-week periods, totaling at June 30, 2020, $7.5 million, inclusive of interest. The Trustees and A&W Food Services are developing a plan for the payment of this amount with interest to the date of payment.
Trade Marks will declare an equivalent dividend on the shares of Trade Marks held by A&W Food Services. However, A&W Food Services has agreed with the Fund and Trade Marks that the dividend is not be paid to A&W Food Services until it has paid all deferred royalties, together with interest to the Fund.
A&W Food Services and the Fund are jointly providing a further update on the impact of the COVID-19 pandemic on A&W restaurant operations and the decisions taken by the Trustees of the Fund.
Update:
Same Store Sales Growth for A&W Restaurants in the Royalty Pool were -31.6% for the second quarter of 2020 as compared to the second quarter of 2019.
Actions required in response to the COVID-19 pandemic have adversely affected restaurant operations across Canada, including the temporary closures of a large number of restaurants.
At its peak a total of 230 A&W restaurants (out of 971 restaurants in the Royalty Pool) were temporarily closed. There was steady improvement during the second quarter and at quarter end (June 14, 2020), 109 restaurants in the Royalty Pool remained temporarily closed. Since then, approximately 85 of those temporarily closed A&W restaurants have reopened. The balance of the A&W restaurants are currently expected to reopen when permitted by the appropriate authorities.
For most of the second quarter of 2020, A&W restaurants which were operating were restricted to drive thru, delivery and mobile ordering.
In a number of locations, A&W restaurants are now permitted to open for limited dine-in and take out sales.
Given the extraordinary level of business uncertainty, especially related to the restaurant industry, coupled with the immediate decline in A&W restaurant sales and therefore the royalty payable to the Fund by A&W Food Services, the Trustees announced on March 31, 2020 that monthly distributions on the Units would be temporarily suspended commencing with the distribution that would ordinarily have been declared in April 2020. The Trustees determined that temporarily suspending distributions to unitholders was the most prudent course of action until business conditions and sales trends became less uncertain. They did so mindful of the long-term interests of the Fund, recognizing that it is in the long-term interest of unitholders to have a healthy and stable network of A&W restaurants coming out of the COVID-19 pandemic.
The Trustees previously communicated that they would continue to closely monitor the results of operations and outlook of A&W Food Services and the A&W system with the intention to preserve unitholder value by restarting distributions in a prudent manner based upon A&W restaurant sales that permit distributions to be paid in amounts that are reasonably predictable. The Trustees have received weekly written and oral updates from A&W Food Services regarding the A&W business and the steps being taken by A&W Food Services to protect and restore the A&W business. The Trustees also received updated financial projections for both the Fund and A&W Food Services for the remainder of 2020. As noted above, the Trustees have determined, in consultation with their independent financial advisors and legal counsel, that it is prudent to restart monthly distributions at 10 cents per unit. The Trustees, in consultation with their independent financial advisors, will continue to closely monitor the sales results of, and projections for, the A&W restaurants in the Royalty Pool going forward with a view to ensuring the payment of regular monthly distributions at a sustainable level.
As previously announced, A&W Food Services delayed the royalty payment payable for the last royalty payment period in Q1 2020 and informed the Fund that A&W Food Services expected to defer payment of royalty payments for Q2 2020. As at July 7, 2020 there are three deferred royalty payments due from A&W Food Services. The total amount payable, with interest, at June 30, 2020 is $7.5 million. A&W Food Services will resume the regular payment of royalties commencing with the royalty payment due on July 10, 2020 for system sales for the last royalty payment period in Q2 2020.
The Trustees and A&W Food Services are formulating a plan for the payment of the deferred royalties and interest.
Further information with respect to the financial results and position of the Fund and A&W Food Services will be included with their respective financial statements for the second quarter of 2020, which are to be released later this month.
Implications for the Fund and Unitholders
Although there continues to be improvement in sales trends, restrictions on the operations of A&W restaurants in response to COVID-19 as well as temporary restaurant closures have resulted, and are expected to continue to result, in material year over year declines to system sales at A&W restaurants for the remainder of 2020, if not longer. These declines will result in reductions to the amounts of royalties payable to the Fund, and, correspondingly, cash available to distribute to unitholders of the Fund.