Q1 2020 Results for its Royalty Partners “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.