Diversified talks Q2 results for royalty partners Diversified Royalty Corp. has released preliminary results for its royalty partners for the three months ended June 30, 2020.
Mr. Lube Second Quarter Results
Mr. Lube Canada Limited Partnership ("Mr. Lube") generated same-store-sales-growth ("SSSG") of -12.5% for the Mr. Lube stores in the royalty pool for Q2 2020, compared to SSSG of 4.2% for the three months ended June 30, 2019 ("Q2 2019"). Mr. Lube generated SSSG of -10.0% for the six months ended June 30, 2020 compared to SSSG of 4.3% for the six months ended June 30, 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. As certain provinces started easing the restrictions put in place to fight the COVID-19 pandemic and Canadians started driving more, Mr. Lube's business has stabilized with June 2020 SSSG for the Mr. Lube stores in the royalty pool up 0.4% (compared to SSSG of -27% in April 2020 and -11% in May 2020).
DIV expects to report that aggregate royalty income and management fees of $3.6 million were generated from Mr. Lube in Q2 2020, a decrease of $0.6 million from Q2 2019.
AIR MILEStrademark Second Quarter Results
Alliance Data Systems Inc. ("ADS") issued a news release earlier today announcing that: (i) AIR MILEStrademark reward miles issued decreased by 26% in Q2 2020 and 11.6% for the six months ended June 30, 2020, reflecting a decline in discretionary spending, including credit card spend and delays in promotions by sponsors, and (ii) AIR MILEStrademark reward miles redeemed decreased by 42% in Q2 2020 and 25% for the six months ended June 30, 2020, reflecting the impact of the COVID-19 pandemic on travel-related categories, offset somewhat by strength from merchandise redemptions. According to ADS, LoyaltyOne is supporting collectors and sponsors by pivoting the reward portfolio to reflect more non-travel options. ADS also noted that the AIR MILEStrademark business continues to renew with sponsors, including a multi-year national renewal with Shell Canada Products, as LoyaltyOne focuses on driving collector engagement in key categories such as gasoline, grocery and liquor, which are deemed essential services.
DIV expects to report that royalty income of $1.5 million was generated from the AIR MILEStrademark licenses in Q2 2020, a decrease of $0.4 million (-22%) compared to Q2 2019. For the six months ended June 30, 2020, DIV expects to report royalty income of $3.4 million, a decrease of $0.3 million (-8.4%) compared to the six months ended June 30, 2019. DIV's royalty payment is derived from several AIR MILEStrademark metrics, with AIR MILEStrademark reward miles issued being the primary metric, and other metrics including AIR MILEStrademark reward miles redeemed, service revenue, commissions and promotional items, all of which affect quarterly variability.
Nurse Next Door Second 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 Q2 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 Second 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 the COVID-19 pandemic, DIV waived 75% of Sutton's April and May royalty payment and management fee obligations (due in May and June, respectively). The June royalty payment and management fees were not subject to a waiver and were received in full. According to the Real Estate Board of Greater Vancouver's news release dated July 3, 2020, home buyers and sellers have gradually become more active in each month of the COVID-19 pandemic, and home sales and listing activity in Metro Vancouver returned to more historically typical levels with June sales volumes up 18% (compared to -39% in April and -44% in May). According to the Toronto Regional Real Estate Board, sales volumes were only down 1% in June (compared to -67% in April and -54% in May).
DIV expects to report that royalty income and management fees of $0.5 million were generated from Sutton in Q2 2020, compared to $1.0 million in Q2 2019. The decrease in Q2 2020 was due to the 75% waiver of the April and May 2020 royalty and management fees.
Oxford Learning Centres Second Quarter Results
DIV expects to report that royalty income and management fees of $0.7 million were generated from Oxford Learning Centres, Inc. ("Oxford") in Q2 2020.
Oxford locations in the Oxford royalty pool generated SSSG (on a constant currency basis) of -41% in Q2 2020 and -29% for the period from February 20, 2020 to June 30, 2020. Oxford's SSSG was negatively impacted by the COVID-19 pandemic, which resulted in the temporary suspension of in-centre services. In mid-March, Oxford management pivoted its business to provide online tutoring with over 95% of its locations currently able to provide this service. Oxford sales are improving with June 2020 SSSG (on a constant currency basis) of -33% for the Oxford locations in the royalty pool (compared to SSSG of -47% in April 2020 and -44% in May 2020). In early July, in accordance with regional guidelines, certain Oxford locations have started transitioning back to in-centre services at a reduced capacity. Oxford is in the process of making the necessary changes in their locations to ensure that every parent, student and staff member will have the safest possible experience at their locations.
Mr. Mikes Royalty Waiver and Second Quarter Results
As previously announced, Mr. Mikes Restaurants Corporation ("Mr. Mikes") temporarily closed all its locations for in-restaurant dining on March 18, 2020. Also as previously announced, as of early June 2020, 33 of 45 Mr. Mikes restaurants had re-opened for in-restaurant or patio dining, which has now increased to 42 of 45 Mr. Mikes restaurants. Overall SSSG for Mr. Mikes restaurants in the royalty pool, including stores that were temporarily closed due to the COVID-19 pandemic, was -28% in June. SSSG for Mr. Mikes restaurants in the Mr. Mikes royalty pool that have re-opened for in-restaurant and patio dining was -19% in June 2020.
Notwithstanding the partial re-opening of such Mr. Mikes restaurants, DIV continues to expect that Mr. Mikes will experience a slow recovery and constrained cash flows. Accordingly, DIV has waived Mr. Mikes' fixed royalty and management fee payment for the period from February 24, 2020 to June 14, 2020. DIV anticipates that Mr. Mikes may require royalty relief for an extended period of time and is in discussions with its lenders and Mr. Mikes in this regard.
DIV expects to report that royalty income and management fees of $nil were generated from Mr. Mikes in Q2 2020, given that royalties and management fees for Q2 2020 were waived.
Second 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 was swift and unprecedented. The management teams of our royalty partners continue to do an excellent job of managing their businesses through these challenging times, and are starting to see encouraging trends as certain provinces have started to ease restrictions put in place to fight the COVID-19 pandemic. In particular, many of our royalty partners are showing positive signs of improvement in June: Mr. Lube's positive June SSSG, full royalty received from Sutton in respect of the June royalty payment period, Oxford SSSG improving by 10% month-over-month and locations re-opening for in-centre services, and Mr. Mikes now having 42 out of 45 restaurants re-opened for in restaurant or patio dining. 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 preserving shareholder value and 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 Q2 2020 financial results could differ materially from the above preliminary financial information.