Diversified Royalty Announces Third Quarter 2018 Results Diversified Royalty Corp. Announces Third Quarter 2018 Results
For Immediate Release – not for distribution to US news wire services or for US dissemination.
Vancouver, BC, November 9, 2018 – Diversified Royalty Corp. (TSX: DIV and DIV.DB) (the “Corporation” or “DIV”) is pleased to announce its financial results for the three months ended September 30, 2018 (“Q3 2018”) and nine months ended September 30, 2018.
Third Quarter and Year-To-Date Results
In Q3 2018, DIV generated $6.7 million of royalty revenue and management fees compared to $5.4 million in the third quarter of 2017. Revenues of $3.8 million were generated from Mr. Lube Canada Limited Partnership (“Mr. Lube”), $1.0 million from Sutton Group Realty Services Ltd. (“Sutton”), and $1.9 million from the AIR MILES® licenses.
For the nine months ended September 30, 2018, DIV generated $19.5 million of royalty revenue and management fees compared to $14.1 million in the prior year. The increase in revenue was driven by the incremental revenue generated from the AIR MILES® licenses, the increase in the Mr. Lube royalty rate, the net addition of one Mr. Lube location to the Mr. Lube royalty pool, positive same-store-sales growth (“SSSG”) at Mr. Lube, and the contractual 2.0% increase in the Sutton royalty rate effective July 1st of each year.
SSSG for the Mr. Lube stores in the royalty pool was 1.6% in Q3 2018 and 3.0% for the nine months ended September 30, 2018. Sutton’s fixed royalty increases at a contractual rate of 2% per year, which effectively represents 2% SSSG. According to Alliance Data Systems Inc.’s (“ADS”) news release dated October 18, 2018, the number of AIR MILES®reward miles issued increased by 3% in Q3 2018 and ADS is forecasting growth in the number of AIR MILES® reward miles issued for the remainder of 2018.
Third Quarter Commentary
Sean Morrison, President and Chief Executive Officer of DIV stated, “Mr. Lube’s Q4 2018 is off to a strong start and is well on track to deliver its 19th consecutive year of positive SSSG, and Sutton’s royalty continues to grow at 2.0% per year. We are encouraged by the growth in the AIR MILES reward miles issued, and look forward to continued growth in the AIR MILES Program. With approximately $81 million of cash on hand, we continue to pursue discussions on several potential opportunities with the aim of acquiring trademarks and royalties from high-quality businesses.”
Distributable Cash
In Q3 2018, distributable cash was $5.1 million ($0.0479 per share) compared to $4.6 million ($0.0436 per share) in the third quarter of 2017. For the nine months ended September 30, 2018, distributable cash was $14.9 million ($0.1394 per share) compared to $11.7 million ($0.1108 per share) in the prior year. The increase was primarily due to the incremental royalty income driven by the acquisition of the AIR MILES® licenses on August 25, 2017. The increase was partially offset by higher interest expense related to the convertible debentures issued on November 7, 2017, the $17.4 million term loan facility drawn on September 6, 2017 associated with the acquisition of the AIR MILES®licenses, and an increase of $7.0 million to ML Royalties Limited Partnership’s term loan facility on May 1, 2018 in connection with the increase in the Mr. Lube royalty rate and the net addition of one location to the Mr. Lube royalty pool.
In Q3 2018, dividends declared exceeded distributable cash by $0.8 million, which resulted in a payout ratio of 116.0%. For the nine months ended September 30, 2018, dividends declared exceeded distributable cash by $2.9 million, which resulted in a payout ratio of 119.7%. However, the Corporation has a dividend reinvestment plan that allows the dividends to be settled through a reinvestment in the Corporation’s shares at the election of the shareholder. As a result, the payout ratio on a cash basis was 103.7% in Q3 2018 and 105.9% for the nine months ended September 30, 2018. The shortfall in distributable cash was funded by the proceeds received from the sale of the trademarks and rights related to the Franworks Franchise Corp. business (the “FW Rights”) in November 2016.
The Corporation intends to use the remaining proceeds from the sale of the FW Rights as well as the proceeds from the convertible debenture offering to fund future royalty acquisitions, with the intention of achieving a payout ratio that approximates 100% over time. The Corporation expects the payout ratio to remain over 100% until such time as further royalty acquisitions are completed and excess cash has been deployed.
Net Income
Net income for Q3 2018 was $3.4 million, compared to net income of $3.1 million in the third quarter of 2017. Net income for the nine months ended September 30, 2018 was $9.1 million, compared to net income of $8.1 million in the prior year. The increase in net income was primarily due to higher income from operations related to the acquisition of the AIR MILES® licenses, offset by higher interest expense and income taxes.