LOOKS GREAT! Diversified Royalty Corp. has entered into an agreement with Nurse Next Door Professional Homecare Services Inc. to add a fifth royalty stream to Diversified Royalty's portfolio.
Highlights:
Acquisition of Nurse Next Door trademarks and certain other intellectual property rights for $52-million, excluding the Nurse Next Door retained interest;
Annual royalty from Nurse Next Door of $4.8-million, representing approximately 13 per cent of Diversified Royalty's pro forma adjusted royalty revenue;
Annual dividend on Diversified Royalty's common shares to be increased 3.4 per cent from 22.25 cents per share to 23 cents per share, subject to closing of the acquisition;
New acquisition credit facility with $50-million of undrawn capacity and a three-year term to finance future trademark and royalty transactions.
Acquisition overview
Diversified Royalty and its wholly owned subsidiary NND Royalties LP (NND LP) entered into an acquisition agreement dated Nov. 1, 2019, with Nurse Next Door to acquire the trademarks and certain other intellectual property rights utilized by Nurse Next Door in its premium home care business for a purchase price of $52-million, excluding a retained interest to be provided to Nurse Next Door through the issuance of limited partnership units of NND LP. The cash purchase price of $52-million will be financed with $44.75-million of Diversified Royalty's cash on hand and approximately $7.25-million of senior debt to be provided by a Canadian chartered bank under a new credit facility having a maximum borrowing capacity of $14.5-million.
Immediately following the closing of the acquisition, Diversified Royalty will license the NND rights back to Nurse Next Door for 99 years, in exchange for an initial royalty payment of $4.8-million per annum. The royalty will grow contractually at a rate of 2 per cent per annum during the term of the licence. The pro forma trailing 12-month royalty coverage is estimated to be greater than 145 per cent.
The acquisition will increase Diversified Royalty's tax pools by $52-million. This depreciable tax basis adds to Diversified Royalty's already existing depreciable tax basis of approximately $185-million and can be depreciated over time to reduce Diversified Royalty's cash taxes.
Founded in 2001, Nurse Next Door operates 177 locations across Canada (65 locations), the United States (109 locations) and Australia (3 locations) generating annual system sales of over $100-million. Nurse Next Door operates two Canadian locations as corporate stores and the remaining 175 locations are franchise operations. Future growth is currently expected to result both from existing operating locations as well as opening additional franchises. Nurse Next Door believes everyone should be able to live at home and provides compassionate service from licensed non-medical caregivers as well as registered nurses to achieve this objective. Nurse Next Door offers services ranging from companionship, meal preparation and homemaking to home nursing care as well as around-the-clock care and end-of-life care. Nurse Next Door's customer satisfaction levels are reflected in its high net promoter score of 65. Favourable North American demographics are expected to drive the need for premium home care services going forward.
Sean Morrison, president and chief executive officer of Diversified Royalty, stated: "The Nurse Next Door transaction adds a fifth royalty stream to DIV's portfolio, representing approximately 13 per cent of DIV's pro forma adjusted royalty revenue and is another step in our strategy of purchasing royalties from a diverse group of proven multilocation businesses and franchisors. Nurse Next Door is one of the leading North American brands in the premium home-health-care market, with an 18-year operating history, proven franchisee economics, strong and growing cash flows, a centralized technology-enabled services platform and call centre, and an experienced leadership team. DIV believes the Nurse Next Door royalty is of superior quality given the competitive strength of the underlying business, strong secular industry trends and demographics, the high royalty coverage, and the fixed 2-per-cent growth rate."
Mr. Morrison continued: "The Nurse Next Door transaction is accretive, deploys the vast majority of DIV's remaining cash on hand and allows DIV to increase its annual dividend to 23 cents per share while reducing the pro forma payout ratio to just under 100 per cent. This transaction, along with DIV's recent Mr. Mikes royalty acquisition, exemplify DIV's business plan -- to acquire high-quality trademarks and royalty streams on an accretive basis, resulting in greater royalty portfolio diversification and dividend increases."
Ken Sim, co-founder of Nurse Next Door, stated: "We are pleased to be able to have reached this agreement with DIV. I remain as committed and invested in the long term of Nurse Next Door as ever. The proceeds of the royalty transaction will enable Nurse Next Door to accomplish a number of strategic objectives, including consolidating ownership within our existing shareholder group, while retaining significant operational and financial flexibility. We will continue to invest in our systems to accelerate franchise partner growth and deliver our unique concept of happier aging to more seniors around the world."
Lawrence Haber, chair of the board of Diversified Royalty, stated: "The Nurse Next Door transaction is an excellent use of DIV's remaining cash on hand and is a testament to the patient and disciplined manner in which DIV's management team continues to approach trademark and royalty acquisitions. Combined with Mr. Lube, Air Miles, Sutton Group Realty and Mr. Mikes, Nurse Next Door proves that DIV is able to execute on its strategy to acquire trademarks and royalties from a diverse group of high-quality businesses and brands."
Further details of the acquisition and royalty
The acquisition will be completed by Diversified Royalty through its newly formed wholly owned subsidiary, NND LP. The cash purchase price of $52-million will be financed with $44.75-million of Diversified Royalty's cash on hand and approximately $7.25-million from the NND credit facility. In addition to the cash portion of the purchase price, NND LP will issue the exchangeable units to Nurse Next Door as a retained interest having an agreed value of $23-million. The exchangeable units will be indirectly exchangeable for common shares of Diversified Royalty (or cash, at Diversified Royalty's election) subject to certain conditions being met.
Under the terms of the licence and royalty agreement that will be entered into upon closing of the transaction, and which will govern the royalty, Nurse Next Door will pay NND LP a gross royalty equal to the greater of (i) 6 per cent of the gross sales from Nurse Next Door's franchises and corporate stores in Canada and the U.S., and (ii) the royalty of $4.8-million per year, which increases at a fixed rate of 2 per cent per annum. To the extent the gross royalty is greater than the contractual royalty, Nurse Next Door will be entitled to receive the excess amount in the form of a cash distribution paid by NND LP on the exchangeable units held by Nurse Next Door. So long as certain royalty coverage tests are met, Nurse Next Door will be able to sell additional annual royalties to Diversified Royalty commencing on Feb. 1, 2021. In consideration for the incremental royalty, Nurse Next Door will be entitled, subject to Toronto Stock Exchange approval, to indirectly exchange certain of the exchangeable units for common shares of Diversified Royalty (or cash, at Diversified Royalty's election) based on a formula that is accretive to Diversified Royalty shareholders.
In addition to the royalty payable to NND LP, Nurse Next Door will pay Diversified Royalty a management fee of approximately $75,000 per year for strategic advice and other services. The management fee will be increased at a rate of 2 per cent per annum over the term of the licence and royalty agreement.
Under the terms of a governance agreement to be entered into by Diversified Royalty and certain of its affiliates and Nurse Next Door and certain of its affiliates on closing, Nurse Next Door will have the right at any time after the seventh anniversary of the closing of the transaction to buy back the NND rights at a price determined in accordance with a formula, which has been structured with the intention of ensuring a strong positive return to Diversified Royalty upon any exercise of such right.
The transaction is expected to close in November, 2019, and is subject to customary closing conditions.
The foregoing is a summary of certain key commercial terms of the acquisition agreement, the licence and royalty agreement, the governance agreement, and certain related agreements to be entered into in connection therewith. These summaries do not purport to be complete and are subject to, and qualified in their entirety by reference to, the full terms of the transaction agreements, copies of which will be filed under Diversified Royalty's profile on SEDAR and will be available on SEDAR in due course.
NND credit facility
Diversified Royalty, through its newly formed wholly-owned subsidiary, NND Holdings LP (Holdings LP), has entered into a term sheet with a Canadian chartered bank for the NND credit facility, which provides for borrowing capacity of up to $14.5-million, of which approximately $7.25-million will be drawn at closing of the transaction. The NND credit facility is expected to have a term of five years, be non-amortizing and have a floating interest rate equal to the bankers' acceptance rate plus 1.9 per cent. Holdings LP intends to enter into an interest-rate swap arrangement for the initial drawn portion of the NND credit facility. The NND credit facility will be secured against Holdings LP's assets including by a pledge of Holding LP's interest in NND LP and will have covenants customary for this type of a credit facility. The NND credit facility will also be guaranteed by NND LP and secured by NND LP's interest in the NND rights and the royalty. The NND credit facility will also be secured by Diversified Royalty on a limited recourse basis through the pledge by Diversified Royalty of its interest in Holdings LP. The NND credit facility remains subject to the finalization of definitive legal documents and customary closing conditions including the completion of the transaction.
Dividend increase
Subject to the completion of the acquisition, Diversified Royalty's board of directors has approved an increase in Diversified Royalty's annual dividend from 22.25 cents per share to 23 cents per share. The dividend increase will take effect beginning in the month following the completion of the acquisition. Diversified Royalty estimates its pro forma payout ratio will be just under 100 per cent following the dividend increase.
Acquisition facility
Diversified Royalty has entered into a term sheet with a Canadian chartered bank to provide a $50-million undrawn senior secured credit facility to finance future trademark and royalty acquisitions by Diversified Royalty. The acquisition facility is expected to have a term of three years and each draw will be interest-only for the first six months and then amortize over 60 months. The acquisition facility will be subject to a customary annual standby fee and draws under the acquisition facility are expected to bear interest at market rates.
Mr. Morrison, president and CEO of Diversified Royalty, stated: "The acquisition facility and the ability to increase the NND credit facility by approximately $7.25-million gives DIV approximately $57.25-million of capital available to fund future royalty acquisitions. In addition, we expect that DIV will be able to obtain additional term debt in connection with any future royalty acquisition on a basis consistent with past transactions, which will further expand DIV's acquisition capacity. The acquisition facility is a significant enhancement to DIV's capital structure as it provides the certainty of acquisition financing to potential royalty partners without the cost associated with carrying cash on DIV's balance sheet. The acquisition facility strengthens DIV's competitive position as it continues to actively pursue additional royalty transaction opportunities."
The acquisition facility remains subject to the finalization of definitive legal documents and customary closing conditions.