Diversified Royalty loses $11.7-million in Q1 Highlights
Revenues of $7.3 million and adjusted revenues of $8.5 million for Q1 2020.
Acquired the trademarks and certain other intellectual property rights (collectively, the "Oxford Rights") related to franchised supplemental education business of Oxford Learning Centres, Inc. ("Oxford") on February 20, 2020.
Completed bought-deal public offering of 10,810,000 common shares at $3.20 per share on March 5, 2020 for gross proceeds of $34.6 million.
First Quarter Results
In Q1 2020, DIV generated $7.3 million of revenue compared to $6.4 million in the three months ended March 31, 2019 ("Q1 2019"). The increase in revenue between periods was primarily driven by the acquisition of the trademarks and certain other intellectual property rights (collectively, the "MRM Rights") used in the business of Mr. Mikes Restaurants Corporation ("Mr. Mikes") in May 2019, the acquisition of the Oxford Rights in February 2020, and the increase in royalty income from the AIR MILEStrademark licenses. These items were partially offset by the impact of the COVID-19 pandemic and related government restrictions, which included negative same-store-sales-growth ("SSSG") at Mr. Lube Canada Limited Partnership ("Mr. Lube") as well as royalty and management fee waivers for Sutton Group Realty Services Ltd. ("Sutton") and Mr. Mikes for certain portions of Q1 2020.
After taking into account the DIV Royalty Entitlement (defined below) of $1.2 million related to DIV's royalty arrangements with Nurse Next Door Homecare Professional Services Inc. ("Nurse Next Door"), DIV's adjusted revenue (defined below) was $8.5 million for Q1 2020.
Royalty Partner Business Updates
Mr. Lube: SSSG for the Mr. Lube stores in the royalty pool was -7.2% in Q1 2020, and was negatively 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. SSSG for the 133 Mr. Lube flagship locations (122 of which are in the Mr. Lube royalty pool) was -26% in April 2020 year-over-year and has begun to trend positively in recent weeks.
AIR MILES trademark : According to Alliance Data Systems Inc.'s ("ADS") news release dated April 23, 2020, the number of AIR MILEStrademark reward miles issued increased by 4.6% in Q1 2020 due to increased sponsor promotions early in Q1 2020 and that the number of AIR MILEStrademark reward miles redeemed decreased by 8.7% in Q1 2020 reflecting the impact of COVID-19 on travel related redemptions in March. The AIR MILES payment received in Q1 2020 was 7.9% higher than Q1 2019.
Nurse Next Door: Nurse Next Door's home health care services were considered an essential service across all its markets where such determinations were made by government authorities and all of Nurse Next Door's franchisees were open for business. Nurse Next Door management has noted that certain clients are requesting to hold or cancel services as a result of COVID-19. However, they are also seeing increases in demand in other areas such as government contracts or facilities. In addition, its first quarter year-over-year new franchise sales were lower, as anticipated.
Sutton: As disclosed in DIV's news release dated April 23, 2020, DIV has waived 50% of Sutton's March 2020 royalty and management fees (that were payable in April 2020) and 75% of Sutton's April and May royalty and management fee obligations (that are payable in May and June 2020, respectively) in connection with the impact on Sutton's business of the dramatic slow-down of residential real estate activity due to COVID-19. Sutton has likewise provided its franchisees with a similar waiver over three months to help them manage through this difficult period. In April 2020, Sutton's business was negatively impacted by the decline in sales volumes. According to the Real Estate Board of Greater Vancouver and the Toronto Regional Real Estate Board, sales volumes were down 39% and 67%, respectively, in Vancouver and Toronto in the month of April. DIV will continue to assess the impact of COVID-19 on Sutton's business and liquidity to determine if any further royalty relief is necessary.
Oxford: SSSG for Oxford locations in the royalty pool on a constant currency basis was -2.4% for the period from February 20, 2020 to March 31, 2020 (after the impact of foreign currency translation, SSSG was -2.2%). Although Oxford has suspended in-person tutoring services for all its locations due to COVID-19, Oxford management has pivoted its business over the last two weeks of March to provide online tutoring with over 95% of its locations able to provide this service. With the quick pivot to online tutoring in its early stages of implementation, Oxford reported materially weaker system sales in April 2020 compared to April 2019 with SSSG for Oxford locations in the royalty pool on a constant currency basis of -47% (after the impact of foreign currency translation, SSSG was -46%).
Mr. Mikes: With all Mr. Mikes restaurants temporarily closed for in-restaurant dining and only a few locations providing take-out, Mr. Mikes is generating minimal revenue and advised DIV that Mr. Mikes will 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. As a result, DIV waived the Mr. Mikes royalty and management fees for such period, and has waived the fixed royalty and management fee payment for the March 23, 2020 to April 19, 2020 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. It is anticipated that Mr. Mikes will require additional royalty relief for an extended period of time.
First Quarter Commentary
Sean Morrison, President and Chief Executive Officer of DIV stated, "DIV had a strong start to 2020 with the acquisition of the Oxford Rights in February and the completion of a bought deal public offering in early March. However, in mid-March, governments in North America began enacting emergency measures to combat the spread of COVID-19, which triggered significant disruptions to businesses. While our royalty partners have had, and are generally expecting to have significant business interruption in the months ahead, the full extent of such disruptions going forward or the timeline for returning to normal operations cannot be predicted at this time. With a strong balance sheet in place, we are focused on navigating this challenging period to preserve shareholder value and best position the Corporation and its royalty partners for success in the long term."
Distributable Cash and Dividends Declared
In Q1 2020, distributable cash was $5.5 million ($0.0486 per share), an increase of $0.7 million ($0.004 per share) compared to Q1 2019. The increase was primarily due to the increase in adjusted revenues on account of the reasons discussed above, partially offset by the impacts of COVID-19 on the performance of DIV's royalty partners, higher current tax expense, lower interest income and higher interest expense.
In Q1 2020, dividends declared exceeded distributable cash by $1.1 million, and the Corporation's payout ratio was 119.2%. 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. On a cash basis, the payout ratio was 101.5% in Q1 2020. The shortfall in distributable cash was funded by $3.8 million GST refund related to the acquisition of the Nurse Next Door trademarks.
As announced on March 31, 2020, given the economic uncertainty facing DIV and its royalty partners as a result of the COVID-19 pandemic, the Board of Directors of the Corporation approved changing the monthly dividend from $0.01958 per share per month ($0.2350 per share on an annualized basis) to $0.01667 per share per month ($0.20 per share on an annualized basis) effective with the dividend declared in the month of April 2020. The Board of Directors believes the reduction of the monthly dividend is a prudent measure to preserve capital and maintain liquidity in the current market environment. In addition, starting with the April 2020 monthly dividend, the Board approved the temporary suspension of the dividend reinvestment plan ("DRIP") until further notice as the Board does not believe it is in the best interests of the Company or its shareholders to issue shares at current prices.
Net Loss
Net loss for Q1 2020 was $11.7 million, compared to net income of $2.5 million in Q1 2019. The net loss in Q1 2020 was primarily due to a non-cash impairment related to the MRM Rights. In connection with the COVID-19 pandemic, Mr. Mikes is generating minimal revenue and has advised DIV that they will likely be unable to pay its fixed royalty payments to DIV. In light of these developments, the Corporation recorded a non-cash impairment of $19.8 million ($14.5 million net of tax) related to the Mr. Mikes trademarks, which is discussed in more detail in the notes to the Corporation's consolidated financial statements for Q1 2020. The net loss in Q1 2020 was also due to the fair value adjustment on financial instruments, higher interest expense, which were slightly offset by an increase in other finance income and a tax recovery.