Diversified Royalty Corp. is providing an update on the businesses of its royalty partners.
Mr. Lube Canada Limited Partnership’s (“Mr. Lube”) business has continued to stabilize since provinces started easing the restrictions put in place to fight the COVID-19 pandemic and Canadians began driving more. Mr. Lube has been proactive in enacting measures to support franchisee cash flow, including negotiating rent deferrals and concessions, suspending marketing contributions, arranging for improved payment terms with suppliers and promoting government sponsored initiatives. Further, all Mr. Lube locations have resumed normal operating hours, and Mr. Lube has advised DIV that marketing activities are ramping up. Mr. Lube generated same-store-sales-growth (“SSSG”) for the Mr. Lube stores in the royalty pool of 1.1% in July 2020 and -0.5% in August 2020, compared to SSSG of -12.5% for the three months ended June 30, 2020 (“Q2 2020”). Mr. Lube has paid all royalties and management fees due and owing to DIV to date.
The AIR MILES® Reward Program is operated by Loyalty One, Inc., a subsidiary of Alliance Data Systems Inc. (“ADS”). LoyaltyOne has an exclusive right to use the AIR MILES® Rights for purposes of operating the AIR MILES® Reward Program in Canada for an indefinite term in exchange for a royalty payment to DIV equal to 1% of “gross billings” from the AIR MILES® Reward Program. Gross billings for the AIR MILES® Reward Program is derived from several AIR MILES® metrics, primarily from the issuance of AIR MILES® as well as redemption of AIR MILES®, service revenue, commissions and promotional items. According to ADS, LoyaltyOne is supporting collectors and sponsors by pivoting the reward portfolio to reflect more non-travel options. ADS has also noted that the AIR MILES® 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. We expect AIR MILES® issued to generally track total Canadian consumer spending during COVID-19 and return to normal levels thereafter. Royalty income from the AIR MILES® Reward Program is collected on a quarterly basis, accordingly no information is currently available in respect of the Q3 2020 performance of this royalty. LoyaltyOne has paid all royalties due and owing to DIV to date.
Nurse Next Door
The COVID-19 pandemic has highlighted preferences by certain seniors to remain in their homes for as long as possible, compared to long-term care facilities. In recent months, Nurse Next Door Professional Homecare Services Inc. (“Nurse Next Door”) has received a high level of interest from existing franchisees about adding to their current territories and from potential franchisees enquiring about franchise opportunities. In addition, Nurse Next Door is in the process of re-selling the territories previously held by franchise partners that issued notices of their purported termination of their respective franchise agreements. These territories are also being sub-divided to optimize the market penetration of the Nurse Next Door brand. The initial franchise fees generated from the sale of these territories, along with the incremental franchise revenues from these new operations are expected to enhance Nurse Next Door’s profitability and provide improved royalty coverage. Additionally, Nurse Next Door is pursuing legal remedies from all franchisees who have wrongfully exited the system.
The 12-month restricted period subsequent to the termination of the St. Joseph Health Personal Care Services, LLC (“St. Joseph”) master license agreement will end in August 2021. Nurse Next Door expects to focus its business development efforts in California, a region that was largely covered by the St. Joseph master licence agreement. The California region is an attractive market where Nurse Next Door intends to sell approximately 50 new territories following the expiry of the 12-month restricted period.
Nurse Next Door has a strong balance sheet, has received the USD$1.1 million payment from St. Joseph, and has continued to make its fixed royalty payment to DIV in full, which DIV expects will continue.
Two of Sutton’s primary markets are Vancouver and Toronto, both of which are currently experiencing strong recoveries following a period of low transactional activity in April and May 2020. According to the Real Estate Board of Greater Vancouver, July 2020 and August 2020 home sales activity in Metro Vancouver significantly outpaced historical averages for those months. These results reflect pent up activity from both home buyers and sellers. July 2020 and August 2020 sales volumes in Metro Vancouver were up 22% and 37% over 2019 levels, respectively (compared to -39% in April, -44% in May and +18% in June).
According to the Toronto Regional Real Estate Board (“TRREB”), July 2020 and August 2020 home sales activity hit a new record for the months of July and August, respectively. The TRREB also noted that the increase in demand is attributable to improving economic conditions and the continuation of low borrowing costs. July 2020 and August 2020 sales volumes in the Greater Toronto Area were up 30% and 40% over 2019 levels, respectively (compared to -67% in April, -54% in May and -1% in June).
Since June 2020, DIV has been collecting 100% of the fixed royalty and management fee payments from Sutton Group Realty Services Ltd. (“Sutton”), which fixed royalty increases at a rate of 2% per year, with the most recent increase effective July 1, 2020.
Oxford Learning Centres
Locations in the Oxford Learning Centres, Inc. (“Oxford”) royalty pool generated SSSG (on a constant currency basis) of -24% in July 2020 and -23% in August 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. In addition, in early July, in accordance with regional guidelines, certain Oxford locations started transitioning back to in-centre services at a reduced capacity (90% of 154 locations have now re-opened). Oxford has paid all royalties and management fees due and owing to DIV to date.
Currently, 43 of 45 Mr. Mikes Restaurants Corporation (“Mr. Mikes”) restaurants are open for in-restaurant or patio dining. Overall SSSG for Mr. Mikes restaurants in the royalty pool, including stores that were temporarily closed due to the COVID-19 pandemic, was approximately -18% in July and -14% in August.
Notwithstanding the partial re-opening of such Mr. Mikes restaurants, Mr. Mikes expects a slow recovery as we move into fall, including the potential effects of cooler weather, decreased patio utilization and further government restrictions on operations. DIV has waived 100% of Mr. Mikes’ fixed royalty and management fee payments from February 24, 2020 to July 12, 2020. For the period from July 13, 2020 to August 9, 2020, DIV received a payment from Mr. Mikes of $0.15 million, which represents 50% of Mr. Mikes’ fixed royalty payment for the period. DIV expects continued royalty relief will be required by Mr. Mikes going forward.
Sean Morrison, President and Chief Executive Officer of DIV stated, “Many of our royalty partners are currently experiencing encouraging trends in their business. We continue to have discussions with our royalty partners to assist them during this challenging economic period. Based on current trends and expectations, we estimate the run-rate payout ratio on DIV’s $0.20 per share annual dividend to be approximately 101%. DIV remains focused on preserving and enhancing shareholder value and the long-term success of 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 Q3 2020 financial results could differ materially from the above preliminary financial information.
About Diversified Royalty Corp.
DIV is a multi-royalty corporation, engaged in the business of acquiring top-line royalties from well-managed multi-location businesses and franchisors in North America. DIV’s objective is to acquire predictable, growing royalty streams from a diverse group of multi-location businesses and franchisors.
DIV currently owns the Mr. Lube, AIR MILES®, Sutton, Mr. Mikes, Nurse Next Door and Oxford Learning Centres trademarks. Mr. Lube is the leading quick lube service business in Canada, with locations across Canada. AIR MILES® is Canada’s largest coalition loyalty program with approximately two-thirds of Canadian households actively participating in the AIR MILES® Program. Sutton is among the leading residential real estate brokerage franchisor businesses in Canada. Mr. Mikes currently operates casual steakhouse restaurants primarily in western Canadian communities. Nurse Next Door is one of North America’s fastest growing home care providers with locations across Canada and the United States as well as in Australia. Oxford Learning Centres is one of Canada’s leading franchised supplemental education services in Canada and the United States.
DIV intends to increase cash flow per share by making accretive royalty purchases and through the growth of purchased royalties. DIV expects to pay a predictable and stable dividend to shareholders and increase the dividend as cash flow per share increases allow.
Sean Morrison, President and Chief Executive Officer
Diversified Royalty Corp.
Greg Gutmanis, Chief Financial Officer and VP Acquisitions
Diversified Royalty Corp.