TRADING SYMBOL:  TSX: AW.UN   

VANCOUVER, BC, July 28, 2021 /CNW/ -

  • Same Store Sales Growth(1) was 33.5% for Q2 2021 as compared to Q2 2020 when the impact of COVID-19 on A&W restaurants was at its peak.
  • Same Store Sales Growth(1) for the year to date period ended June 20, 2021 was 12.2%.
  • The monthly distribution rate will be increased from 13.5¢ per Unit to 15.0¢ per Unit beginning with the July 2021 distribution that is payable August 31, 2021.

SECOND QUARTER 2021 RESULTS

A&W Revenue Royalties Income Fund (the "Fund") and A&W Food Services of Canada Inc. ("A&W Food Services") today reported results for the second quarter and year to date period ended July 20, 2021.  The Fund will hold a conference call to discuss the results on Wednesday, July 28, 2021 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time).  The call can be accessed by dialling toll-free 1-800-367-2403 or (647) 490-5367 Passcode 6533796#.  A replay will be available until August 4, 2021 by dialling toll-free 1-888-203-1112 or (647) 436-0148 Passcode 6533796#.

Same Store Sales(i) for the second quarter of 2021 increased by 33.5% as compared to the same quarter of 2020. Same Store Sales(i) for the 24-week period ended June 20, 2021 increased by 12.2% as compared to the comparable period in 2020.  When comparing the results of the second quarter of 2021 to the second quarter of 2020 it is important to note that COVID-19 had the most pronounced impact on A&W restaurants to date in the second quarter of 2020.  During the second quarter of 2020 the number of A&W's restaurants that were temporarily closed due to restrictions or other COVID-19 related reasons peaked at 230 and the A&W restaurants that remained open were restricted to drive thru operations, delivery and take-out for most of the quarter.  The Same Store Sales Growth(i) of 33.5% for the second quarter of 2021 is a reflection of Canada being on the road to recovery from COVID-19, which has led to increased guest counts and a reduction in the number of A&W restaurants that are temporarily closed, as compared to the second quarter of 2020. Since the second quarter of 2020, when COVID-19 impacts on A&W were at their peak, Same Store Sales Growth(i) has trended upwards. 

Actions required in response to COVID-19 continue to adversely impact A&W restaurant operations across Canada, particularly for those restaurants located on urban street fronts and in shopping centres. Throughout the year to date period ended June 20, 2021, there continued to be a number of A&W restaurants that were either temporarily closed or were not able to offer dine-in services due to government imposed COVID-19 restrictions. As at July 27, 2021, eight restaurants remained temporarily closed. These temporarily closed A&W restaurants are expected to reopen when permitted to do so, however, there continues to be uncertainty related to COVID-19 and its impact on our business.  It is possible that the number of restaurants temporarily closed increases again as the situation evolves in the next year.

As a result of the performance by restaurants in the Royalty Pool, the monthly distribution to unitholders will increase from 13.5 cents per Unit to 15.0 cents per Unit, beginning with the July distribution which is payable on August 31, 2021. The new distribution rate translates into an annualized distribution rate of $1.80 per Unit, an increase of 11.1% from the prior level of $1.62 per Unit.

"Although we continue to feel the impacts of COVID-19 on our business, with the declining case numbers and easing of restrictions across Canada we are confident that through the efforts of our franchisees A&W is on the road to recovery", said Susan Senecal, President and CEO of A&W Food Services. "We are pleased that the strong performance of the restaurants in the royalty pool has allowed the Fund to increase distributions to the unitholders."

FINANCIAL RESULTS

(dollars in thousands except per unit amounts)

Period from
Mar 29, 2021 to
Jun 20, 2021

Period from
Mar 23, 2020 to
Jun 14, 2020

Period from
Jan 1, 2021 to
Jun 20, 2021

Period from
Jan 1, 2020 to 
Jun 14, 2020

Same Store Sales Growth(i)

33.5%

-31.6%

12.2%

-18.7%

Number of restaurants in the Royalty Pool

994

971

994

971

Gross sales reported by A&W restaurants in the Royalty Pool(ii)

$350,641

$253,173

$661,367

$561,852

Royalty income

$10,519

$7,596

$19,841

$16,856

General and administrative expenses

96

214

302

407

Term loan and other interest (net)

611

543

1,217

1,052

Current income tax provision

1,893

1,967

3,925

2,997

Total distributable cash generated for distributions and dividends(iii)

$7,919

$4,872

$14,397

$12,400

Distributable cash per equivalent unit (2021 – 19,132,830 units; 2020 – 18,556,378 units)(iii)(iv) 

$0.414

$0.262

$0.752

$0.668

Distributions and dividends declared per equivalent unit

$0.405

-

$0.640

$0.318

Net income(v)

$8,095

$4,240

$14,834

$9,788

Net income excluding non-cash items(v)

$7,865

$3,727

$13,989

$11,432



Notes:

(i)

"Same Store Sales" and "Same Store Sales Growth" are calculated as the change in the gross sales reported by A&W restaurants in the Royalty Pool (as defined below) that operated, or were temporarily closed at any point due to COVID-19, during the entire 12-week and 24-week periods ending June 20, 2021 and June 14, 2020 and is based on an equal number of days in each quarter. "Same Store Sales" and "Same Store Sales Growth" are non-IFRS measures – see "Non-IFRS Measures". This important information is provided as it is a key driver of growth in the Fund.  See "Sales Performance".

(ii)

"Gross sales reported by A&W restaurants in the Royalty Pool" is calculated in respect of A&W restaurants in Canada in the Royalty Pool (as defined below), as the amount of gross sales reported to Food Services by franchisees of such A&W restaurants in the Royalty Pool without audit, verification or other form of independent assurance and the gross sales of A&W restaurants owned and operated by Food Services in the Royalty Pool, in each case, after deducting amounts for discounts for coupons and other promotional offerings and applicable sales taxes.

(iii)

"Distributable cash", "distributable cash per equivalent unit", "total distributions and dividends declared and accrued per equivalent unit" and "payout ratio" are non-IFRS measures.  See "Non-IFRS Measures". This information is provided as it identifies the amount of actual cash generated to pay distributions to unitholders and dividends to Food Services.  See "Distributable Cash" and footnote (iv) below for more information, including a description of how these non-IFRS measures are calculated.

(iv)   

Equivalent units includes units of the Fund ("Units") and limited voting units of the Fund ("Limited Voting Units" and together with the Units, the "Trust Units") and common shares of A&W Trade Marks Inc. ("Trade Marks") that are exchangeable for Trust Units. The number of equivalent units and distributable cash per equivalent unit in 2021 is calculated on a fully-diluted basis and includes the 116,329 LP units (as hereinafter defined) exchangeable for 232,658 common shares of Trade Marks representing the remaining 20% of the initial consideration for the January 5, 2021 adjustment to the Royalty Pool, which LP units are held back until the number of LP units is determined in December 2021 based on the actual annual sales reported by the new restaurants. See "Adjustment to the Royalty Pool". The number of equivalent units and distributable cash per equivalent unit in Q2 2020 is calculated on a fully-diluted basis and includes 152,965 LP units, exchangeable for 305,930 common shares of Trade Marks representing the remaining 20% of the initial consideration for the January 5, 2020 adjustment to the Royalty Pool but does not include the adjustment to reduce the final consideration by 5,193 LP units, equivalent to 10,386 common shares of Trade Marks, made in December 2020 based on the actual system sales for the A&W Restaurants added to the Royalty Pool as part of the January 5, 2020 adjustment to the Royalty Pool.

(v)

Net income in 2021 and 2020 includes unrealized gains and losses on an interest rate swap, amortization of deferred financing fees and deferred income taxes.  These non-cash items have no impact on the Fund's ability to pay distributions to unitholders.  The Fund's net income excluding these non-cash items is presented for information purposes only.  "Net income excluding non-cash items" is a non-IFRS measure – see "Non-IFRS Measures".

Royalty income for the second quarter of 2021 was $10,519,000 based on gross sales reported by restaurants in the Royalty Pool(ii) of $350,641,000, compared to royalty income of $7,596,000 and gross sales reported by A&W restaurants in the Royalty Pool(ii) of $253,173,000 for the second quarter of 2020. Year to date royalty income for 2021 was $19,841,000 based on gross sales reported by restaurants in the Royalty Pool(ii) of $661,367,000, compared to royalty income of $16,856,000 and gross sales reported by A&W restaurants in the Royalty Pool(ii) of $561,852,000 for the comparable period in 2020.  The increase in royalty income and gross sales for the quarter and year to date is driven by the increase in Same Store Sales(i) and the additional net 23 new restaurants added to the Royalty Pool on January 5, 2021.  The five additional days in the year to date period for fiscal 2021, as compared to the year to date period for fiscal 2020, also contributed to the year to date increase in royalty income.

General and administrative expenses for the second quarter of 2021 decreased by $118,000 to $96,000 from $214,000 for the second quarter of 2020.  Year to date general and administrative expenses were $302,000 compared to $407,000 for the comparable period in 2020. The decrease in general and administrative expenses in 2021 is primarily attributable to additional costs incurred in 2020 for special meetings and advisory services related to COVID-19 that were non-recurring in 2021.

Term loan and other interest (net) was $611,000 for the second quarter of 2021, $68,000 higher compared to the second quarter of 2020.  The increase was due to a higher effective interest rate on the term loan.  An interest rate swap agreement is used to manage risks from fluctuations in interest rates and facilitate uniform monthly distributions when paid. 

Current income taxes payable decreased by $74,000 for the quarter and increased by $928,000 year to date. Total income tax including current tax, non-cash deferred income tax and refundable income tax decreased by $401,000 for the quarter and increased by $561,000 year to date. The decrease in total income tax for the quarter is largely due to a decrease in refundable income tax as a result of the Fund not paying distributions in the second quarter of 2020.  The year to date increase in total income tax is largely due to a $5,607,000 increase in net income before taxes. The increase in net income before taxes is driven by an increase in royalty income and a $2,681,000 year-over-year positive variance in the fair value adjustment on the interest rate swap.

The Fund's net income under International Financial Reporting Standards (IFRS) includes non-cash items, such as the fair value adjustment of the interest rate swap, that have no impact on the Fund's ability to pay distributions to unitholders. Therefore, net income is not the only or most meaningful measure of the Fund's ability to pay distributions and consequently, non-IFRS measures of "distributable cash", "distributable cash per equivalent unit", "total distributions and dividends declared and accrued per equivalent unit" and "payout ratio" are reported to provide investors with more meaningful information. The payout ratio is calculated by dividing total distributions and dividends declared and accrued per equivalent unit, by the distributable cash per equivalent unit generated in that period. 

The Fund's net income for the second quarter of 2021 was $8,095,000 compared to $4,240,000 for the second quarter of 2020. Year to date 2021 net income was $14,834,000 compared to $9,788,000 for the comparable period in 2020. The $5,046,000 year to date increase in net income was a result of the $2,985,000 increase in royalty income, the $2,681,000 positive variance on the unrealized gain (loss) on the interest rate swap and the $105,000 decrease in general and administrative expenses, less the $561,000 increase in total income tax expense and the $164,000 increase in net interest expense.

Distributable cash per equivalent unit increased by 15.2 cents to 41.4 cents per Unit in the second quarter of 2021 from 26.2 cents per Unit for the second quarter of 2020. Year to date distributable cash per equivalent unit increased by 8.4 cents to 75.2 cents per Unit for 2021 from 66.8 cents per Unit for the comparable period in 2020. The increase in distributable cash per equivalent unit is a result of the increase in distributable cash discussed above, partially offset by the increase in the number of equivalent units.

Three monthly distributions totaling 40.5 cents per Unit were declared in the second quarter of 2021. No monthly distributions were declared in the second quarter of 2020 as the Trustees of the Fund (the "Trustees") had temporarily suspended monthly distributions on the Units commencing with the March 2020 distribution that would ordinarily have been declared in April 2020. Five monthly distributions totaling 64.0 cents per Units were declared in the 2021 year to date period compared to two monthly distributions totaling 31.8 cents per Unit for the comparable period in 2020. Total distributions declared and accrued per equivalent unit year to date were 74.3 cents for 2021 compared to 46.2 cents for the comparable period in 2020.

The current monthly distribution rate of 13.5 cents per Unit translates to an annualized distribution of $1.62 per Unit. Due to the performance by restaurants in the Royalty Pool, the monthly distribution to unitholders will increase from 13.5 cents per Unit to 15.0 cents per Unit beginning with the July distribution which is payable on August 31, 2021. The new distribution rate translates into an annualized distribution rate of $1.80 per Unit, an increase of 11.1% from the prior level of $1.62 per Unit.

The payout ratio for the second quarter of 2021 was 88.2% compared to nil for the same quarter of 2020 as no distributions were paid due to a COVID-19 related temporary suspension of distributions in the second quarter of 2020.  The year to date payout ratio for 2021 was 98.8% compared to 69.2% for the comparable period in 2020. The cumulative surplus of distributable cash on reserve at the end of the second quarter of 2021 was $8,748,000, compared to a cumulative surplus of distributable cash on reserve of $8,967,000 at the beginning of the year, a decrease of $219,000

CREDIT FACILITY RENEWAL

Subsequent to quarter end, on July 27, 2021, Trade Marks received approval from its Board of Directors and has reached an agreement with its existing lender (the "Bank") to renew its $60,000,000 term loan, $2,000,000 demand operating loan and interest rate swap (collectively the "Credit Facility"), all of which mature on December 22, 2022. Trade Marks proposes to extend the Credit Facility for an additional five years on terms and conditions consistent with those of the existing Credit Facility. Management is undertaking this early renewal of the Credit Facility to ensure stability in the interest rate and to ensure stability in the associated interest expense impact on distributable cash over the renewed five year term.

Similar to the existing term loan, the interest rate on the renewed term loan is expected to be comprised of a fixed swap rate and a stamping fee that ranges from 0.90% to 1.40% depending on Trade Mark's debt to EBITDA ratio.

It is anticipated that the existing general security agreement over the assets of Trade Marks will remain as collateral for the Credit Facility. Consistent with the current Credit Facility, the renewed Credit Facility is expected to contain a number of covenants including the requirement for Trade Marks to meet certain EBITDA levels and debt to EBITDA ratios during each trailing four quarter period. Similar to the existing term loan, it is proposed that interest will only be payable monthly, provided that Trade Marks' EBITDA tested quarterly on a trailing four quarter basis is not less than specified amounts.  In the event that EBITDA is less than these specified amounts, the term loan is expected to be fully amortized over the greater of three years and the remaining term and repayment will be by way of blended monthly instalments of principal and interest.  A&W Trade Marks Limited Partnership (the "Partnership") intends to provide its guarantee in favour of the Bank of all of the indebtedness, covenants and obligations of Trade Marks. The details of the Credit Facility are still to be settled by the parties and there can be no assurance that the parties will reach a definitive agreement.

ABOUT THE FUND

The Fund is a limited purpose trust established to invest in Trade Marks, which through its interest in the Partnership, owns the A&W trade-marks used in the A&W quick service restaurant business in Canada.  The A&W trade-marks comprise some of the best-known brand names in the Canadian foodservice industry.  In return for licensing A&W Food Services to use its trade-marks, Trade Marks (through the Partnership) is entitled to royalties equal to 3% of the gross sales reported by A&W restaurants in the Royalty Pool(ii)

The Royalty Pool is adjusted annually to reflect gross sales from new A&W restaurants, net of the gross sales of any A&W restaurants that have permanently closed.  Additional limited partnership units ("LP units") are issued to A&W Food Services to reflect the annual adjustment.  A&W Food Services' additional LP units are exchanged for additional common shares of Trade Marks which are exchangeable for Trust Units.  The 19th annual adjustment to the Royalty Pool took place on January 5, 2021 at which time the number of restaurants in the Royalty Pool increased from 971 to 994.   

On April 16, 2021, A&W of Canada Inc. ("A&W Canada"), an indirect shareholder of Food Services, completed a reorganization to provide liquidity for some of its shareholders and to simplify the indirect ownership of Food Services (the "Reorganization").

As part of the Reorganization, and pursuant to the Declaration of Trust and the Amended and Restated Exchange Agreement, Food Services exchanged 1,042,000 common shares of Trade Marks for 521,000 Units, which Units were then purchased by shareholders of A&W Canada at a price of $36.42 per Unit.  The 521,000 Units sold are subject to a four-month statutory hold period under applicable securities laws.  After the exchange and sale of these Units, and as at June 20, 2021 and July 27, 2021, there were 14,585,673 Units outstanding.

The shareholders who purchased the 521,000 Units also entered into an agreement with three individuals (each a "Designated Representative"), which agreement provides that any two of the Designated Representatives are entitled to exercise the voting rights attached to the 521,000 Units while they remain held by those shareholders.  There is no agreement, arrangement, commitment or understanding among the Designated Representatives themselves or amongst the Designated Representatives and those shareholders as to how the voting rights attached to the 521,000 Units will be exercised in any particular circumstance.  The Designated Representatives, individually, therefore do not have control or direction over any of the 521,000 Units.

In addition, Food Services exchanged 3,014,040 of its common shares of Trade Marks for 1,507,020 Limited Voting Units of the Fund.  Limited Voting Units may be converted to Units and have equal rights and privileges to Units except that holders of the Limited Voting Units, together with the common shares of Trade Marks that are exchangeable for Trust Units, are not entitled in the aggregate to cast more than 40% of the votes cast upon a resolution with respect to the appointment or removal of Trustees of the Fund and are not entitled to cast votes upon a resolution to amend the Declaration of Trust.

Prior to the Reorganization, Food Services owned 26.0% of the common shares of Trade Marks which were exchangeable into 26.0% of the total outstanding voting securities of the Fund on a fully diluted basis.  Following the Reorganization, but excluding the issuance of the excess exchangeable LP units that represent the remaining 20% of the initial consideration for the January 5, 2021 Adjustment to the Royalty Pool that are payable in December 2021, Food Services owned 15.4% of the exchangeable common shares of Trade Marks and 9.4% of the Fund's Trust Units. Food Services' ownership of exchangeable common shares of Trade Marks and Trust Units equated to Food Services owning 23.3% of the total outstanding voting securities of the Fund on a fully diluted basis. 

Including the issuance of the excess exchangeable LP units that represent the remaining 20% of the initial consideration for the January 5, 2021 payable in December 2021, Food Services' ownership in the outstanding voting securities of the Fund is approximately 23.8% on a fully diluted basis (26.5% prior to the Reorganization).  Overall, the Reorganization was not dilutive to unitholders of the Fund because the calculation of the number of the fully diluted Trust Units did not change.  Post Reorganization, Food Services holds both Limited Voting Units in the Fund and exchangeable common shares of Trade Marks, whereas prior to the Reorganization, Food Services only held exchangeable common shares of Trade Marks.

The Fund did not receive any proceeds from the Reorganization and Food Services paid for the expenses of the Reorganization. The Reorganization does not constitute a change of control of Food Services, as the existing shareholders will continue to maintain majority control of Food Services.  There is no change in management or the operations of the Food Services' business in connection with the Reorganization.

Trade Marks' dividends to A&W Food Services and the Fund, and the Fund's distributions to unitholders are based on top-line revenues of the A&W restaurants in the Royalty Pool, less interest, general and administrative expenses and current income taxes of Trade Marks.

ABOUT A&W FOOD SERVICES
A&W is the second largest quick-service hamburger restaurant chain in Canada. Operating coast-to-coast, A&W restaurants feature famous trade-marked menu items such as The Burger Family®, Chubby Chicken® and A&W Root Beer®.

Follow A&W on Facebook (www.facebook.com/AWCanada) and Twitter @AWCanada or visit www.awincomefund.ca.

Non-IFRS Measures

The Fund believes that disclosing certain non-IFRS financial measures provides readers of this news release with important information regarding the Fund's financial performance and its ability to pay distributions to Unitholders. By considering these measures in combination with the most closely comparable IFRS measure, if any, the Fund believes that readers are provided with additional and more useful information about the Fund than readers would have if they simply considered IFRS measures alone.

The Fund uses "Same Store Sales Growth", "distributable cash", "distributable cash per equivalent unit", "total distributions and dividends declared and accrued per equivalent unit", "payout ratio" and "net income, excluding non-cash items" as non-IFRS measures in this news release. These measures do not have a standardized meaning prescribed by IFRS and the Fund's method of calculating these measures may differ from those of other issuers or companies and may not be comparable to similar measures used by other issuers or companies. For further details, including how such measures are calculated by the Fund see "Financial Results" above and for reconciliations of certain of these non-IFRS measures to the most closely comparable IFRS measure, see the Fund's MD&A for the second quarter ended July 20, 2021, which will be filed on SEDAR at www.sedar.com in due course. 

Forward-Looking Information

Certain statements in this press release may contain forward-looking information within the meaning of applicable securities laws in Canada (forward-looking information). The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words.  Specific forward-looking statements include statements with respect to: the expectation that the monthly distribution rate will be increased from 13.5 cents per Unit to 15.0 cents per Unit beginning with the July 2021 distribution that is payable August 31, 2021; expectations regarding Canada being on the road to recovery from COVID-19; the expectation that Trade Marks' Credit Facility will be renewed and the terms under which such renewal will occur; the expectation that the Partnership will provide its guarantee in favour of the Bank of all of the indebtedness, covenants and obligations of Trade Marks; the expectation that currently closed A&W restaurants will reopen when able to do so; and the impact of COVID-19, including its impact on store closures, on the global economy in general and on the businesses of A&W Food Services and the A&W franchisees in particular. The forward-looking information is based on assumptions that management considered reasonable at the time it was prepared, which assumptions include: current store closures will be temporary and restaurant performance will continue to improve; the Fund will receive sufficient revenue in the future (in the form of royalty payments from A&W Food Services) to maintain monthly distributions; the projections for the A&W business and the Fund provided by A&W Food Services are accurate; no material changes will occur in the quick service restaurant burger market including as a result of changes in consumer taste or health concerns or changes in economic conditions or unemployment, the COVID-19 pandemic or a disease outbreak; and the impacts of COVID-19 on the A&W system will not significantly worsen. The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by the forward-looking information.  Those risks and uncertainties include, among other things, risks related to: the impacts of  COVID-19 on the Canadian economy, the QSR industry, the willingness of the general public to dine outside their homes and travel, all of which have negatively impacted A&W Food Services and the Fund and have or may, as applicable, adversely affect each of A&W Food Services', their franchisees' and the Fund's respective investments, results of operations, and financial condition; A&W Food Services may become liable for the lease obligations of certain of its franchisees, if such franchisees default on their leases, and such obligations may be significant and A&W Food Services may be unsuccessful in seeking recovery from such franchisees, all of which may adversely affect A&W Food Services' investments, results of operations and financial condition; A&W Food Services' projections may be inaccurate, and do not represent a financial forecast and actual results may differ materially from those anticipated by the projections; monthly distributions are not guaranteed and may be reduced, suspended or terminated at any time; the current sales improvement trends of the A&W restaurants in the Royalty Pool may not continue and may slow or regress; certain A&W restaurants that are currently temporarily closed may not reopen; government restrictions related to COVID-19 may have their durations extended, or may be reinstated, in the case of those that have recently been lifted, which measures may restrict the ability of A&W restaurants to operate, or result in forced closures, further reduced guest traffic, supply interruptions or staff shortages; and, government programs expected to be helpful to A&W Franchisees may not be available to some franchisees, and may not be available in amounts expected for those franchisees for which such programs are available and may be terminated at any time, and following the termination of such programs, or the reduction of amounts available under such programs, franchisees currently receiving support under those programs may need to find alternative sources of financial support and may make requests for such support from, among other parties, A&W Food Services. Additional factors which could cause results to differ from current expectations are described in the Fund's most recent Management Discussion and Analysis under the heading "Risks and Uncertainties" and the Fund's Annual Information Form under the heading "Risk Factors", available on SEDAR at www.sedar.com. The forward-looking information contained in this news release represents the Fund's expectations as of the date of this news release, and are subject to change after this date. The Fund assumes no obligation to update or revise any forward-looking information, except as required by applicable law. 

SOURCE A&W Revenue Royalties Income Fund

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