Boston Pizza Royalties Income Fund
TSX : BPF.UN

Boston Pizza Royalties Income Fund

May 11, 2011 05:00 ET

Boston Pizza Royalties Income Fund Announces First Quarter Results and April 2011 Distributions to Unitholders

Fund Posts Increases in Same Store Sales, Franchise Sales and Royalty Income

VANCOUVER, BRITISH COLUMBIA--(Marketwire - May 11, 2011) - Boston Pizza Royalties Income Fund (TSX:BPF.UN) (the "Fund") and Boston Pizza International Inc. ("BPI") each reported today financial results for the period from January 1, 2011 to March 31, 2011 (the "Period"). A copy of this press release and the consolidated interim financial statements of the Fund and BPI for the Period are available at www.sedar.com and www.bpincomefund.com. The financial results below are reported in accordance with International Financial Reporting Standards ("IFRS") and as a result are not directly comparable to those figures contained within historical financial statements of the Fund that were prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") before the adoption of IFRS. The Fund will host a conference call to discuss the results on May 11, 2011 at 8:30 a.m. Pacific Time (11:30 a.m. Eastern Time). The call can be accessed by dialling 1-800-319-4610 or 604-638-5340. A replay will be available until May 18, 2011 by dialling 1-800-319-6413 or 604-638-9010 and entering the pin code: 4452 followed by the # sign.

Same store sales growth ("SSSG"), a key driver of yield growth for unitholders of the Fund, was positive 1.4% for the Period compared to negative 5.4% in the same period one year ago. On a franchise sales basis, SSSG for the Period was positive 2.1% compared to negative 4.3% for the same period one year ago. The increase in SSSG for the Period was principally due to higher take out and delivery sales resulting from a recent national marketing campaign which promoted the launch of Boston Pizza's online ordering system. Franchise sales of restaurants in the royalty pool were $163.1 million for the Period compared to $160.5 million in the same period in 2010. The increase in Franchise sales for the Period is largely attributed to positive SSSG.

"We are very pleased with Boston Pizza's results for the first quarter of 2011," said George Melville, Co-Chairman and Owner of BPI. "The Fund posted increases in franchise sales, royalty income and same store sales compared to last year. In addition, Boston Pizza opened two new restaurants and renovated six other locations to the latest design standards during the Period. Going forward, our expansion plans include a landmark new Boston Pizza restaurant opening next month on Front Street in downtown Toronto that will introduce an exciting new urban look for our brand."

The Fund's distributable cash for the Period was $3.8 million or $0.258 per unit compared to $5.0 million or $0.360 per unit in the same period one year ago. The decreases in distributable cash and distributable cash per unit are a result of the Fund becoming taxable under the specified investment flow through tax ("SIFT Tax") beginning on January 1, 2011. For comparative purposes, if the Fund was not liable to pay SIFT Tax in respect of the Period, distributable cash for the Period and distributable cash per Fund unit for the Period would have been $5.0 million and $0.345, respectively. As a result of the SIFT Tax, the Fund pays tax at a rate approximately equal to the rate applicable to income earned by a Canadian corporation, and is prevented from deducting trust distributions when calculating taxable income. The SIFT Tax rate is 26.5% in 2011 and anticipated to be 25.0% for 2012 and beyond. The Fund's liability to pay SIFT Tax reduces the amount available for distributions to unitholders. The SIFT Tax also recharacterizes such distributions as eligible dividends received from a Canadian corporation for individual tax purposes. Eligible dividend treatment for distributions to unitholders will generally be beneficial to Canadian resident investors holding their units in taxable accounts compared to the previous characterization primarily as other income because of the potential for individuals to claim a dividend tax credit. Distributions for the Period were funded entirely by cash flow from operations. No debt was incurred at any point during the Period to fund distributions.

The Fund's payout ratio for the Period was 97.7% compared to 98.2% in the same period one year ago. A key feature of the Fund is that it is a "top line" structure, in which BPI pays the Fund a royalty equal to 4% of franchise sales from restaurants in the Fund's royalty pool. Accordingly, Fund unitholders are not directly exposed to changes in the operating costs or profitability of BPI or of individual Boston Pizza restaurants. Given this structure, and that the Fund has no current mandate to retain capital for other purposes, it is expected that the Fund will maintain a payout ratio close to 100% over time as the trustees continue to distribute all available cash in order to maximize returns to unitholders.

The Fund's net income for the Period was $2.9 million compared to $3.8 million in the same period one year ago. The Fund's net income under IFRS contains many non-cash items that do not affect the Fund's operations or its ability to pay distributions to unitholders. As such, it is not in the Fund's view, the only or most meaningful measurement of the Fund's ability to pay distributions. Consequently, the Fund has introduced for the first time the non-IFRS metrics of distributable cash and payout ratio (as set forth in the table below) to provide investors with more meaningful information about the Fund's ability to pay distributions. Readers are cautioned that distributable cash and payout ratio are non-IFRS financial measures that do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. For a reconciliation between net income and distributable cash, please see the table below. For a detailed discussion on the Fund's distributable cash and payout ratio, please refer to the management's discussion and analysis for the Period as filed on SEDAR and posted on the Fund's website at www.bpincomefund.com.

The Trustees of the Fund announced a cash distribution to unitholders of 8.4 cents per unit for April 2011. The distribution will be payable to unitholders of record at the close of business on May 21, 2011 and will be paid on May 31, 2011. The Fund periodically reviews distribution levels based on its policy of stable and sustainable distribution flow to unitholders.

Adoption of IFRS

The Canadian Accounting Standards Board announced in February 2008 that publicly accountable entities would be required to adopt IFRS in place of Canadian GAAP for interim and annual reporting purposes for fiscal years beginning on or after January 1, 2011. Accordingly, the Fund adopted IFRS on January 1, 2011 and the financial results disclosed in this press release for for all periods commencing on or after January 1, 2010 have all been prepared in accordance with IFRS.

The Fund previously accounted for its investment in the Boston Pizza Royalties Limited Partnership (the "Partnership") on an equity basis and BPI previously consolidated the Partnership in its financial statements. The Fund's transition to reporting its financial results in accordance with IFRS from Canadian GAAP has resulted in the Fund now consolidating the accounts of the Partnership rather than BPI consolidating the accounts of the Partnership and the Fund accounting for its investment in the Partnership on an equity basis.

Readers are advised that the Fund's transition to reporting its financial results in accordance with IFRS from Canadian GAAP, including consolidating the Partnership's accounts with the Fund, has had no impact, nor is it expected to have any future impact, on the operations of the Fund's business, the amount of cash that is available to distribute to unitholders or the contractual obligations between the Fund, the Partnership, BPI or any third parties. However, it has impacted the presentation of certain key financial metrics of the Fund and BPI. The comparative financial results contained in this press release for periods in 2010 have been restated to conform to IFRS. Readers are cautioned that they should refer to the consolidated interim financial statements of the Fund for the Period, which are available at www.sedar.com and www.bpincomefund.com, for a full description of the Fund's financial results and the impact of IFRS on the Fund.

HIGHLIGHTS

The table below sets out selected information from the consolidated interim financial statements of the Fund, which includes the accounts of the Partnership, together with other data and should be read in conjunction with the consolidated interim financial statements of the Fund for the three month periods ended March 31, 2011 and March 31, 2010. The financial results reported in the table below are reported in accordance with IFRS, and as a result are not directly comparable to those figures contained within historical financial statements or Management's Discussion and Analysis of the Fund that were previously prepared in accordance with Canadian GAAP.

Jan 1, 2011 to Mar 31, 2011Jan 1, 2010 to Mar 31, 2010 Proforma1Jan 1, 2010 to Mar 31, 2010
(in thousands of dollars – except restaurants, SSSG and per Unit items)
Revenues
Number of restaurants in royalty pool2339340340
Franchise Sales3 reported by restaurants in the royalty pool163,133160,455160,455
Royalty revenue – 4% of Franchise Sales of restaurants6,5256,4186,418
Interest income452450450
Total revenues6,9776,8686,868
Expenses
Administrative expenses and interest on bank debt(502)(437)(437)
Interest accrued to holders of Units4--(3,250)
Interest accrued to BPI on Class B Units and Class C Units5(937)(1,063)(1,063)
Loss on retirement of Unit liability-(135)(135)
Fair value adjustment on Class B Unit liability6(1,278)2,0812,081
Subtotal(2,717)446(2,804)
Current income tax expense(1,263)--
Deferred income tax expense(50)(270)(270)
Total expenses(4,030)176(3,074)
Net Income
Net income2,9477,0443,794
Basic and diluted earnings per Unit0.1470.4290.197
Distributable Cash / Distributions / Payout Ratio7 8
Net Income2,9477,0443,794
Adjusted for non-cash items:
Loss on retirement of Unit liability-135135
Fair value adjustment on Class B Unit liability61,278(2,081)(2,081)
Deferred income tax expense50270270
Current income tax expense1,263--
Changes in non-cash working capital(210)(188)(188)
Interest accrued4 5 / distributions declared on Units and Class B Units6377634,013
Subtotal5,9655,9435,943
Entitlement of BPI on Class B Units(943)(900)(900)
SIFT Tax on Units(1,263)--
Distributable Cash73,7595,0435,043
Interest accrued4 / distributions payable93,6724,9534,953
Payout Ratio897.7%98.2%98.2%
Distributable Cash per Fund unit70.2580.3600.360
Interest4 / distributions payable per Fund unit90.2520.3450.345
Other
Same store sales growth (SSSG)1.4%(5.4%)(5.4%)
Number of restaurants opened during the period222
Number of restaurants closed during the period1--

OUTLOOK

The Canadian Restaurant and Foodservices Association has forecast sales growth of 2.8% for the Canadian full-service restaurant sector in 2011. BPI's management agrees with this outlook for modest growth during 2011 and believes that Boston Pizza is well positioned to attract a wide variety of guests into the restaurant, sports bar and take-out/delivery parts of each location and offer a compelling value proposition to our guests. The two principal factors that affect SSSG are changes in customer traffic and changes in average guest cheque. BPI's strategies to drive higher guest traffic include a larger marketing budget versus the previous year along with a revised calendar of national and local store promotions. Increased average cheque levels will be achieved through a combination of menu design and annual re-pricing. In addition, BPI's franchise agreement requires that each Boston Pizza restaurant undergo a complete store renovation every seven years and six locations have already completed renovations in 2011 with many more underway or planned for later in 2011. Restaurants typically close for two to three weeks to complete the renovation and experience an incremental sales increase in the year following the re-opening.

Boston Pizza remains well positioned for future expansion as evidenced by the three new Boston Pizza restaurants that have opened to date in 2011 and an additional two that are currently under construction and scheduled to open during the first half of 2011. BPI's management believe that Boston Pizza will continue to strengthen its position as the number one casual dining brand in Canada by pursuing further restaurant development opportunities across the country.

Certain information in this press release may constitute "forward-looking information" that involves known and unknown risks, uncertainties, future expectations and other factors which may cause the actual results, performance or achievements of the Fund, Boston Pizza Holdings Trust, the Partnership, Boston Pizza Holdings Limited Partnership, Boston Pizza Holdings GP Inc., Boston Pizza GP Inc., BPI, Boston Pizza Restaurants, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. When used in this press release, forward-looking information may include words such as "anticipate", "estimate", "may", "will", "expect", "believe", "plan" and other similar terminology. This information reflects current expectations regarding future events and operating performance and speaks only as of the date of this press release.

For a complete list of the risks associated with forward-looking information, please refer to the complete forward looking information disclaimer included in the Fund's most recent management's discussion and analysis for the Period available at www.sedar.com and www.bpincomefund.com.

The trustees of the Fund have approved the contents of this press release.

(1) The results shown in this column assume that the Fund units were classified under IFRS as equity at all times during the applicable period rather than as a financial liability and that amounts paid by the Fund to Fund unitholders during or in respect of the applicable period were classified under IFRS as distributions rather than interest expense. These results are not audited and are provided only for information purposes.

(2) Number of restaurants in the royalty pool excludes restaurants that permanently closed during the applicable period.

(3) Franchise sales is the basis on which the royalty is payable; it means the revenues of Boston Pizza restaurants in respect of which the royalty is payable ("Franchise Sales"). The term "revenue" refers to the gross revenue: (i) of the corporate Boston Pizza Restaurants in Canada owned by BPI (as defined herein); and (ii) reported to BPI by franchised Boston Pizza Restaurants in Canada, without audit or other form of independent assurance, and in the case of both (i) and (ii), after deducting revenue from the sale of liquor, beer, wine and tobacco and revenue from BPI approved national promotions and discounts and excluding applicable sales and similar taxes. Nevertheless, BPI periodically conducts audits of the Franchise Sales reported to it by its franchisees, and the Franchise Sales reported herein include results from sales audits of earlier periods conducted during the year.

(4) Units of the Fund are classified as a financial liability under IFRS in respect of the period from January 1, 2010 through December 6, 2010, and as a result the amounts paid by the Fund to Fund unitholders in respect of that period are classified as interest expense of the Fund and not distributions. From and after December 7, 2010, amounts paid by the Fund to Unitholders are classified as distributions of the Fund as the Fund units are classified as equity from and after December 7, 2010.

(5) The Class B general partner units of the Partnership (the "Class B Units") and the Class C general partner units of the Partnership (the "Class C Units") are classified as financial liabilities under IFRS, and as such, amounts paid by the Partnership to BPI in respect of the Class B Units and Class C Units are classified as interest expense and not distributions.

(6) Because the Class B Units are classified as a financial liability under IFRS, the Fund is required under IFRS to fair value that liability at the end of each period and adjust for any increase or decrease in the fair value of that liability as compared to the fair value of that liability at the end of the immediately preceding period. This adjustment has no impact on the Fund's distributable cash.

(7)Distributable Cash is a non-IFRS financial measure that does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. This non-IFRS financial measure provides useful information to investors regarding the amount of cash the Fund has that is available for distribution on the Units. Investors are cautioned that this should not be construed as an alternative net income measure of profitability. The table above provides a reconciliation from this non-IFRS financial measure to net income, which is the most directly comparable IFRS measure.

(8) Payout ratio is calculated by dividing the interest / distributions payable by the Fund in respect of the applicable period by the distributable cash earned in that period. This is a non-IFRS financial measure that does not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.

(9) The Fund pays interest or distributions on the Fund units in respect of any particular calendar month no later than the last business day of the immediately subsequent month. Accordingly, interest and distributions on the Fund units in respect of the calendar month of January are paid no later than the last business day of February and so forth. Consequently, interest and distributions payable by the Fund on the Fund units in respect of the Period were paid in February 2011, March 2011 and April 2011. Similarly, the interest and distributions payable by the Fund on Fund units in respect of any other period are the interest and distributions paid in the immediately subsequent month of each month comprising such other period.

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