The Keg Royalties Income Fund
TSX : KEG.UN

The Keg Royalties Income Fund

July 28, 2014 19:05 ET

The Keg Royalties Income Fund Announces Second Quarter 2014 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - July 28, 2014) -

NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE U.S.

The Keg Royalties Income Fund (TSX:KEG.UN) (the "Fund") is pleased to announce its financial results for the three and six months ended June 30, 2014.

The gross sales reported by the 103 Keg restaurants in the Royalty Pool were $125,394,000 for the quarter, an increase of $10,968,000 or 9.6% from the comparable quarter of the prior year. Year to date gross sales increased by $21,399,000 or 9.0% to $260,154,000. The increase in Royalty Pool sales during the quarter and year to date, reflect the sales of the new Keg restaurants added to the Royalty Pool on January 1, 2014, and same store sales increases of 5.8% for the quarter and 5.0% year to date.

The Keg's same store sales (sales of restaurants that operated during the entire period of both the current and prior years) increased by 4.9% in Canada and by 7.5% in the United States for the 13-week period ended June 29, 2014. For the 26-week period ended June 29, 2014, same store sales increased by 4.1% in Canada and by 4.9% in the United States. After translating the sales of the U.S. restaurants into their Canadian dollar equivalent, consolidated same store sales increased by 5.8% for the 13-week period and by 5.0% for the 26-week period. The average exchange rate moved from 1.027 to 1.092 in the comparable 13-week period, and from 1.017 to 1.095 in the comparable 26-week period, significantly increasing the Canadian dollar equivalent of the U.S. restaurant sales.

Royalty income increased by $345,000 or 7.4% from $4,693,000 in the three months ended June 30, 2013 to $5,038,000 in the three months ended June 30, 2014. For the six months ended June 30, 2014 royalty income increased by $670,000 or 6.9% from $9,759,000 to $10,429,000.

Distributable cash before SIFT tax increased by $247,000 from $3,439,000 (30.3 cents/Fund unit) to $3,686,000 (32.5 cents/Fund unit) for the quarter and by $252,000 from $7,533,000 (66.3 cents/Fund unit) to $7,785,000 (68.6 cents/Fund unit) for the six-month period. Distributable cash available to pay distributions to public unitholders increased by $211,000 from $2,543,000 (22.4 cents/Fund unit) to $2,754,000 (24.3 cents/Fund unit) for the quarter and by $125,000 from $5,723,000 (50.4 cents/Fund unit) to $5,848,000 (51.5 cents/Fund unit) year to date.

The Fund remains financially well-positioned with cash on hand of $1,334,000 and a positive working capital balance of $2,425,000 as at June 30, 2014. The Fund's payout ratio was 98.9% for the second quarter of 2014 and was 93.2% year to date.

"We are very pleased with the same store sales growth generated during the quarter and year to date," said David Aisenstat, President and CEO of Keg Restaurants Ltd. "Same store sales growth is the largest driver of increases to royalty income and ultimately to increases in cash available for distribution to the Fund's unitholders".

FINANCIAL HIGHLIGHTS

Apr. 1 Apr. 1 Jan. 1 Jan. 1
to Jun. 30, to Jun. 30, to Jun. 30, to Jun. 30,
($000's except per unit amounts) 2014 2013 2014 2013
Restaurants in the Royalty Pool 103 102 103 102
Gross sales reported by Keg restaurants in the Royalty Pool $ 125,344 $ 114,426 $ 260,154 $ 238,755
Royalty income (1) $ 5,038 $ 4,693 $ 10,429 $ 9,759
Interest income (2) 1,067 1,067 2,122 2,123
Total income $ 6,105 $ 5,760 $ 12,551 $ 11,882
Administrative expenses (3) (101 ) (91 ) (193 ) (190 )
Interest and financing expenses (4) (154 ) (174 ) (307 ) (347 )
Operating income $ 5,850 $ 5,495 $ 12,051 $ 11,345
Distributions to KRL (5) (2,137 ) (1,980 ) (4,353 ) (4,038 )
Profit (loss) before fair value adjustment and taxes $ 3,713 $ 3,515 $ 7,698 $ 7,307
Fair value adjustment (6) (33 ) 3,107 233 769
Taxes (7) (932 ) (950 ) (1,985 ) (1,923 )
Profit (loss) $ 2,748 $ 5,672 $ 5,946 $ 6,153
Distributable cash before SIFT tax (8) $ 3,686 $ 3,439 $ 7,785 $ 7,533
Distributable cash (9) $ 2,754 $ 2,543 $ 5,848 $ 5,723
Distributions paid to Fund unitholders $ 2,725 $ 2,725 $ 5,450 $ 5,450
Payout Ratio (10) 98.9 % 107.2 % 93.2 % 95.2 %
Per Fund unit information (11)
Profit (loss) before market value adjustment and income taxes $ .327 $ .310 $ .678 $ .644
Profit (loss) $ .242 $ .500 $ .524 $ .542
Distributable cash before SIFT tax (8) $ .325 $ .303 $ .686 $ .663
Distributable cash (9) $ .243 $ .224 $ .515 $ .504
Distributions paid to Fund unitholders $ .240 $ .240 $ .480 $ .480
Notes:
(1) The Fund, indirectly through the Partnership, earns royalty income equal to 4% of gross sales of Keg restaurants in the Royalty Pool.
(2) The Fund directly earns interest income on the $57.0 million Keg Loan, with interest income accruing at 7.5% per annum, payable monthly.
(3) The Fund, indirectly through the Partnership, incurs administrative expenses and interest on the operating line of credit, to the extent utilized.
(4) The Fund, indirectly through the Trust, incurs interest expense on the $14.0 million term loan and amortization of deferred financing charges.
(5) Represents the distributions of the Partnership attributable to KRL during the respective periods on the Exchangeable and Class C units held by KRL. The Class A, entitled Class B and Class D Partnership units are exchangeable into Fund units on a one-for-one basis ("Exchangeable units"). These distributions are presented as interest expense in the financial statements.
(6) Fair value adjustment is the non-cash increase or decrease in the market value of the Exchangeable units held by KRL during the respective period. Exchangeable units are classified as a financial liability under IFRS. The Fund is required to determine the fair value of that liability at the end of each reporting period and adjust for any increase or decrease, taking into consideration the sale of any Exchangeable units and additional entitlements during the same period.
(7) Taxes for the three months ended June 30, 2014, include SIFT tax expense of $932,000 (three months ended June 30, 2013 - $896,000) and non-cash deferred taxes of $nil (three months ended June 30, 2013 - $54,000). Taxes for the six months ended June 30, 2014, include SIFT tax expense of $1,937,000 (six months ended June 30, 2013 - $1,810,000) and non-cash deferred tax of $48,000 (six months ended June 30, 2013 - $113,000).
(8) Distributable cash before SIFT tax is defined as the periodic cash flows from operating activities as reported in the IFRS consolidated financial statements, including the effects of changes in non-cash working capital, plus SIFT tax paid (including current year instalments), less interest and financing fees paid on the term loan, less the Partnership distributions attributable to KRL through its ownership of Exchangeable units. Distributable cash before SIFT tax 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) Distributable cash is the amount of cash available for distribution to the Fund's public unitholders and is calculated as distributable cash before SIFT tax, less current year SIFT tax expense. 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. However, the Fund believes that distributable cash, both before and after SIFT tax, provides useful information regarding the amount of cash available for distribution to the Fund's public unitholders.
(10) Payout ratio is computed as the ratio of aggregate cash distributions paid during the period (numerator) to the aggregate distributable cash of the period (denominator).
(11) All per unit amounts are calculated based on the weighted average number of Fund units outstanding, which are those units held by public unitholders during the respective period. The weighted average number of Fund units outstanding for the three months ended June 30, 2014 were 11,353,500 (three months ended June 30, 2013 - 11,353,500) and for the six months ended June 30, 2014 were 11,353,500 (six months ended June 30, 2013 - 11,353,500).

The Fund (TSX:KEG.UN) is a limited purpose, open-ended trust established under the laws of the Province of Ontario that, through The Keg Rights Limited Partnership, owns certain trademarks and other related intellectual property used by Keg Restaurants Ltd. ("KRL"). In exchange for use of those trademarks, KRL pays the Fund a royalty of 4% of gross sales of Keg restaurants included in the royalty pool.

Vancouver-based KRL is the leading operator and franchisor of the steakhouse restaurants in Canada and has a substantial presence in select regional markets in the United States. KRL continues to operate The Keg restaurant system and expand that system through the addition of both corporate and franchised Keg steakhouses. KRL has been named one of the "50 Best Employers in Canada" for the past thirteen years by Aon Hewitt. For more information on our brand, visit www.kegsteakhouse.com.

This press release may contain certain "forward looking" statements reflecting The Keg Royalties Income Fund's current expectations in the casual dining segment of the restaurant food industry. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those relating to the Keg's ability to continue to realize historical same store sales growth, changes in market and existing competition, new competitive developments, and potential downturns in economic conditions generally. Additional information on these and other potential factors that could affect the Fund's financial results are detailed in documents filed from time to time with the provincial securities commissions in Canada.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy, which may be made only by means of the prospectus, nor shall there be any sale of the Fund units in any state, province or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any state, province or jurisdiction. The Keg Royalties Income Fund units have not been, and will not be registered under the U.S. Securities Act of 1933, as amended and may not be offered or sold in the United States absent registration or an application for exemption from the registration requirement under U.S. securities laws.

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

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