The Keg Royalties Income Fund
TSX : KEG.UN

The Keg Royalties Income Fund

August 09, 2017 18:36 ET

The Keg Royalties Income Fund Announces Second Quarter 2017 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Aug. 9, 2017) -

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

The Keg Royalties Income Fund (the "Fund") (TSX:KEG.UN) is pleased to announce its financial results for the three and six months ended June 30, 2017.

The gross sales reported by the 100 Keg restaurants in the Royalty Pool were $145,472,000 for the quarter, an increase of $8,669,000 or 6.3% from the comparable quarter of the prior year. Year to date gross sales increased by $15,943,000 or 5.6% to $299,532,000. The increase in Royalty Pool sales during the quarter and year to date, reflect the sales of the new Keg restaurant added to the Royalty Pool on January 1, 2017, and same store sales increases of 6.5% for the quarter and 5.5% 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 6.1% in Canada and by 5.7% in the United States for the 13-week period ended July 2, 2017. For the 26-week period ended July 2, 2017, same store sales increased by 5.7% in Canada and by 2.9% in the United States. After translating the sales of the U.S. restaurants into their Canadian dollar equivalent, consolidated same store sales increased by 6.5% for the 13-week period and by 5.5% for the 26-week period. The average exchange rate moved from 1.2840 to 1.3450 in the comparable 13-week period significantly increasing the Canadian dollar equivalent of the U.S. restaurant sales, and from 1.3298 to 1.3341 in the comparable 26-week period, slightly increasing the Canadian dollar equivalent of the U.S. restaurant sales.

Royalty income increased by $397,000 or 7.3% from $5,472,000 in the three months ended June 30, 2016 to $5,869,000 in the three months ended June 30, 2017. For the six months ended June 30, 2017 royalty income increased by $731,000 or 6.4% from $11,344,000 to $12,075,000.

Distributable cash before SIFT tax increased by $161,000 from $4,140,000 (36.5 cents/Fund unit) to $4,301,000 (37.9 cents/Fund unit) for the quarter and by $216,000 from $8,861,000 (78.0 cents/Fund unit) to $9,077,000 (79.9 cents/Fund unit) for the six-month period. Distributable cash available to pay distributions to public unitholders increased by $88,000 from $3,121,000 (27.5 cents/Fund unit) to $3,209,000 (28.3 cents/Fund unit) for the quarter and by $75,000 from $6,751,000 (59.5 cents/Fund unit) to $6,826,000 (60.1 cents/Fund unit) year to date.

The Fund remains financially well-positioned with cash on hand of $2,267,000 and a positive working capital balance of $3,853,000 as at June 30, 2017. The Fund's payout ratio was 97.4% for the second quarter of 2016 and 91.6% year to date.

"We are very pleased with the same store sales growth generated during the quarter," said David Aisenstat, President and CEO of Keg Restaurants Ltd. "Despite some headwinds recently felt in some provinces in

Canada and by the restaurant industry in general, The Keg's performance continues to reflect the strength of our brand".

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) 2017 2016 2017 2016
Restaurants in the Royalty Pool 100 100 100 100
Royalty Pool sales (1) $ 145,472 $ 136,803 $ 299,532 $ 283,589
Royalty income (2) $ 5,869 $ 5,472 $ 12,075 $ 11,344
Interest income (3) 1,067 1,064 2,122 2,128
Total income $ 6,936 $ 6,536 $ 14,197 $ 13,472
Administrative expenses (4) (98 ) (87 ) (187 ) (182 )
Interest and financing expenses (5) (108 ) (108 ) (214 ) (214 )
Operating income $ 6,730 $ 6,341 $ 13,796 $ 13,076
Distributions to KRL (6) (2,429 ) (2,307 ) (4,939 ) (4,708 )
Profit before fair value gain (loss) and income taxes $ 4,301 $ 4,034 $ 8,857 $ 8,368
Fair value gain (loss) (7) (8,279 ) 735 (4,717 ) (1,182 )
Income taxes (8) (1,093 ) (1,016 ) (2,301 ) (2,125 )
Profit (loss) and comprehensive income (loss) $ (5,071 ) $ 3,753 $ 1,839 $ 5,061
Distributable cash before SIFT tax (9) $ 4,301 $ 4,140 $ 9,077 $ 8,861
Distributable cash (10) $ 3,209 $ 3,121 $ 6,826 $ 6,751
Distributions to Fund unitholders (11) $ 3,127 $ 3,037 $ 6,253 $ 6,017
Payout Ratio (12) 97.4 % 97.3 % 91.6 % 89.1 %
Per Fund unit information (13)
Profit before fair value gain (loss) and income taxes $ .379 $ .355 $ .780 $ .737
Profit (loss) and comprehensive income (loss) $ (.447 ) $ .331 $ .162 $ .446
Distributable cash before SIFT tax (9) $ .379 $ .365 $ .799 $ .780
Distributable cash (10) $ .283 $ .275 $ .601 $ .595
Distributions to Fund unitholders (11) $ .275 $ .267 $ .551 $ .530

Notes:

  1. Royalty Pool sales are the gross sales reported by Keg Restaurants included in the Royalty Pool in any period. As of June 30, 2017, the Royalty Pool includes 100 Keg restaurants, 43 of which are owned and operated by KRL and its subsidiaries, (33 in Canada and 10 in the United Sates), and 57 Keg restaurants which are owned and operated by Keg franchisees (all of which are in Canada). As of June 30, 2017, one corporate and two franchised restaurants, as well as one relocated franchise restaurant (all opened subsequent to October 2, 2016), are not yet included in the Royalty Pool, while two permanently closed restaurants remain in the Royalty Pool.
  2. The Fund, indirectly through the "Partnership", earns royalty income equal to 4% of gross sales of Keg restaurants in the Royalty Pool.
  3. The Fund directly earns interest income on the $57.0 million Keg Loan, with interest income accruing at 7.5% per annum, payable monthly.
  4. The Fund, indirectly through the Partnership, incurs administrative expenses and interest on the operating line of credit, to the extent utilized.
  5. The Fund, indirectly through The Keg Holdings Trust (the "Trust"), incurs interest expense on the $14.0 million term loan and amortization of deferred financing charges.
  6. Represents the distributions of the Partnership attributable to KRL during the respective periods on the Class A, entitled Class B, and Class
    D Partnership units ("Exchangeable units") and Class C Partnership units held by KRL. The Exchangeable units are exchangeable into Fund units on a one-for-one basis. These distributions are presented as interest expense in the financial statements.
  7. Fair value gain (loss) is the non-cash decrease or increase 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.
  8. Income taxes for the three months ended June 30, 2017, include SIFT tax expense of $1,092,000 (three months ended June 30, 2016 - $1,019,000) and non-cash deferred tax expense of $1,000 (three months ended June 30, 2016 - deferred tax recovery of $3,000). Income taxes for the six months ended June 30, 2017, include SIFT tax expense of $2,251,000 (six months ended June 30, 2016 - $2,110,000) and a non-cash deferred tax expense of $50,000 (six months ended June 30, 2016 - $15,000).
  9. Distributable cash before SIFT tax is defined as the periodic cash flows from operating activities as reported in the IFRS condensed 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.
  10. 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.
  11. Distributions to Fund unitholders include all regular monthly cash distributions paid to Fund unitholders during a period and any special distributions, either declared or paid, to Fund unitholders in the same period.
  12. Payout ratio is computed as the ratio of aggregate cash distributions paid during the period plus any special distributions declared or paid during the same period (numerator) to the aggregate distributable cash of the period (denominator).
  13. 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, 2017 were 11,353,500 (three months ended June 30, 2016 - 11,353,500), and for the six months ended June 30, 2016 were 11,353,500 (six months ended June 30, 2016 - 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 Keg 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 fifteen 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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