The Keg Royalties Income Fund
TSX : KEG.UN

The Keg Royalties Income Fund

November 02, 2011 07:00 ET

The Keg Royalties Income Fund Announces Third Quarter 2011 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 2, 2011) -

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 nine months ended September 30, 2011.

The gross sales reported by the 102 Keg restaurants in the Royalty Pool were $117,125,000 for the quarter, an increase of $6,743,000 or 6.1% from the comparable quarter of the prior year. The year-to-date gross sales increased by $11,657,000 or 3.4% to $350,145,000. Same store sales growth increases were the principal driver of the increases.

The Keg's same store sales (sales of restaurants that operated during the entire period of both the current and prior years) increased by 5.2% in Canada and by 3.6% in the United States for the 13-week period ended October 2, 2011. For the 39 week period ended October 2, 2011, same store sales increased by 3.6% in Canada and by 3.5% in the United States. After translating the sales of the U.S. restaurants into their Canadian dollar equivalent, consolidated same store sales increased by 4.5% for the 13-week period and by 3.0% for the 39-week period. The exchange rate from US dollars to Canadian dollars declined materially from the same periods last year and this decline offset a portion of the same store sales growth.

Royalty income increased by $259,000 or 5.7% from $4,527,000 in the three months ended September 30, 2010 to $4,786,000 in the three months ended September 30, 2011. For the nine months ended September 30, 2011 royalty income increased by $519,000 or 3.8% from $13,725,000 to $14,244,000. The Fund remains financially well positioned with surplus cash on hand of $3,198,000 and a positive working capital balance of $1,772,000 as of September 30, 2011.

The Fund was required to adopt International Financial Reporting Standards ("IFRS") as of January 1, 2011. As a result, all financial results for periods commencing on or after January 1, 2009 have therefore been prepared in accordance with IFRS. Also on January 1, 2011 changes to the tax treatment of certain income trusts, as a result of the Specified Investment Flow-through Trust tax ("SIFT tax") came into effect. As a result, income trusts are no longer entitled to deduct distributions for tax purposes, and are now subject to taxation similar to corporations.

Distributable cash before SIFT tax increased by $277,000 from $3,206,000 (30.2 cents/Fund unit) to $3,483,000 (30.7 cents/Fund unit) for the quarter and by $967,000 from $9,808,000 (95.4 cents/Fund unit) to $10,775,000 (95.8 cents/Fund unit) for the nine-month period. Because the Fund is now required to deduct SIFT taxes prior to distributing earnings to Unitholders, distributable cash available to pay distributions to public unitholders decreased from $3,206,000 (30.2 cents/Fund unit) to $2,579,000 (22.7 cents/Fund unit) for the quarter and by $1,725,000 from $9,808,000 (95.4 cents/Fund unit) to $8,083,000 (71.9 cents/Fund unit) year to date. The decreases in distributable cash available to pay distributions to public unitholders were solely as a result of the SIFT tax.

"We are very pleased with The Keg Royalties Income Fund's third quarter results," said David Aisenstat, President and CEO of Keg Restaurants Ltd. "The strength of The Keg's brand and the focus the restaurants have on providing exceptional and consistent guest experiences, have once again served KRIF and its unitholders well."

FINANCIAL HIGHLIGHTS

($000's except per unit amounts) Jul. 1 to Sept. 30, 2011 Jul.1 to Sept. 30, 2010 Jan. 1 to Sept. 30, 2011 Jan.1 to Sept. 30 2010
Restaurants in the Royalty Pool 102 102 102 102
Gross sales reported by Keg restaurants in the Royalty Pool $ 117,125 $ 110,382 $ 350,145 $ 338,488
Royalty income (1) $ 4,786 $ 4,527 $ 14,244 $ 13,725
Interest income (2) 1,079 1,078 3,201 3,199
Total income $ 5,865 $ 5,605 $ 17,445 $ 16,924
Administrative expenses (3) (108 ) (99 ) (377 ) (305 )
Interest and financing expenses (4) (174 ) (173 ) (523 ) (473 )
Operating income $ 5,583 $ 5,333 $ 16,545 $ 16,146
Distributions to KRL (5) (2,012 ) (2,196 ) (5,948 ) (6,607 )
Distributions declared to Fund unitholders (6) - (3,388 ) - (8,844 )
Earnings (loss) before fair value adjustment and income taxes $ 3,571 $ (251 ) $ 10,597 $ 695
Fair value adjustment (7) 3,608 (3,279 ) 2,953 (5,169 )
Income taxes (8) (936 ) (28 ) (2,946 ) (160 )
Net earnings (loss) $ 6,243 $ (3,558 ) $ 10,604 $ (4,634 )
Distributable cash before SIFT tax (9) $ 3,483 $ 3,206 $ 10,775 $ 9,808
Distributable cash (10) $ 2,579 $ 3,206 $ 8,083 $ 9,808
Distributions paid to Fund unitholders $ 2,725 $ 3,388 $ 8,395 $ 9,876
Payout Ratio (11) 105.7% 105.7% 103.9% 100.7%
Per Fund unit information (12)
Earnings before fair value adjustment and income taxes $ .315 $ .296 $ .942 $ .928
Net earnings (loss) $ .550 $ (.016 ) $ .943 $ .410
Distributable cash before SIFT tax (9) $ .307 $ .302 $ .958 $ .954
Distributable cash (10) $ .227 $ .302 $ .719 $ .954
Distributions paid to Fund unitholders $ .240 $ .320 $ .746 $ .961
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").
(6) Represents the distributions declared on the publicly traded Fund units during the period. The distributions declared to the Fund's public unitholders during the three and nine months ended September 30, 2011 were recorded as distributions and charged to unitholder's equity whereas the distributions declared during the three and nine months ended September 30, 2010 were expensed as interest.
(7) 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 during the same period.
(8) Income taxes for the quarter ended September 30, 2011, include SIFT tax payable of $904,000 (quarter ended September 30, 2010 - $NIL) and non-cash deferred taxes of $32,000 (quarter ended September 30, 2010 - $28,000). Income taxes for the nine months ended September 30, 2011 include SIFT tax payable of $2,692,000 (nine months ended September 30, 2010 - $NIL) and non-cash deferred taxes of $254,000 (nine months ended September 30, 2010 - $160,000). The obligation to pay SIFT tax did not come into effect until January 1, 2011.
(9) Distributable cash before SIFT tax, is defined as the periodic cash flows from operating activities as reported in the IFRS financial statements, including the effects of changes in non-cash working capital, less the earnings of the Partnership attributable to KRL through its ownership of Exchangeable units.
(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 SIFT tax payable. 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) 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).
(12) 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 September 30, 2011 was 11,353,500 (three months ended September 30, 2010 – 10,603,500) and for the nine months ended September 30, 2011 was 11,249,104 (nine months ended September 30, 2010 – 10,280,423). For comparative purposes, the earnings (loss) per Fund unit calculations for reporting periods prior to and including December 31, 2010, have been adjusted to exclude distributions declared to Fund unitholders, which were previously recorded as interest (prior to December 20, 2010) as a result of the adoption of IFRS.
(13) Same Store Sales Growth ("SSSG") is the overall increase or decrease in gross sales from Keg restaurants (that operated during the entire period of both the current and the prior year) as compared to gross sales for the same period of the prior year. SSSG is not an IFRS financial measure and 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 SSSG provides useful information regarding the increase or decrease in gross sales for comparable restaurants.

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, Keg Restaurants Ltd 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 ten 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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