The Keg Royalties Income Fund
TSX : KEG.UN

The Keg Royalties Income Fund

October 31, 2016 18:02 ET

The Keg Royalties Income Fund Announces Third Quarter 2016 Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Oct. 31, 2016) -

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, 2016.

The gross sales reported by the 100 Keg restaurants in the Royalty Pool were $145,525,000 for the quarter, an increase of $6,676,000 or 4.8% from the comparable quarter of the prior year. Year to date gross sales increased by $9,594,000 or 2.3% to $429,114,000. 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, 2016, and same store sales increases of 2.6% for the quarter and 2.2% 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 2.9% in Canada and by 1.2% in the United States for the 13-week period ended October 2, 2016. For the 39-week period ended October 2, 2016, same store sales increased by 1.7% in both Canada and in the United States. After translating the sales of the U.S. restaurants into their Canadian dollar equivalent, consolidated same store sales increased by 2.6% for the 13-week period and by 2.2% for the 39-week period. The average exchange rate decreased from 1.3238 to 1.3012 in the comparable 13-week period, moderately decreasing the Canadian dollar equivalent of the US restaurant sales, and increased from 1.2627 to 1.3214 in the comparable 39-week period, significantly increasing the Canadian dollar equivalent of the U.S. restaurant sales.

Royalty income increased by $198,000 or 3.5% from $5,629,000 in the three months ended September 30, 2015 to $5,827,000 in the three months ended September 30, 2016. For the nine months ended September 30, 2016 royalty income increased by $307,000 or 1.8% from $16,864,000 to $17,171,000.

Distributable cash before SIFT tax increased by $105,000 from $4,106,000 (36.2 cents/Fund unit) to $4,211,000 (37.1 cents/Fund unit) for the quarter and by $673,000 from $12,399,000 ($1.092/Fund unit) to $13,072,000 ($1.151/Fund unit) for the nine-month period. Distributable cash available to pay distributions to public unitholders increased by $52,000 from $3,062,000 (27.0 cents/Fund unit) to $3,114,000 (27.4 cents/Fund unit) for the quarter and by $630,000 from $9,235,000 (81.3 cents/Fund unit) to $9,865,000 (86.9 cents/Fund unit) year to date.

The Fund remains financially well-positioned with cash on hand of $2,098,000 and a positive working capital balance of $3,675,000 as at September 30, 2016. The Fund's payout ratio was 99.7% for the third quarter of 2016 and 92.5% year to date.

"We are very pleased with the continued growth in distributable cash during both the current quarter and year to date," said David Aisenstat, President and CEO of Keg Restaurants Ltd. "This growth has allowed the Fund to increase distributions to the Fund's unitholders twice thus far in 2016."

FINANCIAL HIGHLIGHTS
Jul. 1 Jul. 1 Jan. 1 Jan. 1
to Sept. 30, to Sept. 30, to Sept. 30, to Sept. 30,
($000's except per unit amounts) 2016 2015 2016 2015
Restaurants in the Royalty Pool 100 102 100 102
Royalty Pool sales (1) $ 145,525 $ 138,849 $ 429,114 $ 419,520
Royalty income (2) $ 5,827 $ 5,629 $ 17,171 $ 16,864
Interest income (3) 1,076 1,079 3,204 3,202
Total income $ 6,903 $ 6,708 $ 20,375 $ 20,066
Administrative expenses (4) (105 ) (105 ) (287 ) (297 )
Interest and financing expenses (5) (113 ) (112 ) (328 ) (412 )
Operating income $ 6,685 $ 6,491 $ 19,760 $ 19,357
Distributions to KRL (6) (2,371 ) (2,371 ) (7,078 ) (6,979 )
Profit before fair value gain (loss) and income taxes $ 4,314 $ 4,120 $ 12,682 $ 12,378
Fair value gain (loss) (7) (12,411 ) 3,642 (13,593 ) (1,874 )
Income taxes (8) (1,132 ) (1,056 ) (3,257 ) (3,256 )
Profit (loss) and comprehensive income (loss) $ (9,229 ) $ 6,706 $ (4,168 ) $ 7,248
Distributable cash before SIFT tax (9) $ 4,211 $ 4,106 $ 13,072 $ 12,399
Distributable cash (10) $ 3,114 $ 3,062 $ 9,865 $ 9,235
Distributions to Fund unitholders (11) $ 3,106 $ 2,878 $ 9,124 $ 8,419
Payout Ratio (12) 99.7 % 94.0 % 92.5 % 91.2 %
Per Fund unit information (13)
Profit before fair value gain (loss) and income taxes $ .380 $ .363 $ 1.117 $ 1.090
Profit (loss) and comprehensive income (loss) $ (.813 ) $ .591 $ (.367 ) $ .638
Distributable cash before SIFT tax (9) $ .371 $ .362 $ 1.151 $ 1.092
Distributable cash (10) $ .274 $ .270 $ .869 $ .813
Distributions to Fund unitholders (11) $ .274 $ .253 $ .804 $ .742

Notes:

(1) Royalty Pool sales are the gross sales reported by Keg Restaurants included in the Royalty Pool in any period. As of January 1, 2016, the Royalty Pool includes 100 Keg restaurants, 42 of which are owned and operated by KRL and its subsidiaries, (32 in Canada and 10 in the United Sates), and 58 Keg restaurants which are owned and operated by Keg franchisees (all of which are in Canada).
(2) The Fund, indirectly through The Keg Rights Limited Partnership (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 September 30, 2016, include SIFT tax expense of $1,097,000 (three months ended September 30, 2015 - $1,044,000) and a non-cash deferred income tax expense of $35,000 (three months ended September 30, 2015 - $12,000). Income taxes for the nine months ended September 30, 2016, include SIFT tax expenses of $3,207,000 (nine months ended September 30, 2015 - $3,164,000) and a non-cash deferred income tax expense of $50,000 (nine months ended September 30, 2015 - $92,000).
(9) 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.
(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 September 30, 2016 were 11,353,500 (three months ended September 30, 2015 - 11,353,500), and for the nine months ended September 30, 2016 were 11,353,500 (nine months ended September 30, 2015 - 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 fourteen 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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