TRADING SYMBOL:  TSX: AW.UN   

VANCOUVER, BC, Oct. 14, 2020 /CNW/ -

• Same Store Sales Growth -12.7% in third quarter, -16.5% year to date
• Monthly distributions on Units resumed in July
• Royalty Payments from Food Services to the Fund resumed in July
• Special cash distribution of $0.30 per unit payable on October 30, 2020 to unitholders of record as of the close of business on October 23, 2020

Third Quarter 2020 Results

A&W Revenue Royalties Income Fund (the Fund) and A&W Food Services of Canada Inc. (A&W Food Services) today reported results for the third quarter and year to date period ended September 6, 2020. The Fund will hold a conference call to discuss the results on Wednesday, October 14, 2020 at 1:00 p.m. Pacific Time (4:00 p.m. Eastern Time). The call can be accessed by dialling toll-free 1-800-367-2403 or (647) 490-5367 Passcode 7300602#. A replay will be available until October 21, 2020 by dialling toll-free 1-888-203-1112 or (647) 436-0148 Passcode 7300602#.

Same Store Sales Growth was -12.7% for the third quarter of 2020 as compared to the third quarter of 2019. Year to date Same Store Sales were -16.5%. The COVID-19 pandemic continued to adversely impact A&W restaurant operations across Canada, including the temporary closures of a number of restaurants. At its peak, since March 1, 2020, a total of 230 A&W restaurants (out of 971 restaurants in the Royalty Pool) were temporarily closed. There was steady improvement beginning in the latter half of the second quarter and through the third quarter (September 6, 2020), only 11 A&W restaurants in the Royalty Pool remained temporarily closed. These remaining temporarily closed A&W restaurants are expected to reopen when able to do so. As the provinces began to ease their restrictions and restaurants began to reopen, sales performance began to improve, from -17.1% Same Store Sales for the first four-week period of the third quarter, to -7.3% Same Store Sales in the last four-week period of the third quarter.

"Our franchisees and their restaurant teams are working diligently to implement programs to enhance safety in their restaurants, and provide great food and service to their guests. We continue to evolve our plans to mitigate the effects of the COVID-19 pandemic," said Susan Senecal, President and CEO of A&W Food Services. "We recognize that there are more challenges to come before we turn the corner in our response to this pandemic. In addition to the top priority of guest and staff safety, we intend to stay focused on our natural ingredients, menu innovation, and continued new restaurant growth, which we believe will help us to rebound from the impacts of COVID-19."

Regular monthly distributions to unitholders resumed in the third quarter of 2020, commencing with the June distribution of 10¢ per unit that was paid on July 31, 2020. The Trustees had previously temporarily suspended monthly distributions on the units; accordingly, no distributions were declared by the Fund in the second quarter. The Trustees, in consultation with their independent financial and legal advisors, will continue to closely monitor the sales results of, and projections for, the A&W restaurants in the Royalty Pool with a view of continuing the payment of regular monthly distributions at a sustainable level. See "Special Cash Distribution" below for more information with respect to the special cash distribution of $0.30 per unit payable on October 30, 2020 to unitholders of record as of the close of business on October 23, 2020.

A&W Food Services resumed regular royalty payments to the Fund, commencing with the royalty payment in respect of gross sales reported by restaurants in the Royalty Pool for the four-week period ended June 14, 2020, which was paid in full on July 10, 2020. Food Services has deferred royalty payments totaling $7,448,000 payable to the Fund for gross sales reported by restaurants in the Royalty Pool for the period February 24, 2020 to May 17, 2020. As contemplated in the Amended and Restated Licence and Royalty Agreement between A&W Food Services and A&W Trade Marks Limited Partnership (the Amended and Restated Licence and Royalty Agreement), late payments of royalties accrue interest at the rate of 2% per annum over the prime rate. A&W Food Services and the Fund have agreed that repayment of this amount plus interest will take place no later than December 31, 2021. A&W Food Services has agreed with the Fund and A&W Trade Marks Inc. (Trade Marks) that dividends declared on the common shares of Trade Marks held by Food Services will not be paid to Food Services until Food Services has paid all deferred royalties, together with interest.

FINANCIAL RESULTS

Royalty income for the third quarter of 2020 was $10,216,000 based on gross sales reported by restaurants in the Royalty Pool of $340,558,000, compared to royalty income of $11,111,000 and gross sales reported by A&W restaurants in the Royalty Pool of $370,376,000 for the third quarter of 2019. Year to date royalty income for 2020 was $27,072,000 based on gross sales reported by restaurants in the Royalty Pool of $902,410,000 compared to royalty income of $30,931,000 and gross sales reported by A&W restaurants in the Royalty Pool of $1,031,044,000 for the comparable period in 2019. The decrease in gross sales for the quarter and year to date is due to the decline in Same Store Sales as a result of the impact of COVID-19. Royalty income for 2020 year to date includes a receivable from Food Services of (i) $3,522,000 for the royalty payable in respect of the gross sales reported by restaurants in the Royalty Pool for the period August 10, 2020 to September 6, 2020 which amount was paid in full on October 2, 2020, and (ii) $7,448,000, representing royalty payments deferred by Food Services for the period February 24, 2020 to May 17, 2020. Interest accrues on unpaid royalties in accordance with the Amended and Restated Licence and Royalty Agreement at 2% per annum over the prime rate. Food Services has resumed regular royalty payments to the Fund, commencing with the royalty payment in respect of gross sales reported by restaurants in the Royalty Pool for the four-week period ended June 14, 2020, which was paid in full on July 10, 2020.

General and administrative expenses for the third quarter of 2020 increased by $73,000 to $124,000 compared to $51,000 for the third quarter of 2019. Year to date expenses increased by $82,000 to $531,000 for 2020 compared to $449,000 for the comparable period in 2019. The increase in general and administrative expenses resulted from higher professional services costs due to COVID-19 and additional fees payable to the trustees of the Fund/independent directors of TMI for their increased meetings in dealing with discussions and agreements with Food Services relating to the deferral of the royalties payable to the Partnership.

Net interest on the term loan and other was $549,000 for the third quarter of 2020, $24,000 lower compared to the third quarter of 2019. Year to date interest expense was $1,601,000, $121,000 lower than the comparable period in 2019. The decrease was due to the term loan having a lower effective interest rate in 2020 compared to the comparable period in 2019, and interest earned on higher cash balances. Interest income accrued and receivable on unpaid royalties was $105,000 for the third quarter and year to date 2020.

Current income taxes payable decreased by $678,000 for the quarter and $1,383,000 year to date. Total income tax including current tax, non-cash deferred income tax and refundable income tax increased by $127,000 year to date.

The Fund's net income under International Financial Reporting Standards (IFRS) includes non-cash items, such as the fair value adjustment of the interest rate swap, that have no impact on the Fund's ability to pay distributions to unitholders. Therefore, net income is not the only or most meaningful measure of the Fund's ability to pay distributions and consequently, non-IFRS measures of "distributable cash", "distributable cash per equivalent unit", "total distributions and dividends declared and accrued per equivalent unit" and "payout ratio" are reported to provide investors with more meaningful information. Total distributions and dividends declared and accrued per equivalent unit is calculated as the sum of (i) distributions and dividends declared per equivalent unit in respect of each full calendar month in the applicable period, and (ii) the aggregate run-rate amount of the current monthly distribution for the remainder of the calendar year, with the sum of (i) and (ii) pro-rated based on the number of days in such period. The payout ratio is calculated by dividing total distributions and dividends declared and accrued per equivalent unit, by the distributable cash per equivalent unit generated in that period.

The Fund's net income for the third quarter of 2020 was $7,392,000 compared to $8,613,000 for the third quarter of 2019. Year to date net income was $17,180,000 compared to $21,833,000 for the comparable period in 2019. The $4,653,000 decrease in year to date net income was a result of the $3,859,000 decrease in royalty income, $811,000 increase in the non-cash loss on the interest rate swap, $82,000 increase in general and administrative expenses and $127,000 increase in total income taxes, less the $226,000 decrease in net interest expense.

Distributable cash generated in the third quarter of 2020 to pay distributions to unitholders and dividends to Food Services was $8,201,000 compared to $8,362,000 in the third quarter of 2019. Distributable cash generated in 2020 year to date to pay distributions to unitholders and dividends to Food Services was $20,601,000 compared to $22,933,000 in the comparable period in 2019. The $2,332,000 year to date decrease in distributable cash was attributable to the $3,859,000 decrease in royalty income and $82,000 increase in general and administrative expenses, partially offset by the $1,383,000 decrease in the current income tax provision (excluding refundable income tax) and $226,000 decrease in net interest expense.

Distributable cash per equivalent unit decreased by 3.2¢ to 44.2¢ per unit in the third quarter of 2020 from 47.4¢ per unit for the third quarter of 2019. Year to date distributable cash per equivalent unit decreased by 18.9¢ to $1.110 per unit for 2020 from $1.299 per unit for the comparable period in 2019. The decrease in distributable cash per equivalent unit in the quarter was attributable to the decrease in royalty income and increase in general and administrative expenses, partially offset by the decrease in current income taxes and net interest expense.

Five monthly distributions totaling 61.8¢ per unit were declared year to date in 2020 compared to eight monthly distributions totaling $1.217 per unit in the comparable period in 2019. No monthly distributions were declared in the second quarter of 2020 as the Trustees had previously temporarily suspended monthly distributions on the units commencing with the March distribution that would ordinarily have been declared in April 2020. The Trustees approved the resumption of regular monthly distributions to unitholders commencing with the June distribution of 10¢ per unit which was paid on July 31, 2020.

Total distributions and dividends declared and accrued per equivalent unit year to date were 69.5¢ per unit for 2020 compared to $1.274 for the comparable period in 2019. The year to date payout ratio was 62.6% compared to 98.1% for the comparable period in 2019. The cumulative surplus of distributable cash on reserve at the end of the third quarter of 2020 was $13,652,000, compared to a reserve of $7,429,000 at the beginning of the year, an increase of $6,223,000.

Distributable cash, distributable cash per equivalent unit and the cumulative surplus of distributable cash for 2020 referred to above include the royalty payments totaling $7,448,000 deferred and not yet paid by Food Services for the period February 24, 2020 to May 17, 2020, of which none is attributable to Q3 2020, $4,558,000 is attributable to Q2 2020 and $2,890,000 is attributable to Q1 2020.

Special Cash Distribution

The Trustees have declared a special distribution of $0.30 per Unit payable on October 30, 2020 to unitholders of record as of the close of business on October 23, 2020 (the "Special Distribution"). In making that determination, the Trustees considered the amount of the cumulative surplus of the Fund at the end of the third quarter, reviewed financial and other information regarding the recent performance of A&W Food Services and the A&W restaurants in the Royalty Pool and financial projections for the Fund and A&W Food Services for the remainder of 2020 and obtained advice from their independent financial advisors and legal counsel. This distribution will be taxed as a non-eligible dividend, as the source of funds to pay the distribution is a dividend from Trade Marks.

Trade Marks will declare an equivalent special dividend on the shares of Trade Marks held by A&W Food Services. However, A&W Food Services has agreed with the Fund and Trade Marks that the special dividend is not to be paid to A&W Food Services until it has paid all deferred royalties, together with interest to the Fund.

ABOUT THE FUND
The Fund is a limited purpose trust established to invest in Trade Marks, which through its interest in A&W Trade Marks Limited Partnership (the Partnership), owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The A&W trade-marks comprise some of the best-known brand names in the Canadian foodservice industry. In return for licensing A&W Food Services to use its trade-marks, Trade Marks (through the Partnership) is entitled to royalties equal to 3% of the gross sales reported by A&W restaurants in the Royalty Pool.

The Royalty Pool is adjusted annually to reflect gross sales from new A&W restaurants, net of the gross sales of any A&W restaurants that have permanently closed. Additional limited partnership units (LP units) are issued to A&W Food Services to reflect the annual adjustment. A&W Food Services' additional LP units are exchanged for additional shares of Trade Marks which are exchangeable for units of the Fund.

As at September 6, 2020 and October 14, 2020, A&W Food Services owned 23.6% of the common shares of Trade Marks, and therefore owned the equivalent of 23.6% of the units of the Fund on a fully-diluted basis.

Trade Marks' dividends to A&W Food Services and the Fund, and the Fund's distributions to unitholders are based on top-line revenues of the A&W restaurants in the Royalty Pool, less interest, general and administrative expenses and current income taxes of Trade Marks.

ABOUT A&W FOOD SERVICES
A&W is the second largest quick-service hamburger restaurant chain in Canada. Operating coast-to-coast, A&W restaurants feature famous trade-marked menu items such as The Burger Family^®, Chubby Chicken^® and A&W Root Beer^®.

Follow A&W on Facebook (www.facebook.com/AWCanada) and Twitter @AWCanada or visit www.awincomefund.ca.

NON-IFRS MEASURES
The Fund believes that disclosing certain non-IFRS financial measures provides readers of this news release with important information regarding the Fund's financial performance and its ability to pay distributions to Unitholders. By considering these measures in combination with the most closely comparable IFRS measure, if any, the Fund believes that readers are provided with additional and more useful information about the Fund than readers would have if they simply considered IFRS measures alone.

The Fund uses "Same Store Sales Growth", "distributable cash", "distributable cash per equivalent unit", "total distributions and dividends declared and accrued per equivalent unit", "payout ratio" and "net income, excluding non-cash items" as non-IFRS measures in this news release. These measures do not have a standardized meaning prescribed by IFRS and the Fund's method of calculating these measures may differ from those of other issuers or companies and may not be comparable to similar measures used by other issuers or companies. For further details, including how such measures are calculated by the Fund see "Financial Highlights" above and for reconciliations of certain of these non-IFRS measures to the most closely comparable IFRS measure, see the Fund's MD&A for the third quarter ended September 6, 2020, which will be filed on SEDAR at www.sedar.com in due course.

Forward-Looking Information
Certain statements in this press release may contain forward-looking information within the meaning of applicable securities laws in Canada (forward-looking information). The words "anticipates", "believes", "budgets", "could", "estimates", "expects", "forecasts", "intends", "may", "might", "plans", "projects", "schedule", "should", "will", "would" and similar expressions are often intended to identify forward-looking information, although not all forward-looking information contains these identifying words.  Specific forward-looking statements include statements with respect to: the payment date for the special distribution to be paid on the units in October 2020; the payment date for the special dividend to be paid on the common shares of Trade Marks in October 2020; the Fund and A&W Food Services have agreed that repayment of the deferred royalties plus interest will take place no later than December 31, 2021; the expectation that currently closed A&W restaurants will reopen when able to do so; the Trustees, in consultation with their independent financial and legal advisors, will continue to closely monitor the sales results of, and projections for, the A&W restaurants in the Royalty Pool going forward with a view of continuing the payment of regular monthly distributions at a sustainable level; the dividends payable to A&W Food Services on its shares of Trade Marks (which includes the special dividend) are to be deferred until the deferred royalties and interest are paid in full; and A&W Food Services' belief that its natural ingredients, menu innovation, and continued new restaurant growth, will help it to rebound from the impacts of COVID-19. The forward-looking information is based on assumptions that management considered reasonable at the time it was prepared, which assumptions include: current store closures will be temporary and restaurant performance will continue to improve; the Fund will receive sufficient revenue in the future (in the form of royalty payments from A&W Food Services) to maintain monthly distributions; the projections for the A&W business and the Fund provided by A&W Food Services are accurate and any deferred royalties will be repaid in full, with interest no later than December 31, 2021; and the impacts of the COVID-19 pandemic on the A&W system will not significantly worsen. The forward-looking information is subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by the forward-looking information. Those risks and uncertainties include, among other things, risks related to: the impacts of the COVID-19 pandemic on the Canadian economy, the QSR industry, the willingness of the general public to dine outside their homes and travel, the level of consumer confidence in the safety of QSR restaurants and A&W restaurants, all of which have and are expected to continue to negatively impact A&W Food Services and the Fund and have or may, as applicable, adversely affect each of A&W Food Services', their franchisees' and the Fund's respective investments, results of operations, financial condition, ability to obtain additional equity or debt financing, or re-finance existing debt, or make interest and principal payments to their respective lenders, and otherwise satisfy their respective financial obligations as they become due and may cause each of A&W Food Services, their franchisees and the Fund to be in non-compliance with one or more of the financial covenants under their respective existing credit facilities and cause a default thereunder; A&W Food Services may become liable for the lease obligations of certain of its franchisees, if such franchisees default on their leases, and such obligations may be significant and A&W Food Services may be unsuccessful in seeking recovery from such franchisees, all of which may adversely affect A&W Food Services' investments, results of operations and financial condition; there is no guarantee that A&W Food Services will repay any deferred royalty payments, and interest thereon by December 31, 2021, or at all, or that further royalty payments will not be deferred; A&W Food Services' projections may be inaccurate, and do not represent a financial forecast and actual results may differ materially from those anticipated by the projections; monthly distributions are not guaranteed and may be reduced, suspended or terminated at any time; the current sales improvement trends of the A&W restaurants in the Royalty Pool may not continue and may slow or regress; certain A&W restaurants that are currently temporarily closed may not reopen; government restrictions related to COVID-19 may have their durations extended, or may be reinstated, in the case of those that have recently been lifted, which measures may restrict the ability of A&W restaurants to operate, or result in forced closures, further reduced guest traffic, supply interruptions or staff shortages; and, government programs expected to be helpful to A&W Franchisees may not be available to some franchisees, and may not be available in amounts expected for those franchisees for which such programs are available and may be terminated at any time, and following the termination of such programs, or the reduction of amounts available under such programs, franchisees currently receiving support under those programs may need to find alternative sources of financial support and may make requests for such support from, among other parties, A&W Food Services. Additional factors which could cause results to differ from current expectations are described in the Fund's most recent Management Discussion and Analysis under the heading "Risks and Uncertainties" and the Fund's Annual Information Form under the heading "Risk Factors", available on SEDAR at www.sedar.com. The forward-looking information contained in this news release represent the Fund's expectations as of the date of this news release, and are subject to change after this date. The Fund assumes no obligation to update or revise any forward-looking information, except as required by applicable law.

SOURCE A&W Revenue Royalties Income Fund