A&W Revenue Royalties Income Fund (Trading Symbol. TSX: AW.UN)

VANCOUVER, BC, July 7, 2020 /CNW/ - A&W Revenue Royalties Income Fund (the "Fund") today announced that it is resuming monthly distributions to its unitholders in the amount of 10 cents per trust unit.  Accordingly, the Fund has declared a cash distribution of 10 cents per trust unit for the month of June 2020.  This distribution will be paid on July 31, 2020 to unitholders of record at the close of business July 15, 2020.  This distribution will be taxed as a non-eligible dividend, as the source of funds to pay the distribution is a dividend from A&W Trade Marks Inc. (Trade Marks).

The Fund also announced that A&W Food Services of Canada Inc. (A&W Food Services) will be resuming regular royalty payments. The royalty of 3% of system sales of the 971 A&W restaurants in the royalty pool (the "Royalty Pool") is to be paid on July 10, 2020 based upon system sales of A&W restaurants in the Royalty Pool for the four-week period ended June 14, 2020.

The Trustees of the Fund determined to recommence monthly distributions to unitholders on the basis of the recent improvement in the performance of the A&W restaurants in the Royalty Pool and the resumption of royalty payments by A&W Food Services.   In making that determination, the Trustees 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.

A&W Food Services has deferred royalty payments payable to the Fund for three four-week periods, totaling at June 30, 2020, $7.5 million, inclusive of interest.  The Trustees and A&W Food Services are developing a plan for the payment of this amount with interest to the date of payment.

Trade Marks will declare an equivalent 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 dividend is not be paid to A&W Food Services until it has paid all deferred royalties, together with interest to the Fund.

A&W Food Services and the Fund are jointly providing a further update on the impact of the COVID-19 pandemic on A&W restaurant operations and the decisions taken by the Trustees of the Fund. 

Update:

• Same Store Sales Growth for A&W Restaurants in the Royalty Pool were -31.6% for the second quarter of 2020 as compared to the second quarter of 2019.
• Actions required in response to the COVID-19 pandemic have adversely affected restaurant operations across Canada, including the temporary closures of a large number of restaurants.
• At its peak a total of 230 A&W restaurants (out of 971 restaurants in the Royalty Pool) were temporarily closed. There was steady improvement during the second quarter and at quarter end (June 14, 2020), 109 restaurants in the Royalty Pool remained temporarily closed. Since then, approximately 85 of those temporarily closed A&W restaurants have reopened. The balance of the A&W restaurants are currently expected to reopen when permitted by the appropriate authorities.
• For most of the second quarter of 2020, A&W restaurants which were operating were restricted to drive thru, delivery and mobile ordering.
• In a number of locations, A&W restaurants are now permitted to open for limited dine-in and take out sales.

Given the extraordinary level of business uncertainty, especially related to the restaurant industry, coupled with the immediate decline in A&W restaurant sales and therefore the royalty payable to the Fund by A&W Food Services, the Trustees announced on March 31, 2020 that monthly distributions on the Units would be temporarily suspended commencing with the distribution that would ordinarily have been declared in April 2020.  The Trustees determined that temporarily suspending distributions to unitholders was the most prudent course of action until business conditions and sales trends became less uncertain. They did so mindful of the long-term interests of the Fund, recognizing that it is in the long-term interest of unitholders to have a healthy and stable network of A&W restaurants coming out of the COVID-19 pandemic. 

The Trustees previously communicated that they would continue to closely monitor the results of operations and outlook of A&W Food Services and the A&W system with the intention to preserve unitholder value by restarting distributions in a prudent manner based upon A&W restaurant sales that permit distributions to be paid in amounts that are reasonably predictable. The Trustees have received weekly written and oral updates from A&W Food Services regarding the A&W business and the steps being taken by A&W Food Services to protect and restore the A&W business.  The Trustees also received updated financial projections for both the Fund and A&W Food Services for the remainder of 2020. As noted above, the Trustees have determined, in consultation with their independent financial advisors and legal counsel, that it is prudent to restart monthly distributions at 10 cents per unit. The Trustees, in consultation with their independent financial 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 to ensuring the payment of regular monthly distributions at a sustainable level.

As previously announced, A&W Food Services delayed the royalty payment payable for the last royalty payment period in Q1 2020 and informed the Fund that A&W Food Services expected to defer payment of royalty payments for Q2 2020. As at July 7, 2020 there are three deferred royalty payments due from A&W Food Services.  The total amount payable, with interest, at June 30, 2020 is $7.5 million.  A&W Food Services will resume the regular payment of royalties commencing with the royalty payment due on July 10, 2020 for system sales for the last royalty payment period in Q2 2020.

The Trustees and A&W Food Services are formulating a plan for the payment of the deferred royalties and interest.

Further information with respect to the financial results and position of the Fund and A&W Food Services will be included with their respective financial statements for the second quarter of 2020, which are to be released later this month.

Implications for the Fund and Unitholders

Although there continues to be improvement in sales trends, restrictions on the operations of A&W restaurants in response to COVID-19 as well as temporary restaurant closures have resulted, and are expected to continue to result, in material year over year declines to system sales at A&W restaurants for the remainder of 2020, if not longer.  These declines will result in reductions to the amounts of royalties payable to the Fund, and, correspondingly, cash available to distribute to unitholders of the Fund.

ABOUT THE FUND

The Fund is a limited purpose trust established to invest in A&W Trade Marks Inc., 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.  In return for licensing A&W Food Services to use its trade-marks, the Fund (through the Partnership and Trade Marks) 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, at the option of A&W Food Services, for units of the Fund. 

As at July 7, 2020 A&W Food Services owned 23.6% of the common shares of Trade Marks, representing 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 Food Services 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®

FORWARD LOOKING INFORMATION

Certain statements in this news 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 resumption of monthly distributions and the amount thereof; the record and payment date for the distribution to be paid in July 2020; the resumption of royalty payments by A&W Food Services; the date of the next royalty payment; the Trustees and A&W Food Services developing a plan for the payment of the deferred royalties with interest to the date of payment; the expectation that currently closed A&W restaurants will reopen when permitted by appropriate authorities; the Trustees, in consultation with their independent financial 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 to ensuring the payment of regular monthly distributions at a sustainable level; the dividends payable to A&W Food Services on its shares of Trade Marks are to be deferred until the deferred royalties and interest are paid in full; the expected timing of the release of the financial results of the Fund and A&W Food Services; the expectation that the impacts of COVID-19 will continue to result, in material year over year declines to system sales at A&W restaurants for the remainder of 2020, if not longer and that such declines will result in reductions to the amounts of royalties payable to the Fund, and, correspondingly, cash available to distribute to unitholders of the Fund. 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; 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,  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. 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.  

The Fund and A&W Food Services typically only provide a business update during the normal quarterly reporting. Given these are not normal times, as Canadians continue to navigate this public health crisis, the Fund and A&W Food Services have provided this information as the impact of the COVID-19 pandemic remains fluid and the Fund and A&W Food Services are continuing to assess the impact COVID-19 has had and is expected to have on the A&W system.

NON-IFRS Measures

The Fund uses "Same Store Sales Growth" as a non-IFRS measure in this news release. This measure does not have a standardized meaning prescribed by IFRS and the Fund's method of calculating this measure 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 measure is calculated by the Fund will be included in the Fund's MD&A for the second quarter ended June 14, 2020, which will be filed on SEDAR at www.sedar.com in due course.

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SOURCE A&W Revenue Royalties Income Fund