Boston Pizza Royalties Income Fund Announces 2019 Third Quarter Results

Toronto Stock Exchange: BPF.UN

Same Restaurant Sales of negative 4.2% for the Period and negative 2.3% YTD

Highlights

• System-Wide Gross Sales¹ of $283.6 million for the Period and $830.2 million YTD, representing decreases of 2.3% and 0.8%, respectively, versus the same periods one year ago.
• Franchise Sales² from royalty pool restaurants of $219.2 million for the Period and $642.6 million YTD, representing decreases of 2.3% and 0.2%, respectively, versus the same periods one year ago.
• Same Restaurant Sales³ of negative 4.2% for the Period and negative 2.3% YTD.
• Same Restaurant Sales on a Franchise Sales basis of negative 3.6% for the Period and negative 1.4% YTD.
• Distributable Cash⁴ per Unit decreased 1.4% for the Period and decreased 0.6% YTD.
• Payout Ratio⁵ of 96.2% for the Period, 103.7% YTD, and 103.7% on a trailing 12-month basis. Cash balance at the end of the Period was $2.2 million.
• On November 6, 2019 the trustees of the Fund declared the October 2019 distribution to unitholders of 11.5 cents per Unit.

VANCOUVER, Nov. 7, 2019 /CNW/ - Boston Pizza Royalties Income Fund (the "Fund") and Boston Pizza International Inc. ("BPI") reported financial results today for the third quarter period from July 1, 2019 to September 30, 2019 (the "Period") and January 1, 2019 to September 30, 2019 ("YTD").  A copy of this press release, the condensed consolidated interim financial statements and related Management's Discussion and Analysis ("MD&A") of the Fund and BPI are available at www.sedar.com and www.bpincomefund.com.  The Fund will host a conference call to discuss the results on November 7, 2019 at 8:30 am Pacific Time (11:30 am Eastern Time).  The call can be accessed by dialling 1-800-319-4610 or 604-638-5340. A replay will be available until December 8, 2019 by dialling 1-800-319-6413 or 604-638-9010. and entering the access code: 3755 followed by the # sign. The replay will also be available at www.bpincomefund.com.

Same Restaurant Sales ("SRS"), a key driver of distribution growth for unitholders of the Fund, was negative 4.2% for the Period and negative 2.3% YTD compared with 0.0% and positive 0.2%, respectively, for the same periods in 2018.  Franchise Sales, the basis upon which Royalty⁶ and Distribution Income⁶ are paid to the Fund, exclude revenue from the sale of liquor, beer, wine and approved national promotions and discounts.  On a Franchise Sales basis, SRS was negative 3.6% for the Period and negative 1.4% YTD compared with negative 0.2% and negative 0.4%, respectively, for the same periods in 2018. SRS results for the Period and YTD were principally due to declines in restaurant guest traffic, partially offset by increased take-out and delivery sales and menu price increases.  Management of BPI believes that such declines in guest traffic are the results of increased competition in the full‑service restaurant sector, shifts in consumer spending habits in response to increased menu pricing tied to rising minimum wages, waning consumer confidence in the retail sector, higher levels of household debt and higher proportions of Boston Pizza restaurants being located in regions of Canada that are facing economic challenges.  Franchise Sales of restaurants in the Fund's Royalty Pool were $219.2 million for the Period and $642.6 million YTD compared to $224.4 million and $643.8 million, respectively, for the same periods in 2018.  The decreases in Franchise Sales for the Period and YTD were primarily due to negative SRS on a Franchise Sales basis, partially offset by additional Franchise Sales from five Net New Restaurants⁷ added to the Royalty Pool on January 1, 2019.

"This quarter has been challenging for the full-service restaurant industry in Canada, and we are not satisfied with our sales results" said Jordan Holm, President of BPI.  "Boston Pizza is aggressively pursuing strategies to increase guest visits to our restaurants including new menu innovation, targeted promotional campaigns and substantial renovations of existing BP restaurants across the country.  In addition, we are taking advantage of the growing consumer preference for take-out and delivery meal occasions by enhancing our online ordering capabilities via www.bostonpizza.com and the MyBP app, and by partnering with third party delivery service providers."

The Fund's net and comprehensive income was $6.9 million for the Period compared to net and comprehensive income of $0.9 million for third quarter of 2018. The $6.0 million increase in the Fund's net and comprehensive income for the Period compared to the third quarter of 2018 was primarily due to a $7.4 million change in fair value adjustments, partially offset by higher non-cash deferred income taxes of $1.1 million. The Fund's net and comprehensive income was $27.1 million YTD compared to net and comprehensive income of $9.6 million year-to-date in 2018.  The $17.5 million increase in the Fund's net and comprehensive income YTD compared to the same period in 2018 was primarily due to a $20.5 million change in fair value adjustments, partially offset by higher non-cash deferred income taxes of $2.5 million. For a detailed discussion on the Fund's net and comprehensive income, please see the "Operating Results – Net and Comprehensive Income / Basic and Diluted Earnings" section in the Fund's MD&A for the Period and YTD.  The Fund's net income under International Financial Reporting Standards ("IFRS") contains non-cash items, such as the fair value adjustments on financial instruments and deferred income taxes, that do not affect the Fund's business operations or its ability to pay distributions to unitholders.  In the Fund's view, net income is not the only or most meaningful measurement of the Fund's ability to pay distributions.  Consequently, the Fund reports the non-IFRS metrics of Distributable Cash and Payout Ratio to provide investors with more meaningful information regarding the amount of cash that the Fund has generated to pay distributions and the extent to which the Fund has distributed that cash.  The Fund also reports the non-IFRS metric of SRS to provide investors useful information regarding the change in gross sales of Boston Pizza restaurants.  Readers are cautioned that Distributable Cash, Payout Ratio and SRS are non-IFRS financial measures that do not have standardized meanings prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.  For a reconciliation between cash flow from operating activities (the most directly comparable IFRS measure) and Distributable Cash see the "Financial Summary" section of this press release.  For a detailed discussion on the Fund's Distributable Cash and Payout Ratio, please see the "Operating Results – Distributable Cash / Payout Ratio" section in the Fund's MD&A for the Period and YTD. A reconciliation of SRS to an IFRS measure is not possible.

The Fund generated Distributable Cash of $7.8 million for the Period, compared to $8.0 million for the third quarter of 2018.  The decrease in Distributable Cash of $0.2 million or 2.0% was primarily due to lower Royalty and Distribution Income of $0.3 million and an increase in BPI's entitlement related to Class B general partner units of Boston Pizza Royalties Limited Partnership ("Royalties LP") of $0.1 million, partially offset by lower SIFT Tax of $0.1 million.  The Fund generated Distributable Cash of $21.7 million YTD compared to $22.0 million year-to-date in 2018.  The decrease in Distributable Cash of $0.3 million or 1.1% was primarily attributable to lower Royalty and Distribution Income of $0.2 million and an increase in BPI's Class B Unit entitlement of $0.3 million, partially offset by lower SIFT Tax of $0.1 million.

The Fund generated Distributable Cash per unit of the Fund ("Unit") of of $0.359 for the Period compared to $0.364 per Unit for the third quarter of 2018.  The decrease in Distributable Cash per Unit of of $0.005 or 1.4% was primarily attributable the decrease in Distributable Cash outlined above, partially offset by there being fewer Units outstanding compared to the same period in 2018 due to the Fund's normal course issuer bid that was active from November 26, 2018 to December 14, 2018, which resulted in the purchase and cancellation of 98,300 Units at an average price of $15.86 per Unit (the "2018 NCIB"). The Fund generated Distributable Cash per Unit of $0.998 YTD compared to $1.004 per Unit year-to-date in 2018.  The decrease in Distributable Cash per Unit of $0.006 or 0.6% was primarily attributable to the decrease in Distributable Cash outlined above, partially offset by there being fewer Units outstanding compared to the same period in 2018 due to the Fund's 2018 NCIB.

The Fund's Payout Ratio was 96.2% for the Period and 103.7% YTD compared to 94.7% and 103.1%, respectively, for the same periods in 2018. The increase in the Fund's Payout Ratio for the Period compared to the same period in 2018 was due to the combined effects of Distributable Cash decreasing by $0.2 million or 2.0%, partially offset by distributions paid decreasing by a nominal amount or 0.5%. The increase in the Fund's Payout Ratio YTD compared to the same period in 2018 was due to the combined effects of Distributable Cash decreasing by $0.3 million or 1.1%, partially offset by distributions paid decreasing by $0.1 million or 0.5%. Distributions paid for the Period and YTD decreased as a result of there being fewer Units outstanding compared to same period in 2018 due to the 2018 NCIB.  The Fund strives to provide unitholders with consistent monthly distributions, and as a result, the Fund will generally experience seasonal fluctuations in its Payout Ratio.  The Fund's Payout Ratio is likely to be higher in the first and fourth quarters each year compared to the second and third quarters each year since Boston Pizza restaurants generally experience higher Franchise Sales during the summer months when restaurants open their patios and benefit from increased tourist traffic.  Higher Franchise Sales generally result in increases in Distributable Cash. On a trailing 12-month basis, the Fund's Payout Ratio was 103.7% as at September 30, 2019.  A key feature of the Fund is that it is a "top line" structure, in which BPI and Boston Pizza Canada Limited Partnership  ("BP Canada LP") pay the Fund an amount based on Franchise Sales from restaurants in the Royalty Pool.  Accordingly, unitholders of the Fund are not directly exposed to changes in the operating costs or profitability of BPI, BP Canada LP or individual Boston Pizza restaurants.  Given this structure, and that the Fund has no current mandate to retain capital for other purposes, it is expected that the Fund will maintain a Payout Ratio close to 100% over time as the trustees of the Fund continue to distribute all available cash in order to maximize returns to unitholders.

On November 6, 2019 the trustees of the Fund approved a cash distribution to unitholders of 11.5 cents per Unit in respect of the period from October 1, 2019 to October 31, 2019.  This distribution will be payable on November 29, 2019 to unitholders of record at the close of business on November 21, 2019.  The Fund periodically reviews distribution levels based on its policy of stable and sustainable distribution flow to unitholders.  Including the October 2019 distribution, which will be payable on November 29, 2019, the Fund will have paid out 208 consecutive monthly distributions totaling $331.9 million or $21.79 per Unit. Unitholders have received 18 distribution increases since the Fund's initial public offering of Units in 2002. 

FINANCIAL SUMMARY

The table below sets out selected information from the Fund's condensed consolidated interim financial statements together with other data and should be read in conjunction with the condensed consolidated interim financial statements and MD&A of the Fund for the three and nine month periods ended September 30, 2019 and 2018.

For the periods ended September 30	Q3 2019	Q3 2018	YTD 2019	YTD 2018
(in thousands of dollars – except restaurants, SRS, Payout Ratio and per Unit items)
System-Wide Gross Sales	283,570	290,331	830,178	836,714
Number of restaurants in Royalty Pool	396	391	396	391
Franchise Sales reported by restaurants in the Royalty Pool	219,226	224,368	642,555	643,758
Royalty income	8,769	8,974	25,702	25,750
Distribution Income	2,886	2,991	8,461	8,584
Interest income	9	8	31	24
Total revenue	11,664	11,973	34,194	34,358
Administrative expenses	(345)	(303)	(968)	(956)
Interest expense on debt	(712)	(672)	(2,117)	(1,983)
Interest expense on Class B Unit liability	(1,010)	(908)	(2,750)	(2,483)
Profit before fair value adjustments and income taxes^8	9,597	10,090	28,359	28,936
Fair value adjustment on investment in BP Canada LP	(873)	(13,476)	11,675	(25,424)
Fair value adjustment on Class B Unit liability	385	5,380	(4,987)	10,153
Fair value adjustment on interest rate swaps	97	298	(1,148)	320
Current and deferred income tax expense	(2,343)	(1,361)	(6,768)	(4,355)
Net and comprehensive income	6,863	931	27,131	9,630
Basic earnings per Unit	0.31	0.04	1.25	0.44
Diluted earnings (loss) per Unit	0.27	(0.17)	1.25	0.05
Distributable Cash / Distributions / Payout Ratio
Cash flows from operating activities	9,497	9,548	26,900	26,796
BPI Class B Unit entitlement	(1,025)	(915)	(3,102)	(2,796)
Interest paid on long-term debt	(710)	(687)	(2,119)	(2,027)
SIFT Tax on Units	52	25	60	1
Distributable Cash	7,814	7,971	21,739	21,974
Distributions paid	7,516	7,551	22,550	22,652
Payout Ratio	96.2%	94.7%	103.7%	103.1%
Distributable Cash per Unit	0.359	0.364	0.998	1.004
Distributions paid per Unit	0.345	0.345	1.035	1.035
Other
Same Restaurant Sales	(4.2%)	0.0%	(2.3%)	0.2%
Number of restaurants opened	2	2	5	3
Number of restaurants closed	0	4	4	5
			Sep 30, 2019	Dec 31, 2018
Total assets			417,337	403,686
Total liabilities			137,583	131,019

Notes:
1)	"System-Wide Gross Sales" means the gross revenue: (i) of the corporate Boston Pizza restaurants in Canada owned by BPI; and (ii) reported to BP Canada LP by franchised Boston Pizza restaurants in Canada, without audit or other form of independent assurance, and in the case of both (i) and (ii), including revenue from the sale of liquor, beer, wine and revenue from BP Canada LP approved national promotions and discounts and excluding applicable sales and similar taxes.
2)	"Franchise Sales" is the basis upon which Royalty and Distribution Income are payable, and means the gross revenue: (i) of the corporate Boston Pizza restaurants in Canada owned by BPI that are in the Fund's Royalty Pool; and (ii) reported to BP Canada LP by franchised Boston Pizza restaurants in Canada that are in the Fund's Royalty Pool, without audit or other form of independent assurance, and in the case of both (i) and (ii), after deducting revenue from the sale of liquor, beer, wine and revenue from BP Canada LP approved national promotions and discounts and excluding applicable sales and similar taxes. Nevertheless, BP Canada LP periodically conducts audits of the Franchise Sales reported to it by its franchisees, and the Franchise Sales reported herein include results from sales audits of earlier periods.
3)	"Same Restaurant Sales" or "SRS" (previously named "same store sales growth" – see the "Overview – Top-Line Fund / Increases in Franchise Sales" section of the Fund's MD&A for the Period and YTD for more details) is the change in gross revenue of Boston Pizza restaurants as compared to the gross revenue for the same period in the previous year for Boston Pizza restaurants that have been open for a minimum 24 months.  SRS 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.  Management believes SRS provides investors useful information regarding the change in gross sales of Boston Pizza restaurants.
4)	"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.  Management believes that this non-IFRS financial measure provides useful information to investors regarding the amount of cash the Fund has generated for distribution on the Units.  The preceding table provides a reconciliation from this non-IFRS financial measure to cash flows from operating activities, which is the most directly comparable IFRS measure.  Investors are cautioned that this should not be construed as an alternative to cash flows from operating activities.  For additional information regarding this financial metric, see the heading "Description of Non-IFRS and Additional IFRS Measures" in the Fund's MD&A for the Period and YTD.
5)	"Payout Ratio" is calculated by dividing the aggregate distributions paid by the Fund during a period by the Distributable Cash generated in that period.  Payout Ratio 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.  Management believes that this non-IFRS financial measure provides investors with useful information regarding the extent to which the Fund distributes cash on the Units.  As the Payout Ratio is calculated from a formula which includes Distributable Cash, which is a non-IFRS measure, a reconciliation of Payout Ratio to an IFRS measure is not possible.  For additional information regarding this financial metric, see the heading "Description of Non-IFRS and Additional IFRS Measures" in the Fund's MD&A for the Period and YTD.
6)	Royalties LP licenses BPI the right to use various Boston Pizza trademarks in return for BPI paying Royalties LP a royalty equal to 4% of Franchise Sales of Boston Pizza restaurants (the "Royalty") in the Fund's royalty pool (the "Royalty Pool").  "Distribution Income" is income received indirectly by the Fund on Class 1 LP Units and Class 2 LP Units of BP Canada LP.  See the "Overview – Purpose of the Fund / Sources of Revenue" section of the Fund's MD&A for the Period and YTD for more details.
7)	On January 1 of each year, an adjustment is made to add the Fund's Royalty Pool new Boston Pizza restaurants that opened and to remove any Boston Pizza restaurants that permanently closed since January 1 of the previous year (the "Net New Restaurants").
8)	Profit before fair value adjustments and income taxes is an additional IFRS measure.  For additional information regarding these financial metrics, see the heading "Description of Non- IFRS and Additional IFRS Measures" in the Fund's MD&A for the Period and YTD.
9)	Capitalized terms used in this press release that are undefined have the meanings ascribed to them in the Fund's MD&A for the Period and YTD.

OUTLOOK

The Fund's and Boston Pizza's growth plans are largely dependent upon the ability to generate positive SRS.  The two principal factors that affect SRS are changes in guest traffic and changes in average guest cheque.  BPI's and BP Canada LP's strategies to drive higher guest traffic include attracting a wide variety of guests into the restaurant, sports bar and take-out and delivery channels of each restaurant, offering a compelling value proposition to guests and leveraging a large marketing budget to drive national and local restaurant promotions.  Increased average cheque levels are expected to be achieved through a combination of culinary innovation and periodic menu re-pricing.  In addition, the franchise agreement governing each Boston Pizza Restaurant requires a complete restaurant renovation every seven years.  Restaurants typically close for two to three weeks to complete the renovation and experience an incremental sales increase in the year following the re-opening.

The Canadian full-service restaurant sector has recently experienced declines in guest traffic and Boston Pizza is no exception.  Management of BPI believes that such declines are the results of increased competition in the full-service restaurant sector, shifts in consumer spending habits in response to increased menu pricing tied to rising minimum wages, waning consumer confidence in the retail sector, higher levels of household debt and higher proportions of Boston Pizza restaurants being located in regions of Canada that are facing economic challenges.  These factors have contributed to the decline in Boston Pizza's recent SRS performance.  Management of BPI is aggressively implementing various initiatives to mitigate the effects current industry challenges are having on Boston Pizza's results, however, if current industry challenges persist, they will continue to negatively affect SRS.  Notwithstanding the current industry challenges, management of BPI continues to believe that Boston Pizza is well-positioned to attract guests, achieve positive SRS over the long term and continue to strengthen its position as the number one casual dining brand in Canada.  In addition, management of BPI continues to believe that Boston Pizza remains well positioned for long term future expansion.

ABOUT US

The Fund is a limited purpose open ended trust with an excellent track record for investors since its IPO in 2002.  Including the October 2019 distribution which is payable on November 29, 2019, the Fund has delivered 18 distribution increases and 208 consecutive monthly distributions totaling $331.9 million or $21.79 per Unit. The Fund earns revenue based on the franchise system sales of the 396 Boston Pizza restaurants in the Fund's royalty pool.

BPI is Canada's number one casual dining brand with annual gross sales of over $1.1 billion serving more than 50 million guests through over 395 mainly franchisee operated restaurants.  The Boston Pizza brand has successfully existed for over 50 years since opening its first restaurant in Edmonton, Alberta in 1964.  BPI has been recognized as a Platinum Member of Canada's 50 Best Managed Companies and has been a Franchisees' Choice Designation winner for eight consecutive years.

Certain information in this press release constitutes "forward-looking information" that involves known and unknown risks, uncertainties, future expectations and other factors which may cause the actual results, performance or achievements of the Fund, Boston Pizza Holdings Trust, Boston Pizza Royalties Limited Partnership, Boston Pizza Holdings Limited Partnership, Boston Pizza Holdings GP Inc., Boston Pizza GP Inc., BPI, BP Canada LP, Boston Pizza Canada Holdings Inc., Boston Pizza Canada Holdings Partnership, Boston Pizza restaurants, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information.  All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Fund or management of BPI expects or anticipates will or may occur in the future, including such things as, Boston Pizza aggressively pursuing strategies to increase guest visits to restaurants including new menu innovation, targeted promotional campaigns and substantial renovations of existing BP restaurants across the country, growing consumer preference for take-out and delivery meal occasions by enhancing online ordering capabilites and partnering with third party delivery services, seasonal fluctuations in the Payout Ratio, the Payout Ratio is likely to be higher in the first and fourth quarters, higher Franchise Sales generally result in increases in Distributable Cash, a Payout Ratio close to 100% will be maintained, trustees of the Fund will continue to distribute all available cash in order to maximize returns to unitholders, managemnet of BPI aggressively implementing various initiatives to mitigate the effects current industry challenges are having on Boston Pizza's results, the persistance of industry challenges continuing to negatively affect SRS, management of BPI continuing to believe that Boston Pizza is well positioned to attract guests, achieve positive SRS over the long term, continue to stregthen its position as the number one casual dining brand in Canada and for long-term future expansion, attracting a wide variety of guests into the restaurant, sports bar and take-out and delivery channels at each restaurant, offering compelling value propostion to guests, leveraging a large marketing budget to drive national and restaurant promotions, increases in average guest cheques levels, incremental sales increasing after restaurant renovations, plans to pursue restaurant development opportunities and other such matters are forward-looking information.  When used in this press release, forward-looking information may include words such as "anticipate", "estimate", "may", "will", "expect", "believe", "plan", "should", "continue" and other similar terminology.  The material factors and assumptions used to develop the forward-looking information contained in this press release include the following: future results being similar to historical results, expectation related to future general economic conditions, business plans, receipt of franchise fees and other amounts, franchisees access to financing, pace of commercial real estate development, protection of intellectual property rights of Boston Pizza Royalties Limited Partnership and absence of changes of laws.  Risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievement expressed or implied by the forward-looking information contained herein, relate to (among others) competition, demographic trends, consumer preferences and discretionary spending patterns, business and economic conditions, legislation, and regulation, Distributable Cash and reliance on operating revenues, accounting policies and practices, the results of operations and financial condition of BPI, BP Canada LP and the Fund, changes in consumer spending habits, consumer confidence in the retail sector, household debt, as well as those factors discussed under the heading "Risks and Uncertainties" in the most recent Annual Information Form of the Fund. This information reflects current expectations regarding future events and operating performance and speaks only as of the date of this press release. Except as required by law, the Fund and BPI assume no obligation to update previously disclosed forward-looking information. For a complete list of the risks associated with forward-looking information and the Fund's business, please refer to the "Risks and Uncertainties" and "Note Regarding Forward-Looking Information" sections included in the Fund's MD&A for the Period and YTD available at www.sedar.com and www.bpincomefund.com.

The trustees of the Fund approved the contents of this press release.

® Boston Pizza Royalties Limited Partnership. All Boston Pizza registered Canadian trade-marks and unregistered Canadian trade-marks containing the words "Boston", "BP", and/or "Pizza" are trade-marks owned by the Boston Pizza Royalties Limited Partnership and licensed by the Boston Pizza Royalties Limited Partnership to Boston Pizza International Inc.

SOURCE Boston Pizza Royalties Income Fund

Michael Harbinson, Chief Financial Officer, Tel: [phone], E-mail: [email protected], www.bpincomefund.com