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Boston Pizza Royalties Income Fund
Symbol C : BPF.UN
Shares Issued 21,886,063
Close 2019-01-02 C$ 15.98
Recent Sedar Documents

Boston Pizza adds 10 new restaurants to royalty pool

2019-01-02 08:11 ET - News Release

Mr. Jordan Holm reports

BOSTON PIZZA INTERNATIONAL ADDS 10 NEW RESTAURANTS OPENED IN 2018 TO THE ROYALTY POOL OF BOSTON PIZZA ROYALTIES INCOME FUND

Effective Jan. 1, 2019, Boston Pizza Royalties Income Fund's royalty pool has been adjusted to include the 10 new full-service restaurants opened across Canada between Jan. 1, 2018, and Dec. 31, 2018, and to remove the five full-service restaurants that were permanently closed during the period. With the adjustment for these openings and closures during 2018, the royalty pool now includes 396 Boston Pizza restaurants. This is the 17th consecutive year of adding new Boston Pizza restaurants into the royalty pool.

"We are very pleased with the 10 new Boston Pizza restaurants opened in 2018, including five in Western Canada, three in Eastern Canada and two in Quebec. These new locations further strengthen our position as Canada's No. 1 casual dining brand," said Jordan Holm, president of Boston Pizza International Inc. "Since the inception of the fund, 242 net new Boston Pizza restaurants have been added to the royalty pool, growing from 154 in 2002 to 396 locations across the country today."

The fund effectively receives 5.5 per cent of franchise revenues of Boston Pizza restaurants in the royalty pool less the pro rata portion payable to BPI in respect of its retained interest in the fund. Annually, the royalty pool of Boston Pizza restaurants is adjusted to include the new Boston Pizza restaurants that opened, and to remove Boston Pizza restaurants that permanently closed, in the prior year.

On Jan. 1 of each year, an adjustment is made to add to the royalty pool new Boston Pizza restaurants that opened and to remove any Boston Pizza restaurants that permanently closed since the last adjustment date. In return for adding net additional royalty and distribution income from net new restaurants, BPI receives the right to indirectly acquire additional units of the fund. The calculation of additional entitlements is designed to be accretive to unitholders of the fund as the expected increase in net franchise revenues from the net new restaurants added to the royalty pool is valued at a 7.5-per-cent discount. The additional entitlements are calculated at 92.5 per cent of the estimated royalty and distribution income expected to be generated by the net new restaurants, multiplied by one minus the effective tax rate estimated to be paid by the fund during that year, divided by the yield of the fund, divided by the weighted average unit price over a specified period. BPI indirectly receives 80 per cent of the additional entitlements initially, with the balance received when the actual full-year performance of the net new restaurants and the actual effective tax rate paid by the fund are known with certainty. BPI indirectly receives 100 per cent of distributions from the additional entitlements (including the holdback) throughout the year. Once the net new restaurants have been part of the royalty pool for a full year, an audit of the franchise revenues of these restaurants is performed, and the actual effective tax rate paid by the fund is determined. At such time, an adjustment is made to reconcile distributions indirectly paid to BPI and the additional entitlements indirectly received by BPI.

In return for adding net additional royalty and distribution income from the five net new restaurants added to the royalty pool, BPI indirectly received 255,019 additional entitlements (representing 80 per cent of the total additional entitlements), comprising 185,469 Class B additional entitlements and 69,550 Class 2 additional entitlements, and the holdback is 63,755 additional entitlements (representing 20 per cent of the total additional entitlements), comprising 46,367 Class B holdback and 17,388 Class 2 holdback. The holdback (as adjusted) will be indirectly received by BPI when both the actual full-year performance of the net new restaurants and the effective tax rate paid by the fund are known with certainty. Including the 255,019 additional entitlements, BPI indirectly holds Class B general partner units of Boston Pizza Royalties LP that are exchangeable for 2,309,446 fund units, and Class 2 general partner units of Boston Pizza Canada LP that are exchangeable for 785,837 fund units. Together, the Class B general partner units of Boston Pizza Royalties LP and Class 2 general partner units of Boston Pizza Canada LP indirectly held by BPI are currently exchangeable for 3,095,283 fund units, representing the equivalent of a 12.4-per-cent interest in the fund on a fully diluted basis. The 318,774 additional entitlements (being the 255,019 additional entitlements indirectly received by BPI plus the 63,755 holdback) represent 1.3 per cent of fund units on a fully diluted basis. Including the 318,774 additional entitlements described above, BPI indirectly has the right to acquire 3,233,548 fund units, representing a 12.9-per-cent interest in the fund on a fully diluted basis. The issuance of the additional entitlements indirectly to BPI has been conditionally approved by the Toronto Stock Exchange and remains subject to its final approval.

The estimated annual franchise revenues in 2019 for the 10 new Boston Pizza restaurants that opened in 2018 is $18.7-million. BPI is required to deduct from this amount the actual franchise revenues received from the five Boston Pizza restaurants that permanently closed in 2018 during the first 12-month period immediately following their addition to the royalty pool, which is $6.9-million. Consequently, the estimated annual net franchise revenues in 2019 for the five net new restaurants added to the royalty pool on Jan. 1, 2019, is $11.8-million. The estimated royalty and distribution income expected to be generated by these five net new restaurants is 5.5 per cent of this amount, or $700,000. The pretax amount for the purposes of calculating the additional entitlements, therefore, is approximately $600,000 or 92.5 per cent of $700,000. The estimated effective tax rate that the fund will pay in the calendar year 2019 is 27.0 per cent. Accordingly, the after-tax additional royalty and distribution income for the purposes of calculating the additional entitlements is approximately $400,000 ($600,000 times (one minus 0.27)). Once the actual performance of the 10 new Boston Pizza restaurants added to the royalty pool on Jan. 1, 2019, for 2019 and the actual effective tax rate paid by the fund for 2019 are known, the number of additional entitlements will be adjusted in 2020 to reflect the actual franchise revenues generated by these Boston Pizza restaurants in 2019 and the actual effective tax rate paid by the fund in 2019.

See the fund's annual information form dated Feb. 7, 2018, for a detailed description of the annual adjustment that is made to the royalty pool. Depending on market conditions and internal considerations, BPI may acquire or dispose of additional securities of the fund in the future.

The associated table sets forth a summary of the issued and outstanding units of the fund, together with additional entitlements, as at both Dec. 31, 2018, and Jan. 1, 2019.

                           SUMMARY OF BOSTON PIZZA ROYALTIES INCOME FUND UNITS

                                    Dec. 31, 2018,       Dec. 31, 2018,   Jan. 1, 2019,           Jan. 1, 2019,
                                         excluding            including       excluding               including
                                          holdback             holdback        holdback                holdback
Units outstanding
Total issued and
outstanding fund units                  21,787,763           21,787,763      21,787,763          21,787,763 (1)
Class B additional
entitlements outstanding
Class B additional
entitlements (excluding
Jan. 1, 2019, adjustment date)           2,123,977            2,123,977       2,123,977               2,123,977
Class B holdback
(excluding Jan. 1, 2019,
adjustment date)                               N/A               54,189             N/A              54,189 (2)
Class B additional
entitlements -- issued
Jan. 1, 2019 (five net
new restaurants)                               N/A                  N/A         185,469                 185,469
Class B holdback -- created
Jan. 1, 2019 (five net
new restaurants)                               N/A                  N/A             N/A              46,367 (3)
Total Class B additional
entitlements                             2,123,977            2,178,166       2,309,446               2,410,002
Class 2 additional
entitlements outstanding
Class 2 additional
entitlements (excluding Jan.
1, 2019, adjustment date)                  716,287              716,287         716,287                 716,287
Class 2 holdback (excluding
Jan. 1, 2019, adjustment date)                 N/A               20,321             N/A              20,321 (2)
Class 2 additional
entitlements -- issued
Jan. 1, 2019 (five net new
restaurants)                                   N/A                  N/A          69,550                  69,550
Class 2 holdback -- created
Jan. 1, 2019 (five net new
restaurants)                                   N/A                  N/A             N/A              17,388 (3)
Total Class 2 additional
entitlements                               716,287              726,608         785,837                 823,546
Summary
Total issued and
outstanding fund units                  21,787,763           21,787,763      21,787,763              21,787,763
Total additional
entitlements                             2,840,264            2,914,774       3,095,283               3,233,548
Total diluted units                     24,628,027           24,702,537      24,883,046              25,021,311
BPI's total percentage
ownership                                    11.5%                11.8%           12.4%                   12.9%
BPI's percentage ownership
based only on the five net
new restaurants added to the
royalty pool on Jan. 1, 2019                   N/A                  N/A            1.0%                    1.3%
                   
Notes 
(1) Issued and outstanding units as at Dec. 31, 2018, are after the repurchase and cancellation 
of 98,300 units of the fund under the fund's normal course issuer bid that commenced on 
Nov. 28, 2018.
(2) Additional entitlements from the eight net new restaurants added to royalty pool on 
Jan. 1, 2018, prior to the audit of the eight net new restaurants and determination of the 
actual effective tax rate paid by the fund.
(3) Holdback from five net new restaurants added to the royalty pool on Jan. 1, 2019. The 
actual number of additional entitlements will be determined in early 2020, effective Jan.
1, 2019, once audited results of the five net new restaurants and actual effective tax 
rate paid by the fund are known.

About Boston Pizza Royalties Income Fund

The fund is a limited purpose open-ended trust with an excellent record for investors since its initial public offering in 2002. Including the December, 2018, distribution which will be payable on Jan. 31, 2019, the fund will have delivered 18 distribution increases and 198 consecutive monthly distributions to unitholders totalling $306.8-million or $20.64 per unit since 2002. The fund earns revenue based on the franchise system sales of the 396 Boston Pizza restaurants included in the fund's royalty pool.

We seek Safe Harbor.

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