KEG.UN - The Keg Restaurants

[lessthaniv]

The Keg: KEG.UN $8.15/sh

 

Since 2002, through it’s 4% Royalty on Gross Sales, the Keg has been able to sustain a monthly distribution that has fluctuated within the following range: $.08/month on the low end to $.1065/month on the high end.

 

They have been negatively affected as expected with the COVID shut down. There most recent Q2 results highlight the damage. There are 106 restaurants in the pool that were all shut down which resulted in an 88% drop in quarterly sales. No gross sales, no incoming royalties.

 

From recent MD&A

 

Notes:

 

(1) Royalty Pool sales are the gross sales reported by Keg Restaurants included in the Royalty Pool in any period. As of June 30, 2020, the Royalty Pool includes 106 Keg restaurants, 49 of which are owned and operated by KRL and its subsidiaries, (39 in Canada and 10 in the United Sates), and 57 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) 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 June 30, 2020 were 11,353,500 (three months ended June 30, 2019 - 11,353,500), and for six months ended June 30, 2020 were 11,353,000 (six months ended June 30, 2019 - 11,353,000).

 

With many Canadian provinces and US states permitting the gradual reopening of dine-in operations, KRL has begun reopening restaurants across Canada and in the United States. Provincial and State governments in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Newfoundland, Nova Scotia, Arizona, Texas, Washington and Colorado have now permitted the gradual reopening of dine-in operations at restaurants, subject to certain capacity restrictions. Following strict operational procedures and sanitary guidelines to prioritize the safety of its guests and staff, KRL has gradually re-opened its locations in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, Newfoundland, Nova Scotia, Arizona, Texas and Washington.

 

The province of Ontario has permitted the gradual re-opening of restaurant outdoor patios in select regions of the province. On June 19, 2020 patio openings were permitted in all other public health regions in Ontario, except Toronto, Peel and Windsor- Essex. Following strict operational procedures and sanitary guidelines to prioritize the safety of its guests and staff, KRL has gradually re-opened its locations in Ontario where permitted.

 

As of KRL’s quarter end of June 28, 2020, 53 of the 105 Keg restaurants have re-opened for business, subject to certain capacity restrictions, as indicated below in the following chart:

 

In addition, as of June 15, 2020, The Keg introduced a no-contact curbside pick-up program at certain of its locations, with plans to roll-out the program across all locations in the near future.

   

On June 29, 2020, subsequent to KRL’s quarter end, KRL re-opened its 5 corporate restaurants in the province of Quebec. On July 5, 2020, KRL re-purchased two franchise restaurants in Canada located in Nova Scotia and New Brunswick, and re-opened both for business. Many of the corporate and franchise restaurants located in Ontario remained temporarily closed for full dine-in service, although some were partially open for patio service where permitted up until July 17, 2020, at which time they were permitted to re-open for dine-in service. On July 31, 2020 the corporate and franchise restaurants located in the Greater Toronto Area re-opened for dine-in service.

 

The Keg, is now essentially back in business albeit with reduced operations and COVID restrictions.

 

In calling a few different locations to inquire on reservation, they are filling up fast. Not surprising to me given there long term brand strength and the consistency of their service and food quality.

 

Bottom line:

 

I think The Keg will survive COVID and in time, I  expect them to distribute similar monthly payments as they’ve done over their long visible history.

 

Currently, the emergency distribution reduction in April to $.035/month provides a yield of 5.08% annually on the $8.15/share price.

 

An eventual return to $.09/month or $1.08/year (Historical mid range) would produce a 13.25% yield on today’s purchase price.

 

Surely, an investor would likely see some capital appreciation too under that scenario given the high yield.

 

Personally, I’m looking for a double back to the $16/share range over time if things work out. Return expectations on this idea will obviously be a function of time to normalize and assumes we make it through recent events without drastic changes to consumer behaviour in there markets.

 

Restaurants are being looked at as a higher risk place and the Keg has recently had a couple employees diagnosed with COVID. 

 

I’m long sub today’s market price.

 

 

 

 

 

 

[Foreign Tuffett]

Help me understand how The Keg (and especially its franchisees) can be successful with this entity taking 4% of all sales.

 

It was distributing more per month way back in 2010 than it was last year. No growth over 10 years?

[Parsad]

I was in the South Surrey location near me for my birthday in July, shortly after it reopened.  It was packed like before.  The good thing about the Keg interior design, is that most booths were already more than 6 feet apart and about 8 feet across the main corridors that servers/patrons walk along.  So unlike most other restaurants, they aren't shutting down tables in between other tables.  They made some adjustments, but that Keg was doing at least 80% of normal business that night, if not closer to 90%.  I can see the Keg getting back to full normal business as soon as the vaccine becomes available.  Cheers!

[bizaro86]

The only thing I have to add to this at present is that I used to own this, and it provided the only shareholder perk I've ever used. One year with the annual report I got a $50 gift card. Just happened once (and I owned this for probably 5-6 years after the last recession) so I wouldn't buy a share in hopes of getting free steak.

 

[johnny]

Help me understand how The Keg (and especially its franchisees) can be successful with this entity taking 4% of all sales.

 

It was distributing more per month way back in 2010 than it was last year. No growth over 10 years?

 

Way out of my domain here, but I noticed a similar entity (A&W) in Canada so I surmise there was some tax/financial engineering thing that was hot for a while that justified sort of creating these special royalty trusts/pships/whatever.

 

In that sense, from the perspective of the franchisee, it's not especially different to a normal franchisee operation (where you're always giving up over 4% of sales). It does produce a very weird siamese separation of what is "normally" a single franchisor entity though.

[lessthaniv]

Help me understand how The Keg (and especially its franchisees) can be successful with this entity taking 4% of all sales.

 

It was distributing more per month way back in 2010 than it was last year. No growth over 10 years?

 

SIFT tax came into effect January, 2011.

 

The company had to accept a tax rate on the order of 26%. Consequently the distribution dropped to accommodate the tax change in that year. It took 4 years from there for the next increase in 2015.  Net the tax effect change out and you’ll see the fund has actually raised the distribution 14 times since 2002 prior to COVID. Increases have averaged about 2-3% when implemented.

[petec]

I have the vaguest of memories that Recipe occasionally buys shares in this. Might it get taken out at some point?

[bizaro86]

I have the vaguest of memories that Recipe occasionally buys shares in this. Might it get taken out at some point?

 

Are you sure they are buying the shares? When they open new restaurants (or a franchisee does) they vend the royalty in to the trust for more units. There is a formula based on expected sales that determines how many they get. So they get more annually based on recent openings, without actually buying them in the market.

[lessthaniv]

I have the vaguest of memories that Recipe occasionally buys shares in this. Might it get taken out at some point?

 

Cara, now Recipe merged with KRL in January 2018. They paid $200m using a combination of $105m in cash + Cara shares. Also, there was the potential for another $30m based on achieving milestones over 3 years. Shareholders were Fairfax and David Aisenstat.

 

At the time KRL was doing $612m in annual system sales.

 

David Aisenstat is still President and CEO of Keg Restaurants Limited. Following a business merger with Recipe Unlimited Corporation in January 2018, David assumed leadership of the Milestones, Bier Markt and Landing restaurant brands. He is also Vice Chairman of the Recipe Board of Directors. David has spent most of his life in the restaurant business learning from his father Hy, a giant of the industry and owner of the famous Hy’s Steakhouse chain of which David eventually became President in 1988. In 1997, David purchased The Keg Steakhouse + Bar chain, one of Canada’s most renowned premium casual restaurant chains.

[petec]

Yes, I know the history. I just had a vague memory of seeing Recipe buy shares fairly recently. Probably wrong. Bizaro’s explanation makes sense. Sorry!

[bearprowler6]

Yes, I know the history. I just had a vague memory of seeing Recipe buy shares fairly recently. Probably wrong. Bizaro’s explanation makes sense. Sorry!

 

https://www.newswire.ca/news-releases/recipe-unlimited-corporation-increases-investment-in-the-keg-royalties-income-fund-810645046.html

[petec]

Excellent. I'm not going mad.

 

Imagine what recipe could do now if they hadn’t spent all that cash on buybacks when times were good.

[lessthaniv]

The Keg has announced an increase in dividends for the next quarter to $.05/unit or $.60/unit/year ~ 7.7% yield on today's price. The press release is below. I went to the restaurant for dinner last week and it was full. Management has left room for further adjustments up/down depending on how COVID progresses.

 

Good news. Hopefully, COVID settles too moving forward.

 

<IV

___________________________________________________________________________

ORIGINAL: The Keg Royalties Income Fund Announces An Increase In Distributions to Unitholders

 

2020-10-13 16:05 ET - News Release

 

 

Not for distribution to U.S. News wire services or dissemination in the U.S.

 

VANCOUVER, British Columbia, Oct. 13, 2020 (GLOBE NEWSWIRE) -- The Keg Royalties Income Fund (TSX: KEG.UN or the “Fund”) today announced that it would be increasing the monthly distributions on units of the Fund (“Units”) commencing with the October 2020 distribution. Monthly distributions will be increased from their current level of $0.035 per Unit to $0.05 per Unit. The revised monthly distribution of $0.05 per Unit has therefore been declared and will be paid on October 30, 2020 to unitholders of record on October 21, 2020. Annually, the revised distributions result in an increase from the current level of $0.42 per Unit to $0.60 per Unit. The Fund currently plans to make those distributions each month for the next three months on the traditional pattern beginning on October 30, 2020, as noted above.

 

The Fund’s objective continues to be to provide consistent monthly distributions to unitholders at the highest sustainable level, and the Trustees of the Fund continue to review distribution levels on an on ongoing basis to fulfill that objective. The Trustees have reviewed current Royalty Pool sales forecasts as prepared by senior management of KRL, and after due consideration, the Trustees have concluded that the revised distribution of $0.05 cents per Unit per month is sustainable, at least for the next three months. However, should a surplus in cash available for distribution to the Fund’s unitholders arise over the next three months, as a result of royalty fee income exceeding current expectations, a special distribution will be declared in December 2020 to resolve that issue. The magnitude of that special distribution, should it be required, will be subject to reserves as considered reasonable by the Trustees in the circumstances at that time.

 

“At this point, the outlook remains uncertain and unpredictable for The Keg’s sales levels going forward. We have been relatively satisfied with our performance since restaurants have reopened starting in late May through to the beginning of July. Despite substantially limited capacity due to COVID-related mandates involving physical distancing and hours of operation, our guests have been very supportive of The Keg,” said David Aisenstat, CEO of The Keg.

 

“Unfortunately, that is somewhat offset by recent events,” added Aisenstat. “Clearly, the COVID virus is not under satisfactory control. That has caused Quebec to close indoor restaurant dining once again beginning October 3rd. On October 10th, much of Ontario followed with additional closures. We certainly hope those closures are short-lived and we certainly hope additional closures, unless warranted, are not adopted by other provinces, but we cannot predict that with any degree of certainty.”

[samwise]

Isn’t this a contractual credit instrument of recipe? Or do the royalty agreements survive a potential recipe bankruptcy?

 

Recipe  burned 80 million last quarter and has 231 million left, amended its credit covenants etc. I agree the Keg brand probably survives and eventually thrives, but just wondering about shorter term risks for franchises, and recipe. Recipe  seems to be suffering along with all other restaurants.

 

Can see no other reason for it to trade here. Surely Amazon won’t replace a steakhouse.

[bizaro86]

The contract to pay a specific amount of royalties is a contractual agreement, but iirc the fund owns the trademarks for the name. So while I think recipes could disclaim the contracts in CCAA, I think they'd also have to re-name the restaurants. This is probably their most valuable brand, so I doubt they'd want to do that. Although I wouldn't be shocked to see the royalty negotiated downward in the scenario where recipes files.

[samwise]

I think they'd also have to re-name the restaurants. This is probably their most valuable brand, so I doubt they'd want to do that.

 

Isn’t renaming easy? Just put out some ads “The restaurants formerly known as KEG are now known as ....”. Prince did that, and nobody forgot his brand. And the rebranding is probably cheaper than paying 4% of sales in perpetuity. Or am I underestimating the power of the name vs the actual restaurants?

[bizaro86]

I've never tried to rebrand a restaurant, and I can't think of a single example of a restaurant changing its name. Presumably there is a reason for that (and I'm probably missing a few edge cases...)

 

Of course, the royalty is very significant as well, so there would be an incentive to change. I think its worth noting that many of the restaurants are franchises. I bet right to use the name are included in those franchise agreements. So the franchisees would have a good case to pay less royalties inbound to recipes (or maybe they could quit completely) if recipes no longer had the name.

 

I think in CCAA the royalty gets reduced slightly but not eliminated. That said, there are other possibilities there, and it is hard to estimate probabilities on them.

[samwise]

Thanks. Yes the franchise agreements could be messy. Also the owner in control is named Prem and not Bruce Flatt, so they might be an expectation of fair corporate behaviour. So perhaps both ability and willingness to reject the royalty and rebrand might not be there.

 

I’m not really trying to nail all possibilities, just the chance of a zero ( or close to that). A double or nothing bet isn’t attractive, but a double or same bet is very attractive.

[kaioji]

Isn’t this a contractual credit instrument of recipe? Or do the royalty agreements survive a potential recipe bankruptcy?

 

Recipe  burned 80 million last quarter and has 231 million left, amended its credit covenants etc. I agree the Keg brand probably survives and eventually thrives, but just wondering about shorter term risks for franchises, and recipe. Recipe  seems to be suffering along with all other restaurants.

 

Can see no other reason for it to trade here. Surely Amazon won’t replace a steakhouse.

 

It is true RECP went through 81M in cash in Q2 and 183M in Q3 but most of that went to paying off their revolving credit facility. Their overall liquidity as at Q3 is 405.6M, up 30M from Q2.

 

Recipe is definitely feeling the pain, but the company doesn't seem like it will run into any liquidity issues (unless their credit providers decide to cut funding)

[lessthaniv]

With such a nice run up I’ve taken the opportunity to generate cash for other positions. It was short but fun and profitable!

 

 

[clutch]

Darn... I bought this at the very early stage of the pandemic (in early March) thinking the COVID will be a short-term issue. Then decided to sell it for a pretty big loss in June... Now it's at the price I originally bought.

 

I love the brand and definitely think that their combination of food/experience is a moat.

 

[lessthaniv]

Looks like they have reduced their monthly dividend again circling back to $.035/share until the end of June, 2021. I suspect they revisit where they are at at that time and adjust accordingly for the remainder of the year if necessary. Hopefully, things settle down for the restaurant businesses soon.

 

https://markets.businessinsider.com/news/stocks/the-keg-royalties-income-fund-announces-a-reduction-in-distributions-to-unitholders-1030086256