1. What is the Pizza Pizza Royalty Income Fund's (the "Fund") plan for post 2011?
Taxation on Income Trusts becomes effective January 1, 2011 and the Fund has until December 31, 2012 to convert to a corporation. The Fund's Trustees continue to review and assess alternatives open to the Fund after January 1, 2011, with one example being a conversion to a high yielding corporation. However, until 2011, the Fund has no plans to give up the current tax holiday.
2. What is a Restaurant Royalty Trust?
Pizza Pizza Royalty Income Fund (the “Fund”) is a restaurant royalty trust and, by structure, is different than a regular “business” trust. There are eight restaurant royalty trusts which are considered a subset within the overall income trust segment. A key attribute of a restaurant royalty trust is that its revenue is based on top-line, system sales of the restaurants on which it earns a royalty. The Fund’s revenues are not subject to the profitability of the company operating the restaurants or the profitability of the restaurants themselves.
The success of Pizza Pizza Royalty Income Fund depends primarily on the ability of Pizza Pizza Limited, the operating company, to maintain and increase system sales of the restaurants and to meet its royalty obligations. As opposed to a restaurant royalty trust, a regular “business” trust may be exposed to operating activities and capital expenditure requirements.
3. What is the status of Pizza Pizza Limited?
Pizza Pizza Limited (“PPL”) is a privately held company that is the licensee of the Pizza Pizza trademarks owned and licensed by the Pizza Pizza Royalties Limited Partnership, an affiliate of the Fund. PPL continues to be the franchisor of Pizza Pizza restaurants in Canada, providing management consulting services to Pizza Pizza franchisees. PPL also holds securities exchangeable for units of the Fund that if exchanged would give PPL a 26.3% interest in the Fund. The number of units that PPL is entitled to receive upon exchange of these securities should, in the absence of restaurant closures, increase as new locations are added to the Royalty Pool.
4. What is a payout ratio?
Very often you may hear the media speak of payout ratios when discussing income trusts. The ratio is sometimes used to judge an income trust’s health. A payout ratio is calculated by dividing a trust’s annual distribution by annual earnings. Restaurant royalty trusts tend to have higher payout ratios than regular business trusts since restaurant royalty trusts are not exposed to operating and capital expenditure requirements.
5. What is Pizza Pizza Royalty Income Fund’s payout ratio?
For the twelve months ended December 31, 2008 the payout ratio was 92%. Our Fund has accumulated a cash reserve to cover seasonality and any unforeseen administrative costs. The percentage of earnings not distributed is added to the accumulated cash reserve.
6. What is the current Unitholder distribution and when is it paid?
The current distribution is 7.75 cents per unit per month, or $0.93 per unit per year. Distributions are paid on the 15th day of each month.
7. How can I calculate a return on my investment?
If units are trading at $7.50 and the annual distribution is $0.93, then the return or yield is 12.4%.
8. When did the distributions start?
The first distribution of 5.7 cents per unit for the 26-day period from July 06, 2005 to July 31, 2005 was paid on August 15, 2005. The first monthly distribution of 6.67 cents per unit was paid on September 15, 2005. The most recent, monthly distribution paid was 7.75 cents per unit.
9. Are fund distributions taxable?
In 2009, 85% of the distributions paid by Pizza Pizza Royalty Income Fund was taxable as other income and 15% was considered a return of capital. This is very important for taxpayers holding units outside a tax-deferred plan.
10. What is “return of capital” and how does this benefit me?
When you purchase a unit, say for $10.00, this is your capital or cost basis. The return of capital is a tax-deferred mechanism which decreases your original cost basis as opposed to being immediately taxable at marginal rates. In 2009 Pizza Pizza Royalty Income Fund’s distribution was 15% return of capital.
If, in future years, you decide to sell your unit and the price is higher than your adjusted cost basis, the difference between the selling price and the adjusted cost basis is treated as a capital gain which rate is usually much lower than a taxpayer’s marginal rate. Please consult with your tax advisor for further explanations. Your adjusted cost basis must be tracked each year.
11. How will the taxable portion of the distributions be communicated to Unitholders?
All Unitholders will receive a T3 Form on which the taxable portion and return of capital portion will be separated and detailed.
12. Why is the distribution a Unitholder receives on January 15 of each year included in the prior year’s T3?
The income reported on the T3’s provided to Unitholders of record on December 31, includes the distribution per unit for the period December 1 to 31. As distributions are paid monthly in arrears, this distribution of December’s income, paid January 15, is required to be included in the prior year’s T3.
13. What are Pizza Pizza’s anticipated sales for the coming year?
At this time we do not provide estimates of future sales.
14. When will distributions be further increased?
Distributions were originally $0.80 per year per unit. Distributions have been increased six times since the July 5, 2005 initial public offering. The last increase was June 2008 resulting in annual distributions increasing to $0.93. The ability to increase distributions depends on the same store sales growth of the restaurants in the Royalty Pool and management of the Fund’s general and administrative expenses, as well as the accretion from the royalties of the new restaurants added to the Pool each January.
15. On which stock exchange are the units of Pizza Pizza Royalty Income Fund traded?
The Unit's trading symbol is PZA.UN and is traded on the Toronto Stock Exchange.
16. How can I find the current price of Pizza Pizza Royalty Income Fund units?
A 15-minute delayed price fund information is available on the homepage of this website or by logging onto tsx.com. Unit prices are also quoted in most major Canadian newspapers.
17. How many units of Pizza Pizza Royalty Income Fund are currently outstanding?
There are currently 21,818,392 publicly traded units outstanding and 29,595,718 units outstanding on a fully diluted basis.
Pizza Pizza Royalty Income Fund is the largest restaurant royalty trust when measured by the number of units.
18. How can I purchase units of the Pizza Pizza Royalty Income Fund?
Units are traded on the Toronto Stock Exchange under the symbol PZA.UN. There are currently 21,818,392 units outstanding.
To purchase units of the Pizza Pizza Royalty Income Fund, contact any brokerage firm.
19. When was the initial public offering (IPO) of Pizza Pizza Royalty Income Fund?
Pizza Pizza Royalty Income Fund began trading on the Toronto Stock Exchange on July 6, 2005.
20. Does the Fund pay management fees?
There are no management fees charged by Pizza Pizza Limited, however the Fund incurs general and administrative costs, as well as interest on a $47 million term loan.
21. What is the interest rate on the term loan?
The Fund has a $47 million term loan with a syndicate of Chartered Canadian Banks. $20 million of the term loan has an interest rate locked in at 3.93% using an interest SWAP until 2012. The remaining $27 million, has an interest rate locked in at 6.3% using an interest SWAP until 2012.
22. Does the Fund have a Dividend Reinvestment Program available to Unitholders?
No. A dividend reinvestment program, or ‘DRIP”, is a mechanism that allows investors to elect to receive dividends (or distributions in the case of income trusts) in securities as opposed to cash. The company paying the dividend/distribution retains the cash that would have been paid for reinvestment. In essence, a DRIP equates to periodic small offerings of shares or units by the company or fund. The Pizza Pizza Royalty Income Fund has no capital expenditure requirements or other reinvestment, and therefore does not have an opportunity to reinvest retained cash on a basis beneficial for Unitholders. As such, the Fund has not implemented a DRIP at this time. Alternatively, most brokerage firms offer a feature similar to a “DRIP” which allows investors to rollover monthly cash distributions for additional Fund units.
23. Are new Pizza Pizza and Pizza 73 Restaurants added to the Royalty Pool?
On January 1 of each year (the “Adjustment Date”), an adjustment is made to the Royalty Pool to roll-in new Pizza Pizza restaurants that have been opened by the December 31 and for new Pizza 73 restaurants that were open on or prior to September 1 of the previous year prior to that Adjustment Date. At each adjustment, the Fund pays PPL, in securities exchangeable for Units of the Fund, 92.5% of the amount reflecting the value of any increase in the royalty at that time. The adjustment for new franchise revenues rolled into the Royalty Pool is designed to be accretive to current Unitholders. On January 1, 2010 there are 671 restaurants in the Fund’s Royalty Pool, comprised of 590 Pizza Pizza restaurants and 81 Pizza 73 restaurants.
24. What incentive is there for Pizza Pizza Limited to maximize the Fund’s growth and performance?
The interests of PPL management and Unitholders are closely aligned. Exceptional performance of the Fund is beneficial to both Unitholders and PPL. PPL currently owns, through securities exchangeable into units of the Fund, a 26.3% interest in the Fund.
25. What is distributable cash and how is it calculated?
Distributable cash is a common term used by income funds to describe the amount of cash that is available to meet distribution obligations of the Fund. Pizza Pizza Royalty Income Fund is a top-line royalty fund and not exposed to operating activities or capital expenditures requirements of PPL or the Pizza Pizza restaurants. Our Fund receives a 6% royalty on system sales of Pizza Pizza restaurants and a 9% rolyalty on system sales of Pizza 73 restaurants then pays interest and administrative expenses, before distributions are made to Unitholders.
26. Why did the Fund accumulate a cash reserve?
Since the initial public offering, the fund has accumulated a reasonable reserve to allow for seasonality or unforeseen administrative expenses.
27. What is Pizza Pizza Limited’s ownership in the Fund?
Effective January 1, 2010, PPL owns the equivalent of 26.3% of the units of the Fund on a fully diluted basis.
28. Why is there a difference in the number of restaurants in the Royalty Pool and the total number of restaurants reported by PPL?
The number of restaurants in the Royalty Pool is adjusted each January 1 to include the revenue stream from restaurants which opened in the prior year less closed restaurants. Therefore at any given time there are restaurants which are not in the Royalty Pool.
29. Are share certificates issued for the units?
Share certificates are not issued for the units.
30. How can I contact the Pizza Pizza Royalty Income Fund?
For more information about Pizza Pizza Royalty Income Fund, please contact:
Curt Feltner, CFO
T. (416) 967 1010 ext. 307
Pizza Pizza Royalty Income Fund
500 Kipling Avenue
Toronto, Ontario
M8Z 5E5