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SIR Royalty Income Fund Announces Adjustments to Royalty Pool

BURLINGTON, ON , Jan. 28, 2020 /CNW/ - SIR Royalty Income Fund (SRV-UN.TO) (the "Fund") today announced that, as of January 1, 2020 , one new restaurant has been added to the Royalty Pooled Restaurants (the "Royalty Pool") from which the Fund earns distribution income. SIR Corp. ("SIR") closed three restaurants during 2019, which were removed from the Royalty Pool effective January 1, 2020 . The Fund's Royalty Pool now consists of 56 restaurants, including 38 Jack Astor'sâ restaurants.

The new restaurant added to the Royalty Pool is the Scaddabush Italian Kitchen & Barâ ("Scaddabush") in the Mimico neighbourhood of Etobicoke, Ontario (opened June 2, 2019 ). The three restaurants that were closed during 2019 and are no longer part of the Royalty Pool include: the Jack Astor's in the St. Lawrence market neighbourhood of downtown Toronto , the Jack Astor's on John Street in downtown Toronto , and the Canyon Creekâ in Burlington , Ontario.   

"We are pleased to add our ninth Scaddabush restaurant to the Fund's Royalty Pool, and with the recent opening of a new Scaddabush restaurant in Burlington, Ontario , formerly a Canyon Creek location, we expect to add our tenth Scaddabush location to the Royalty Pool next January," said Peter Fowler , Chief Executive Officer of SIR Corp.

The Royalty Pool is adjusted in January of each year to include sales from any new SIR restaurants that opened on or before November 2nd of the prior year, net of sales of any Royalty Pooled Restaurants that were closed. The Fund, through the Partnership, pays SIR for the additional royalty stream from net new restaurants, based upon a formula set out in the License and Royalty Agreement between SIR and the Partnership. The payment formula, which is designed to be accretive to Fund unitholders, is based on the 6% royalty from the estimated annualized revenue from the net new restaurants divided by the tax-adjusted current yield on the units of the Fund. The accretion to Fund unitholders is achieved by discounting the payment to SIR by 7.5%. The payment to SIR is in the form of additional Class A GP Units of the Partnership. These units are the economic equivalent of Fund units.

2020 Initial Adjustment
The estimated annualized net revenue of the new Royalty Pool restaurant (Scaddabush in the Mimico neighbourhood of Etobicoke ) of $2.5  million is expected to result in a $0 .1 million increase to the royalty stream on the basis of the 6% royalty. The Fund, through the Partnership, will pay SIR for the additional royalty stream through the conversion of 65,371 Class B GP Units currently held by SIR, into Class A GP Units on a one-for-one basis. The Class A Units received by SIR are valued at $0 .5 million, or $8 .41 per Unit, representing the volume weighted average price ("VWAP") of the Fund units for the 20 trading days ended December 20, 2019 ("Current Fund Unit Price"). The 65,371 Class A GP Units represent 80% of the estimated Class A GP Units that SIR is expected to receive. The remaining amount, if any, will be issued in the Second Incremental Adjustment, which will be based on the actual annual revenue for the new Royalty Pool restaurant in 2020, as opposed to the current annualized estimate. The valuation of the new royalty stream includes a 7.5% discount to the value paid to SIR, which is accretive to the Fund unitholders. The date of the Second Incremental Adjustment is January 1, 2021 . The actual payment from the Partnership to SIR for the additional Royalty stream is calculated as follows: 

Calculation of Payment Related to the 2020 Initial Adjustment








Estimated annual net revenue from new restaurants added to the Royalty Pool


$

2,457,000


Royalty rate on net revenue paid to the Fund


6%


Estimated net increase in royalty stream


$

147,420



Less:





7.5% Accretion adjustment


$

11,057


Estimated additions to Royalty Pool before 80% Initial Adjustment


$

136,364






Estimated additions to Royalty Pool after 80% Initial Adjustment


$

109,091






Calculation of 2020 Initial Adjustment








Estimated additions to Royalty Pool after 80% Initial Adjustment


$

109,091


Current Yield on Fund Units (Note 1)


19.84%


Capitalized value of estimated additions to royalty stream 


$

549,766


Volume Weighted Average Price of Fund Units at December 20, 2018


$

8.41

Number of Units to be exchanged by the Partnership for additions to the Royalty Pool


65,371






Notes:




1)

Current Yield as defined in Amendment No. 2 to the Limited Partnership Agreement of the Partnership dated December 20, 2010.  Calculated as follows:




Sum of:





Aggregate cash distributions paid by the Fund during the 12 months ended December 31, 2019

$

10,260,070




SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2019

$

3,717,134



Fund distributions and SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2018


$

13,977,204


Weighted (per Fund Unit distribution amounts) average number of Fund Units issued and outstanding during the 12 months ended December 31, 2018

8,375,567



Weighted average distribution per Fund Unit


$

1.67



Current Fund Unit Price


$

8.41


Current Yield on Fund Units


19.84%

 

2019 Second Incremental Adjustment
The Second Incremental Adjustment for the January 1, 2019 addition of two new restaurants (Scaddabush in Etobicoke and Redsâ at Square One shopping centre in Mississauga, Ontario ) to the Royalty Pool has been finalized. The actual revenue for the 52-weeks ended December 31, 2019 of the two new restaurants added to the Royalty Pool effective January 1, 2019 totaled $8 .7 million, which was approximately 23.6% less than the amount originally estimated. This resulted in SIR effectively returning 13,941 Class A GP Units to the Partnership as the impact of actual revenue shortfall to estimate was more than the 20% initial adjustment reduction. The 2019 Second Incremental Adjustment is calculated as follows:

Calculation of Payment Related to 2019 Second Incremental Adjustment








Actual annual net revenue from new restaurants added to the Royalty Pool


$

8,683,392


Royalty rate on net revenue paid to the Fund


6%


Net increase in restaurant Royalties


$

521,004



Less:





7.5% Accretion adjustment


$

39,075

Actual additional royalty stream subject to the 2019 Second Incremental Adjustment


$

481,928






Calculation of 2019 Second Incremental Adjustment








Actual additional royalty stream subject to the 2019 Second Incremental Adjustment


$

481,928


Current Yield on Fund Units (Note 1)


10.34%


Capitalized value of actual additions to royalty stream 


$

4,661,307


Volume Weighted Average Price of Fund Units at December20, 2018


$

15.61


Number of Units to be exchanged by the Partnership for additions to the Royalty Pool


298,610


Number of Units exchanged in the 2019 Initial Adjustment


(312,552)

2019 Second Incremental Adjustment 


(13,941)






Notes:




1)

Current Yield as defined in Amendment No. 2 to the Limited Partnership Agreement of the Partnership dated December 20, 2010.  Calculated as follows:



Sum of:





Aggregate cash distributions paid by the Fund during the 12 months ended December 31, 2018

$

10,092,558




SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2018

$

3,424,801



Fund distributions and SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2018


$

13,517,359


Weighted (per Fund Unit distribution amounts) average number of Fund Units issued and outstanding during the 12 months ended December 31, 2018

8,375,567



Weighted average distribution per Fund Unit


$1.61



Volume Weighted Average Price of Fund Units at December 20, 2018


$

15.61


Current Yield on Fund Units


10.34%






 

2020 Adjustment for Reduction
The 65,371 Class A GP Units received by SIR for the one restaurant now being added to the Royalty Pool are offset by 447,329 Class A GP Units that are associated with the Adjustment for Reduction for the three restaurants that were closed in 2019 (the "Closed Restaurants") noted above. The Adjustment for Reduction repayment formula, as set out in the License and Royalty Agreement, is designed to reflect the loss in value to the Partnership of the decreased future royalty stream related to the Closed Restaurants. This is achieved by SIR returning the estimated number of units it received when the closed restaurants were initially added to the Royalty Pool.

Two of the three Closed Restaurants, the two Jack Astor's restaurants, were added to the Royalty Pool after the Closing Date of the Fund's IPO. The actual repayment, in Class A GP Units, from SIR to the Partnership for the reduction in the Royalty stream is calculated as follows:

For the Jack Astor's in the St. Lawrence market neighbourhood of downtown Toronto , which was added to the Royalty Pool on January 1, 2013 , $0 .2 million (the estimated annual reduction to the Royalty Pool based on 6% of the $3 .7 million in Base Level Revenue of the closed restaurants) multiplied by 92.5% (the accretive adjustment - 100% for restaurants added at the IPO, or 92.5% for restaurants added after the IPO) divided by the yield on the Fund units of 11.9% (equal to the annual minimum cash distribution payable per Fund unit of $1.47 divided by the Fund Unit Price of $12.36 ) divided by the Fund Unit Price of $12.36 . Base Level Revenue is defined as the actual revenues of the Jack Astor's in the St. Lawrence market neighbourhood of downtown Toronto for the 52-week period ended December 31, 2013 .

For the Jack Astor's on John Street in downtown Toronto , which was added to the Royalty Pool on January 1, 2009 , $0 .3 million (the estimated annual reduction to the Royalty Pool based on 6% of the $4 .8 million in Base Level Revenue of the closed restaurants) multiplied by 92.5% (the accretive adjustment - 100% for restaurants added at the IPO, or 92.5% for restaurants added after the IPO) divided by the yield on the Fund units of 26.7% (equal to the annual minimum cash distribution payable per Fund unit of $1.36 divided by the Fund Unit Price of $5.07 ) divided by the Fund Unit Price of $5.07 . Base Level Revenue is defined as the actual revenues of the Jack Astor's on John Street in downtown Toronto for the 52-week period ended December 31, 2009 .

The third of the Closed Restaurants, the Canyon Creek in Burlington, Ontario , was added to the Royalty Pool on the Closing Date of the Fund's IPO. The actual repayment, in Class A GP Units, from SIR to the Partnership for the reduction in the Royalty stream is calculated as follows:

For the Canyon Creek in Burlington, Ontario , $0 .1 million (the estimated annual reduction to the Royalty Pool based on 6% of the $2 .2 million in Base Level Revenue of the closed restaurants) multiplied by 100% (the accretive adjustment - 100% for restaurants added at the IPO, or 92.5% for restaurants added after the IPO) divided by the Initial Yield on the Fund units of 12% (equal to the annual minimum cash distribution payable per Fund unit of $1.20 divided by the Initial Fund Unit Price of $10.00 ) divided by the Initial Fund Unit Price of $10.00 .

The Canyon Creek in Burlington, Ontario became part of the Royalty Pool at the time of the Fund's IPO on October 12, 2004 , so the Base Level Revenue is defined as the actual revenues of the Closed Restaurants for the 52-week period ended December 31, 2004 , and the Initial Yield is defined as the IPO yield of 12%. The Initial Fund Unit Price is defined as the $10.00 IPO price.

Special Conversion Distribution/Refund
The Special Conversion Refund ("Conversion Refund") payable to SIR from the Partnership for December 31, 2019 has been finalized. The amount of the Conversion Refund is $23,240 . The annual Conversion Distribution/Refund can only be calculated once the actual revenue for the 52-weeks ended December 31, 2019 for the new restaurants added to the Royalty Pool effective January 1, 2019 , and the number of additional Class B GP Units that will be converted to Class A GP Units for the Second Incremental Adjustment related to the January 1, 2019 new additional restaurants, are known with certainty. The amount of the Conversion Refund is equal to the aggregate distributions declared per Fund unit, adjusted for the impact of the SIFT tax paid or payable, for the preceding calendar year of $1.6670 multiplied by 13,941, which is the number of Class A GP Units that are converted back into Class B GP Units as a result of the 2019 Second Incremental Adjustment. The Conversion Refund has been declared effective December 31, 2019 and will be paid on January 31, 2020 .

Capital Structure
Following the 2020 Initial Adjustment, 2019 Second Incremental Adjustment and the 2020 Adjustment for Reduction, all effective January 1, 2020 , SIR will own, control and hold 1,818,351 Class A GP Units, representing the equivalent of 17.84% of the units of the Fund on a fully diluted basis. This 17.84% consists of:

  • 2,214,250 Class A GP Units held by SIR as at December 31, 2019 , and
  • The 395,899 in Class A GP Units returned for the adjustments described above (65,371 for the 2020 Initial Adjustment minus 13,941 returned for the 2019 Second Incremental Adjustment minus 447,329 returned for the 2020 Adjustment for Reduction). 395,899 Class A GP Units were exchanged for Class B GP Units effective January 1, 2020 . This conversion reduces SIR's share of the fully diluted units from 20.91% to 17.84%.



Issued and Outstanding
Units, & Additional Units
resulting from 2020
Adjustments to Royalty Pool

Calculation of SIR's share of the Fund on a Fully Diluted Basis



Public Float at December 31, 2019



8,375,567



Class A GP Units held by SIR as at December 31, 2019 (convertible



 to Units on a one-for-one basis)



2,214,250

Add / (Subtract):









Class A GP Units per the 2020 Initial Adjustment 

65,371


Class A GP Units per the 2019 Second Incremental Adjustment

(13,941)


Class A GP Units per the 2019 Adjustment for Reduction

(447,329)



Number of fully-diluted Units




10,193,918





Number of fully diluted Units available for exchange by


 SIR effective January 1, 2020




1,818,351










Percentage of fully-diluted Units available for exchange 


by SIR effective January 1, 2020




17.84%

 

SIR's Class A GP Units currently represent 100% of the issued and outstanding Class A GP Units.

Subsequent to the aforementioned exchanges, SIR owns, controls and holds 95,757,934 Class B GP Units, which are convertible in certain circumstances (based on the addition of further new restaurants to Royalty Pooled Restaurants) into Class A GP Units on a one-for-one basis. Other than as described herein, none are currently convertible. If converted, the resulting Class A GP Units would, subject to the Partnership's right to re-convert them back into Class B GP Units in certain circumstances (based on the new restaurants' performance being below 80% of the original expectations), also be exchangeable on a one-for-one basis into units of the Fund. The 95,757,934 Class B GP Units currently represent 100% of the issued and outstanding Class B GP Units.

The Fund expects there to be a 2020 Second Incremental Adjustment effective January 1, 2021 and an associated Special Conversion Distribution declared effective December 31, 2020 , both related to the new restaurant that was just added to the Royalty Pool. The amount of such adjustment and distribution cannot be determined at this time.    

The Offeror and Peter Fowler (who beneficially owns 31,500 units of the Fund apart from the Offeror's holdings), who are affiliated, may be considered under applicable securities laws to be acting jointly or in concert. This news release is not confirmation of same, and the 17.84% equivalent Fund unit holding, represented by SIR's Class A GP Units noted above, would increase to 18.15%, taking into account such additional units of the Fund.

Except for the foregoing, SIR is not acting in concert with any other person, including any of its shareholders, directors or officers, in connection with its holdings of the Fund or the Partnership, and thus any holdings that they may have in the Fund are not included in this report.

The transactions noted herein took place privately.

SIR holds its interests in the Partnership for investment purposes and in connection with its operation of its restaurant business, which produces the revenues from which the Partnership and the Fund derive their income via a trademark License and Royalty Agreement and loan entered into in connection with the Fund's IPO.

SIR may, depending on market and other conditions, increase or decrease its beneficial ownership, control or direction over units of the Fund, or (as applicable) securities of the Partnership, through market transactions, private agreements, treasury issuances, exercise of options, convertible or exchangeable securities or otherwise.

SIR has entered into a number of material agreements with the Fund and/or the Partnership, which are described in the final prospectus of the Fund dated October 1, 2004 . In addition to the Royalty generated by any new SIR restaurants added to Royalty Pooled Restaurants, the consideration paid by SIR for its Class A GP Units and Class B GP Units was the transfer of certain trade-marks, as described in the final prospectus of the Fund. Certain amendments to the Declaration of Trust and other material agreements were approved at a Special Meeting of Unitholders held on December 20, 2010 . They are filed on SEDAR.

About SIR Corp.
SIR Corp. ("SIR") is a privately held Canadian corporation that owns a portfolio of 60 restaurants in Canada . SIR's Concept brands include: Jack Astor's Bar and Grill®, with 38 locations; Scaddabush Italian Kitchen & Bar® with ten locations; and Canyon Creek®, with five locations. SIR also operates one-of-a-kind "Signature" brands including Reds® Wine Tavern, Reds® Midtown Tavern, Reds® Square One and The Loose Moose®. All trademarks related to the Concept and Signature brands noted above are used by SIR under a License and Royalty Agreement with SIR Royalty Limited Partnership in consideration for a Royalty, payable by SIR to the Partnership, equal to six percent of the revenue of the 56 restaurants currently included in the Royalty Pool. SIR also owns two Duke's Refresher® & Bar locations in downtown Toronto , and one seasonal Signature restaurant, Abbey's Bakehouse®, which are currently not in consideration to be part of the Royalty Pool. For more information on SIR Corp. or the SIR Royalty Income Fund, please visit www.sircorp.com.

About SIR Royalty Income Fund
The Fund is a trust governed by the laws of the province of Ontario that receives distribution income from its investment in the SIR Royalty Limited Partnership and interest income from the SIR Loan. The Fund intends to pay distributions to unitholders on a monthly basis.

Caution concerning forward-looking statements

Certain statements contained in this report, or incorporated herein by reference, including the information set forth as to the future financial or operating performance of the Fund or SIR, that are not current or historical factual statements may constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"). Statements concerning the objectives, goals, strategies, intentions, plans, beliefs, expectations and estimates, and the business, operations, financial performance and condition of the Fund, the SIR Holdings Trust (the "Trust"), the Partnership, SIR, the SIR Restaurants or industry results, are forward-looking statements. The words "may", "will", "should", "would", "expect", "believe", "plan", "anticipate", "intend", "estimate" and other similar terminology and the negative of such expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Fund, the Trust, the Partnership, SIR, the SIR Restaurants or industry results, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. These statements reflect Management's current expectations, estimates and projections regarding future events and operating performance and speak only as of the date of this document. Readers should not place undue importance on forward-looking statements and should not rely upon this information as of any other date. Risks related to forward-looking statements include, among other things, challenges presented by a number of factors, including: market conditions at the time of this filing; competition; changes in demographic trends; weather; changing consumer preferences and discretionary spending patterns; changes in consumer confidence; changes in national and local business and economic conditions; pandemics or other material outbreaks of disease or safety issues affecting humans or animals or food products; changes in tariffs and international trade; changes in foreign exchange; changes in availability of credit; legal proceedings and challenges to intellectual property rights; dependence of the Fund on the financial condition of SIR; legislation and governmental regulation, including the cost and/or availability of labour as it relates to changes in minimum wage rates or other changes to labour legislation; laws affecting the sale and use of alcohol (including availability and enforcement); changes in cannabis laws; accounting policies and practices; and the results of operations and financial condition of SIR. The foregoing list of factors is not exhaustive. Many of these issues can affect the Fund's or SIR's actual results and could cause their actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, the Fund or SIR.  There can be no assurance that SIR will remain compliant in the future with all of its financial covenants under the Credit Agreement and imposed by the lender. Given these uncertainties, readers are cautioned that forward-looking statements are not guarantees of future performance and should not place undue reliance on them. The Fund and SIR expressly disclaim any obligation or undertaking to publicly disclose or release any updates or revisions to any forward-looking statements. Forward-looking statements are based on Management's current plans, estimates, projections, beliefs and opinions, and the Fund and SIR do not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change, except as expressly required by applicable securities laws.

In formulating the forward-looking statements contained herein, Management has assumed that business and economic conditions affecting SIR's restaurants and the Fund will continue substantially in the ordinary course, including without limitation with respect to general industry conditions, competition, delivery and takeout services, general levels of economic activity (including in downtown Toronto ), regulations (including those regarding employees, food safety, tobacco, cannabis, and alcohol), weather, taxes, foreign exchange rates and interest rates, that there will be no pandemics or other material outbreaks of disease or safety issues affecting humans or animals or food products, and that there will be no unplanned material changes in its facilities, equipment, customer and employee relations, or credit arrangements. Recent changes in employment law, including announced increases in minimum wages, are factored into management's assumptions. These assumptions, although considered reasonable by Management at the time of preparation, may prove to be incorrect. In addition, Management has assumed that the tax effects on distributions will remain consistent with current regulations or pronouncements, and also in estimating the revenue for new restaurants, Management has assumed that they will operate consistent with other similar SIR restaurants and has assumed that SIR will remain compliant in the future with all of its financial covenants under the Credit Agreement and imposed by the lender. For more information concerning the Fund's risks and uncertainties, please refer to the March 12, 2019 Annual Information Form, for the period ended December 31, 2018 , which is available under the Fund's profile at www.sedar.com. All of the forward-looking statements made herein are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Fund or SIR.

SOURCE SIR Royalty Income Fund


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