SIR Royalty Income Fund : Announces Adjustments to Royalty Pool

BURLINGTON, ON, Jan. 29, 2021 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN) (the "Fund") today announced that, as of January 1, 2021, 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 one restaurant during 2020, which was removed from the Royalty Pool effective January 1, 2021. The Fund's Royalty Pool now consists of 56 restaurants, including 37 Jack Astor's® restaurants.

The new restaurant added to the Royalty Pool is the Scaddabush Italian Kitchen & Bar® ("Scaddabush") in Burlington, Ontario (opened November 19, 2019). The restaurant that was closed during 2020 and no longer part of the Royalty Pool was the Jack Astor's in Calgary, Alberta.   

Two additional Canyon Creek locations were permanently closed effective end of day January 8, 2021.  Given the current business environment there can be no assurance that there will be no further closures in the future and SIR has no future commitments or current plans to open any new SIR Restaurants.

"The new Scaddabush restaurant that has been added to the Fund's Royalty Pool is currently open for take-out and delivery only.  The negative impact of COVID-19 related business restrictions on overall pooled revenue in 2020, including the revenues of this location, has been severe.  The current lockdowns that are in place are expected to continue, at least into the near future.  Further, it is reasonable to expect that social distancing and/or similar restrictions on in-restaurant dining capacity will continue for a period of time once the lockdowns are lifted.  As a result, we have estimated that revenues for the calendar year 2021 will be significantly below our expected post-pandemic potential." 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 SIR Royalty Limited Partnership (the "Partnership"), pays SIR for the additional royalty stream rights 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.  The formula is based on the royalties that are expected to be accrued on the sales of the new restaurant in its first full calendar after being added to the Royalty Pool.  It should be noted that royalty payments are currently not being paid by SIR as required by SIR's senior lender.  There is a deferral agreement in place between SIR, the Fund and the Partnership that continues until March 31, 2021.  There can be no assurances that additional deferral periods will not be requested by the senior lender in the future.

2021 Initial Adjustment
The estimated annualized net revenue of the new Royalty Pool restaurant (Scaddabush in Burlington, Ontario) of $2.6 million is expected to result in a $0.2 million increase to the royalty stream entitlement on the basis of the 6% royalty. The Fund, through the Partnership, will pay SIR for the additional royalty stream entitlement through the conversion of 321,667 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 $1.0 million, or $3.02 per Unit, representing the volume weighted average price ("VWAP") of the Fund units for the 20 trading days ended December 22, 2020 ("Current Fund Unit Price"). The 321,667 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 2021, 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, 2022. The actual payment from the Partnership to SIR for the additional royalty stream entitlement is calculated as follows:

Calculation of Payment Related to the 2021 Initial Adjustment
Estimated annual net revenue from new restaurants added to the Royalty Pool					$	2,600,000
	Royalty rate on net revenue paid to the Fund					6%
	Estimated net increase in royalty stream				$	156,000
		Less:
		7.5% Accretion adjustment			$	11,700
	Estimated additions to Royalty Pool before 80% Initial Adjustment				$	144,300
Estimated additions to Royalty Pool after 80% Initial Adjustment					$	115,440
Calculation of 2021 Initial Adjustment
Estimated additions to Royalty Pool after 80% Initial Adjustment					$	115,440
	Current Yield on Fund Units (Note 1)					11.88%
	Capitalized value of estimated additions to royalty stream				$	971,436
	Volume Weighted Average Price of Fund Units at December 22, 2020				$	3.02
Number of Units to be exchanged by the Partnership for additions to the Royalty Pool						321,667
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, 2020	$	2,198,586
		SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2020	$	807,254
	Fund distributions and SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2020				$	3,005,840
	Weighted (per Fund Unit distribution amounts) average number of Fund Units issued and outstanding during the 12 months ended December 31, 2020					8,375,567
		Weighted average distribution per Fund Unit			$	0.36
		Current Fund Unit Price			$	3.02
	Current Yield on Fund Units					11.88%

The Current Yield in the above vend-in calculation is based on the prior year actual distributions paid to unitholders plus SIFT taxes paid or payable in the prior year, as well as the volume weighted average price for the units traded for the days noted above during December 2020. Future new restaurant additions to the royalty pool will likely have a different economic impact on the Fund as they will be based on the Current Yield at that time.

2020 Second Incremental Adjustment
The Second Incremental Adjustment for the January 1, 2020 addition of one new restaurant (Scaddabush in the Mimico neighbourhood of Etobicoke, Ontario) to the Royalty Pool has been finalized. Revenue in this location, like all other restaurants in the Royalty Pool, was significantly negatively affected by the impact of COVID-19 business restrictions during 2020. The actual revenue of this restaurant for the 52-weeks ended December 31, 2020 totaled $1.2 million, which was approximately 50.4% less than the amount originally estimated. This resulted in SIR effectively returning 24,813 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 2020 Second Incremental Adjustment is calculated as follows:

Calculation of Payment Related to 2020 Second Incremental Adjustment
Actual annual net revenue from new restaurants added to the Royalty Pool					$	1,219,516
	Royalty rate on net revenue paid to the Fund					6%
	Net increase in restaurant Royalties				$	73,171
		Less:
		7.5% Accretion adjustment			$	5,488
Actual additional royalty stream subject to the 2020 Second Incremental Adjustment					$	67,683
Calculation of 2020 Second Incremental Adjustment
Actual additional royalty stream subject to the 2020 Second Incremental Adjustment					$	67,683
	Current Yield on Fund Units (Note 1)					19.84%
	Capitalized value of actual additions to royalty stream				$	341,091
	Volume Weighted Average Price of Fund Units at December 20, 2019				$	8.41
	Number of Units to be exchanged by the Partnership for additions to the Royalty Pool					40,558
	Number of Units exchanged in the 2020 Initial Adjustment					(65,371)
2020 Second Incremental Adjustment						(24,813)
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, 2019				$	13,977,204
	Weighted (per Fund Unit distribution amounts) average number of Fund Units issued and outstanding during the 12 months ended December 31, 2019					8,375,567
		Weighted average distribution per Fund Unit			$	1.67
		Volume Weighted Average Price of Fund Units at December 20, 2019			$	8.41
	Current Yield on Fund Units					19.84%

2021 Adjustment for Reduction
The 321,667 Class A GP Units received by SIR for the one restaurant now being added to the Royalty Pool are offset by 143,653 Class A GP Units that are associated with the Adjustment for Reduction for the one restaurant that was closed in 2020 (the "Closed Restaurant") 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 entitlement related to the Closed Restaurant. This is achieved by SIR returning the estimated number of units it received when the closed restaurant was initially added to the Royalty Pool.

The Closed Restaurant (Jack Astor's in Calgary, Alberta) 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 entitlement is calculated as follows:

For the Jack Astor's in Calgary, Alberta, $0.2 million (the estimated annual reduction to the Royalty Pool based on 6% of the $2.9 million in Base Level Revenue of the closed restaurant) 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 Jack Astor's in Calgary 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 revenue of the Closed Restaurant 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 by SIR to the Partnership for December 31, 2020 has been finalized. The amount of the Conversion Refund is $8,858. The annual Conversion Distribution/Refund can only be calculated once the actual revenue for the 52-weeks ended December 31, 2020 for the new restaurant added to the Royalty Pool effective January 1, 2020, 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, 2020 new additional restaurant, was 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 $0.3570 multiplied by 24,813, which is the number of Class A GP Units that are converted back into Class B GP Units as a result of the 2020 Second Incremental Adjustment. The Conversion Refund has been declared effective December 31, 2020 and will be paid on January 29, 2021.

Capital Structure
Following the 2021 Initial Adjustment, 2020 Second Incremental Adjustment and the 2021 Adjustment for Reduction, all effective January 1, 2021, SIR will own, control and hold 1,971,552 Class A GP Units, representing the equivalent of 19.05% of the units of the Fund on a fully diluted basis. This 19.05% consists of:

• 1,818,351 Class A GP Units held by SIR as at December 31, 2020, and
• The 153,201 in Class A GP Units received for the adjustments described above (321,667 for the 2021 Initial Adjustment minus 24,813 returned for the 2020 Second Incremental Adjustment minus 143,653 returned for the 2021 Adjustment for Reduction). 153,201 Class B GP Units were exchanged for Class A GP Units effective January 1, 2021. This conversion increases SIR's share of the fully diluted units from 17.84% to 19.05%.

 

								Issued and Outstanding Units, & Additional Units resulting from 2021 Adjustments to Royalty Pool
Calculation of SIR's share of the Fund on a Fully Diluted Basis
Public Float at December 31, 2020								8,375,567
Class A GP Units held by SIR as at December 31, 2020 (convertible
	to Units on a one-for-one basis)							1,818,351
Add / (Subtract):
	Class A GP Units per the 2021 Initial Adjustment							321,667
	Class A GP Units per the 2020 Second Incremental Adjustment							(24,813)
	Class A GP Units per the 2021 Adjustment for Reduction							(143,653)
Number of fully-diluted Units								10,347,119
Number of fully diluted Units available for exchange by
SIR effective January 1, 2021								1,971,552
Percentage of fully-diluted Units available for exchange
by SIR effective January 1, 2021								19.05%

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 95,604,733 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 95,604,733 Class B GP Units currently represent 100% of the issued and outstanding Class B GP Units.

The Fund expects there to be a 2021 Second Incremental Adjustment effective January 1, 2022 and an associated Special Conversion Distribution declared effective December 31, 2021, 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 19.05% equivalent Fund unit holding, represented by SIR's Class A GP Units noted above, would increase to 19.36%, 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 57 restaurants in Canada. SIR's Concept brands include: Jack Astor's Bar and Grill®, with 37 locations; Scaddabush Italian Kitchen & Bar® with 10 locations; and Canyon Creek®, with three 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. 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 indirectly has interests in the trademarks used by SIR.

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", "would", "should", "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 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: the impact of the COVID-19 pandemic; 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 and forced closures of restaurants and bars; 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.  Given these uncertainties, readers are cautioned that forward-looking statements are not guarantees of future performance, and should not place undue reliance on them. 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.

For more information concerning the Fund's risks and uncertainties, please refer to the March 12, 2020 Annual Information Form, for the year ended December 31, 2019, and the Fund's most recent interim filings, which are available under the Fund's profile at www.sedar.com.

All of the forward-looking statements made in this report 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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