SIR Royalty Income Fund announces additions to Royalty Pool
BURLINGTON, ON, Jan. 24, 2013 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN) ("the Fund") today announced that, as of January 1, 2013, four new Jack Astor's® restaurants have been added to Royalty Pooled Restaurants (the "Royalty Pool") from which the Fund earns distribution income. The Fund announced details of the Initial Adjustment related to these four new restaurants and the Adjustment for Reduction for two restaurants closed during 2012. The Fund also announced details of the Second Incremental Adjustment for the restaurant added to the Royalty Pool effective January 1, 2012 and details of the associated Priority Special Conversion Distribution.
Effective January 1, 2013, the Royalty Pool is expected to receive an estimated annualized net increase in restaurant Royalties of $1.2 million. This amount is based on the addition of the 6% Royalty on the $19.3 million in estimated annual net revenue from the four new Royalty Pooled Restaurants. The Fund, through the SIR Royalty Limited Partnership (the "Partnership") pays SIR Corp. ("SIR") for the additional royalties through the conversion of 581,906 Class B GP Units held by SIR, into Class A GP Units. The payment formula as set out in the License and Royalty Agreement between SIR and the Partnership (as amended the "License and Royalty Agreement") is designed to be accretive to Fund unitholders. SIR will also receive an additional 15,420 Class A GP Units from the 2012 Second Incremental Adjustment, partially offset by the 300,867 Class A GP Units that are associated with the 2013 Adjustment for Reduction (both of these adjustments are described in detail below). The net number of Class B GP Units converted to Class A GP Units from these three adjustments is 296,459.
The four new Royalty Pooled Restaurants which were opened during the period from November 14, 2011 through November 2, 2012, include: the Jack Astor's on Argentia Road in Mississauga, Ontario; the Jack Astor's near St. Lawrence Market in Toronto, Ontario; the Jack Astor's in Laval, Quebec; and the Jack Astor's in Kingston, Ontario. With the addition of these four new restaurant Royalty streams, less the two closed restaurants, the Fund will indirectly receive Royalty payments from 49 restaurants effective January 1, 2013.
"These new additions to the Royalty pool demonstrate our commitment to continuing to expand our restaurant network into both new markets and areas where we have an established presence," said Peter Fowler, Chief Executive Officer of SIR. "The revenue streams from the four new Jack Astor's are expected to contribute significantly to the Fund's distributable cash, as we maintain our focus on delivering stable and growing levels of distribution income for our Fund unitholders."
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 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 units of the Fund.
These transactions were approved by the Partnership on or about January 16, 2013, with effect on January 1, 2013.
2013 Initial Adjustment
The estimated annualized revenue of the four new restaurants added to the Royalty pool in 2013 is anticipated to be $19.3 million, translating into an estimated addition of $1.2 million to the Royalty pool. The amount initially paid by the Fund, through the Partnership, to SIR for this additional Royalty stream is $7.2 million through the conversion of 581,906 Class B GP Units into Class A GP Units of the Partnership on a one-for-one basis. These Class A GP Units are valued at $12.36 per Unit, representing the volume weighted average price of the Fund units for the 20 trading days ending December 20, 2012 ("Current Fund Unit Price"). The 581,906 Class A GP Units represent 80% of the estimated Class A GP Units that SIR is estimated to receive. The remaining amount will be issued in the Second Incremental Adjustment based on the actual annual revenue for the new restaurants in 2013. The date of such Second Incremental Adjustment is January 1, 2014. The actual payment from the Partnership to SIR for the additional Royalty stream is calculated as follows:
$1.2 million (the estimated annual addition to the Royalty Pool based on 6% of the $19.3 million in estimated revenue from the new additional restaurants) multiplied by 92.5% (the accretive adjustment) multiplied by 80% (the Initial Adjustment) divided by the Current Yield* on the Fund units of 11.91% (equal to (a) the sum of (i) the aggregate cash distributions paid by the Fund during the immediately preceding 12 calendar months of $5.9 million, and (ii) the SIFT taxes paid or payable by the Fund in respect of the immediately preceding 12 calendar months of $2.1 million, (b) divided by the weighted (per Fund Unit distribution amounts) average number of Fund Units issued and outstanding during such immediately preceding 12 calendar months of 5,461,225, and (c) further divided by the Current Fund Unit Price of $12.36).
2013 Adjustment for Reduction
The 581,906 Class A GP Units received for the four new restaurants are partially offset by 300,867 Class A GP Units that are associated with the Adjustment for Reduction for the two restaurants that were closed on January 27, 2012 and February 13, 2012. 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 thereto. This is achieved by SIR returning the estimated number of units it received when the closed restaurants were initially added to the Royalty pool. The actual repayment, in Class A GP Units, from SIR to the Partnership for the reduction in the Royalty stream is calculated as follows:
$0.4 million (the estimated annual reduction to the Royalty pool based on 6% of the $6.0 million in Base Level Revenues of the closed restaurants) multiplied by 100% (the accretive adjustment - 100% for restaurants added at the initial public offering ("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 two closed restaurants became part of the Royalty pool at the time of the Fund's IPO on October 12, 2004, so the Base Level Revenues are defined as those restaurants' actual revenues for the 52-week period ended December 31, 2004, the Initial Yield is defined as the IPO yield of 12%, and the Initial Fund Unit Price is defined as the $10.00 IPO price.
2012 Second Incremental Adjustment
The Second Incremental Adjustment for the January 1, 2012 addition of new restaurants to the Royalty pool has been finalized. The actual revenue, for the 52-weeks ended December 31, 2012, of the one Jack Astor's restaurant added to the Royalty pool effective January 1, 2012 totaled $5.0 million, which was approximately 13% less than the amount originally estimated. This resulted in SIR receiving an additional 15,420 Class A GP Units. The Second Incremental Adjustment is calculated as follows:
$0.3 million (the estimated annual addition to the Royalty Pool based on 6% of the $5.0 million in actual revenue for the 52-weeks ended December 31, 2012) multiplied by 92.5% (the accretive adjustment) divided by the Current Yield* at the date of the Initial Adjustment on the Fund units of 15.49% (equal to (a) the sum of (i) the aggregate cash distributions paid by the Fund during the immediately preceding 12 calendar months of $5.5 million, and (ii) the SIFT taxes paid or payable by the Fund in respect of the immediately preceding 12 calendar months of $2.1 million, (b) divided by the weighted (per Fund Unit distribution amounts) average number of Fund Units issued and outstanding during such immediately preceding 12 calendar months of 5,356,667, and (c) further divided by the volume weighted average price of the Fund units for the 20 trading days ending December 21, 2011 of $9.22 ("Current Fund Unit Price at the time of the Initial Adjustment")) divided by the Current Fund Unit Price at the time of the Initial Adjustment ($9.22) minus the Initial Adjustment of 180,305 Class A GP Units for the January 1, 2012 addition of new restaurants.
Priority Special Conversion Distribution
The Priority Special Conversion Distribution ("Conversion Distribution") payable to SIR from the Partnership for December 31, 2012 has been finalized. The amount of the Conversion Distribution is $22,708. This distribution can only be calculated once the actual revenue for the 52-weeks ended December 31, 2012 for the new restaurant added to the Royalty pool effective January 1, 2012, 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, 2012 new additional restaurants are known with certainty. The amount of the Conversion Distribution 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 $1.47 multiplied by 15,420, which is the number of Class B GP Units that are converted into Class A GP Units as a result of the Second Incremental Adjustment. This distribution has been declared effective December 31, 2012 and will be paid on January 25, 2013.
2013 Second Incremental Adjustment
Assuming the four additional new restaurants added to the Royalty pool effective January 1, 2013 achieve their estimated revenue for the 52-weeks ended December 31, 2013, SIR would have the right to convert an additional 145,477 Class B GP Units to Class A GP Units effective January 1, 2014 as the Second Incremental Adjustment for the January 1, 2013 additional new restaurants. This would increase SIR's share of the Fund on a fully diluted basis on January 1, 2014 to 35.4% assuming no other changes in the number of outstanding Class A GP Units or Fund units occurred before that date. Further, again assuming the four additional new restaurants added to the Royalty pool effective January 1, 2013 achieve their estimated revenue for the 52-weeks ended December 31, 2013, a Conversion Distribution as of December 31, 2013 would be declared on the 145,477 Class B GP Units that would be converted into Class A GP Units as a result of the Second Incremental Adjustment on January 1, 2014. Assuming the monthly distributions per Fund unit, adjusted for the impact of the SIFT tax paid or payable, remained at the current level throughout 2013, the amount of the December 31, 2013 Conversion Distribution would be estimated to be $0.2 million.
Following the: i) 2013 Initial Adjustment, ii) 2013 Adjustment for Reduction, and iii) 2012 Second Incremental Adjustment, all effective January 1, 2013, SIR will own, control and hold 3,082,951 Class A GP Units, representing the equivalent of 34.4% of the units of the Fund on a fully diluted basis. This 34.4% consists of:
- 2,786,492 Class A GP Units held by SIR as at December 31, 2012, and
- 296,459 in additional Class A GP Units received for the adjustments described above (581,906 for the 2013 Initial Adjustment minus 300,867 for the 2013 Adjustment for Reduction plus 15,420 for the 2012 Second Incremental Adjustment).
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 96,988,334 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 96,988,334 Class B GP Units currently represent 100% of the issued and outstanding Class B GP Units.
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 an admission of same, and the 34.4% equivalent Fund unit holding, represented by SIR's Class A GP Units noted above would increase to 34.7%, 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 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 securities of the Partnership, through market transactions, private agreements, treasury issuances, exercise of options, convertible or exchangeable securities or otherwise. During November 2012, SIR converted 0.5 million Class A GP units into Fund units and subsequently sold these Fund units, generating net proceeds of $6.6 million which were required to be held in an account that is restricted by SIR's lender. Under an Amendment to the Amended Credit Agreement, the lender released the security it held on a portion of the Class A GP Units in the Partnership (and any Fund units received upon conversion of Class A GP Units in the Partnership) under the condition that that all proceeds received from the sale of the Fund units must be used to fund the costs associated with constructing new SIR restaurants or renovating existing restaurants.
As a result of SIR exercising its right to convert these Class A GP units into Fund units, the Fund issued 0.5 million Fund units to SIR in exchange for an increased interest in the Partnership. Accordingly, this transaction does not have a dilutive effect on the Fund unitholders. In addition, the number of outstanding Fund units increased by 0.5 million or 9.8%, from 5.4 million units to 5.9 million units.
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.
* Current Yield as defined in Amendment No. 2 to the Limited Partnership Agreement of the Partnership dated December 20, 2010.
About SIR Corp.
SIR is a privately held Canadian corporation that owns and operates a portfolio of 51 restaurants in Canada. SIR's Concept brands include: Jack Astor's Bar and Grill®, with 34 locations; Alice Fazooli's®, with four locations; and Canyon Creek Chop House®, with eight locations. SIR also operates one-of-a-kind "Signature" brands in downtown Toronto, which comprise the upscale Reds® Wine Tavern, Far Niente®/FOUR®/Petit Four®, and the Loose Moose Tap & Grill®. 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 49 restaurants currently included in the Royalty pool. SIR also owns and operates two seasonal Signature restaurants: Abbey's Bakehouse™ and Duke's Refresher™. These two restaurants are not currently 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 news release, 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 Trust, the Partnership, SIR, the SIR Restaurants or industry results, are forward-looking statements. The words "may", "will", "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 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: competition; changes in demographic trends; changing consumer preferences and discretionary spending patterns; changes in consumer confidence; changes in national and local business and economic conditions; 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; 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. The Fund and SIR expressly disclaim any obligation or undertaking to publicly 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, general levels of economic activity (including in downtown Toronto), regulations (including those regarding employees, food safety, tobacco 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. These assumptions, although considered reasonable by Management at the time of preparation, may prove to be incorrect. In particular, Management has assumed the tax effects on distributions will remain consistent with current regulations or pronouncements, and also in estimating the revenue for the new Jack Astor's restaurants, Management has assumed that it will operate consistent with other Jack Astor's restaurants. For more information concerning the Fund's risks and uncertainties, please refer to the March 30, 2012 Annual Information Form, all of which are available under the Fund's profile at www.sedar.com.
All of the forward-looking statements made in this news release 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 FundFor further information:
CEO SIR Corp.
BMIR, Investor Relations
Tel: 416-447-4740 ext. 232