SIR Royalty Income Fund Announces Addition to Royalty Pool

BURLINGTON, ON, Jan. 31, 2017 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN) (the "Fund") today announced that, as of January 1, 2017, one new Scaddabush® restaurant has been added to the Royalty Pooled Restaurants (the "Royalty Pool") from which the Fund earns distribution income. SIR closed one restaurant during 2016, which was removed from the Royalty Pool effective January 1, 2017. The Fund's Royalty Pool now consists of 57 restaurants, including 40 Jack Astor's® restaurants.

"The Scaddabush added to the Royalty Pool on January 1, 2017 is the fourth Scaddabush Italian Kitchen & Bar in the Royalty Pool. With the opening of another new Scaddabush in November 2016, which is scheduled for addition to the Royalty Pool next January, and the planned closure and conversion of the last two remaining Alice Fazooli's® to two additional new Scaddabush restaurants in 2017, we will have seven Scaddabush locations. We are excited by the growth prospects for this brand, both for SIR and the Fund," 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 "Initial Adjustment"). The Fund, through the SIR Royalty Limited Partnership (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 (the "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.

2017 Initial Adjustment
The estimated annualized net revenue of the one new restaurant (Scaddabush Scarborough) of $7.0 million is expected to result in a $0.4 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 200,885 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 $2.8 million, or $14.04 per Unit, representing the volume weighted average price ("VWAP") of the Fund units for the 20 trading days ended December 21, 2016 ("Current Fund Unit Price"). The 200,885 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 restaurant in 2017, 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, 2018. The actual payment from the Partnership to SIR for the additional Royalty stream is calculated as follows:

Calculation of Payment Related to the  2017 Initial Adjustment










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


$

7,000,000


Royalty rate on net revenue paid to the Fund



6%


Estimated net increase in royalty stream


$

420,000



Less:






7.5% Accretion adjustment


$

31,500


Estimated additions to Royalty Pool before 80% Initial Adjustment


$

388,500

Estimated additions to Royalty Pool after 80% Initial Adjustment


$

310,800







Calculation of 2017 Initial Adjustment










Estimated additions to Royalty Pool after 80% Initial Adjustment


$

310,800


Current Yield on Fund Units (Note 1)



11.02%


Capitalized value of estimated additions to royalty stream 


$

2,820,428


Volume Weighted Average Price of Fund Units at December 21, 2016


$

14.04

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



200,885







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, 2016

$        8,978,146





SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2016

$        3,205,724




Fund distributions and SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2016


$

12,183,870


Weighted (per Fund Unit distribution amounts) average number of Fund Units issued and outstanding during the 12 months ended December 31, 2016


7,875,030



Weighted average distribution per Fund Unit


$

1.55



Current Fund Unit Price


$

14.04


Current Yield on Fund Units



11.02%

 

2016 Second Incremental Adjustment
The Second Incremental Adjustment for the January 1, 2016 addition of new restaurants to the Royalty Pool is negative. The actual revenue for the 52-weeks ended December 31, 2016 of the two new Jack Astor's restaurants added to the Royalty Pool effective January 1, 2016 totaled $7.0 million, which was approximately 20.1% less than the amount originally estimated. This resulted in SIR effectively returning 317 Class A GP Units to the Partnership, as the impact of actual revenue shortfall to estimate was marginally more the 20% initial adjustment reduction. The 2016 Second Incremental Adjustment is calculated as follows:

Calculation of Payment Related to 2016 Second Incremental Adjustment










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


$

7,020,785


Royalty rate on net revenue paid to the Fund



6%


Net increase in restaurant Royalties


$

421,247.13



Less:






7.5% Accretion adjustment


$

31,594

Actual additional royalty stream subject to the 2016 Second Incremental Adjustment


$

389,654







Calculation of 2016 Second Incremental Adjustment










Actual additional royalty stream subject to the 2016 Second Incremental Adjustment


$

389,654


Current Yield on Fund Units (Note 1)



11.90%


Capitalized value of actual additions to royalty stream 


$

3,274,964


Volume Weighted Average Price of Fund Units at December 22, 2015


$

12.99


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



252,114


Number of Units exchanged in the 2016 Initial Adjustment



(252,431)

2016 Second Incremental Adjustment 



(317)

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, 2015

$         8,693,146




SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2015

$         3,092,500



Fund distributions and SIFT taxes paid/payable by the Fund during the 12 months ended December 31, 2015


$

11,785,646


Weighted (per Fund Unit distribution amounts) average number of Fund Units issued and outstanding during the 12 months ended December 31, 2015


7,625,567



Weighted average distribution per Fund Unit


$

1.55



Volume Weighted Average Price of Fund Units at December 22, 2015


$

12.99


Current Yield on Fund Units


11.90%

 

2017 Adjustment for Reduction
The 200,885 Class A GP Units received by SIR for the one new restaurant now being added to the Royalty Pool are offset by 280,049 Class A GP Units that are associated with the Adjustment for Reduction for the one restaurant (Far Niente®/FOUR®/Petit Four®) that was closed on October 15, 2016. 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 restaurant was 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:

$0.3 million (the estimated annual reduction to the Royalty Pool based on 6% of the $5.6 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 one closed restaurant 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 that restaurant's actual revenues for the 52-week period ended December 31, 2004, 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
As the 2016 Second Incremental Adjustment resulted in SIR effectively returning 317 Class A GP Units to the Partnership, the Special Conversion Refund ("Conversion Refund") payable by SIR to the Partnership for December 31, 2016 has been finalized. The amount of the Conversion Refund is $492. The annual Special Conversion Distribution / Refund can only be calculated once the actual revenue for the 52-weeks ended December 31, 2016 for the new restaurants added to the Royalty Pool effective January 1, 2016, 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, 2016 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 $1.5516 multiplied by 317, which is the number of Class A GP Units that are effectively converted back into Class B GP Units as a result of the 2016 Second Incremental Adjustment. The Conversion Refund has been declared effective December 31, 2016 and will be paid on January 31, 2017.

Capital Structure
Following the 2017 Initial Adjustment, 2016 Second Incremental Adjustment and the 2017 Adjustment for Reduction, all effective January 1, 2017, SIR will own, control and hold 1,981,616 Class A GP Units, representing the equivalent of 19.13% of the units of the Fund on a fully diluted basis. This 19.13% consists of:

  • 2,061,097 Class A GP Units held by SIR as at December 31, 2016, and
  • The 79,481 Class A GP Units returned for the adjustments described above (200,885 for the 2017 Initial Adjustment minus 317 returned for the 2016 Second Incremental Adjustment minus 280,049 returned for the 2017 Adjustment for Reduction). 79,481 Class A GP Units were converted back into Class B GP units effective January 1, 2017. This conversion of Class A GP units into Class B GP units reduces SIR's share of the fully diluted units from 19.75% to 19.13%.

 

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

Issued and Outstanding
Units, & Additional Units
resulting from 2017
Adjustments to Royalty Pool

Public Float at December 31, 2016

8,375,567



Class A GP Units held by SIR as at December 31, 2016 (convertible



to Units on a one-for-one basis)

2,061,097

Add / Subtract):



Class A GP Units per the 2017 Initial Adjustment

200,885


Class A GP Units per the 2016 Second Incremental Adjustment

(317)


Class A GP Units per the 2017 Adjustment for Reduction

(280,049)



Number of fully-diluted Units

10,357,183



Number of fully diluted Units available for exchange by



SIR effective January 1, 2017

1,981,616

Percentage of fully-diluted Units available for exchange



by SIR effective January 1, 2017

19.13%

 

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 95,594,669 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 95,594,669 Class B GP Units currently represent 100% of the issued and outstanding Class B GP Units.

The Fund expects there to be a 2017 Second Incremental Adjustment effective January 1, 2018 and an associated Special Conversion Distribution declared effective December 31, 2017, both related to the one 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 an admission of same, and the 19.13% equivalent Fund unit holding, represented by SIR's Class A GP Units noted above, would increase to 19.44%, 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 is a privately held Canadian corporation that owns and operates a portfolio of 60 restaurants and one seasonal retail outlet in Canada. SIR's Concept brands include: Jack Astor's Bar and Grill®, with 40 locations; Scaddabush Italian Kitchen & Bar®, together with Alice Fazooli's®, for a total of seven locations; and Canyon Creek®, with eight locations.  SIR also operates one-of-a-kind "Signature" brands in downtown Toronto, including Reds® Wine Tavern, Reds® Midtown Tavern, 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 57 restaurants currently included in the Royalty Pool. SIR also owns and operates Duke's Refresher® & Bar in downtown Toronto, one seasonal Signature restaurant, Abbey's Bakehouse®, and one seasonal retail outlet, which 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 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: 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; 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; 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, 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 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 15, 2016 Annual Information Form, for the period ended December 31, 2015, 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

To view this news release in HTML formatting, please use the following URL: http://www.newswire.ca/en/releases/archive/January2017/31/c3838.html

For further information: please contact: Jeff Good, Chief Financial Officer, Tel: 905-681-2997; Bruce Wigle, Bay Street Communications, Tel: 647-496-7856

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