SIR Royalty Income Fund announces increase to Royalty Pool



    BURLINGTON, ON, Jan. 23 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN)
("the Fund") today announced that, as of January 1, 2008, three new Jack
Astor's(R) restaurants will be added to the Royalty Pooled Restaurants (the
"Royalty Pool") from which the Fund earns distribution income. The Fund
announced details of the Initial Adjustment related to these three openings
and the Adjustment for Reduction for two restaurants closed during 2007. The
Fund also announced details of the Second Incremental Adjustment for
restaurants added to the Royalty Pool effective January 1, 2007 and details of
the associated Priority Special Conversion Distribution.
    Effective January 1, 2008, the Royalty Pool is expected to receive an
estimated annualized net increase in restaurant Royalties of $0.4 million.
This amount is based on the addition of the 6% Royalty on the $6.3 million in
estimated annual net revenue. The net revenue increase is derived from
$11.4 million of revenue from the three new Jack Astor's(R) less $5.2 million
from two closed restaurants. The Fund, through the SIR Royalty Limited
Partnership (the "Partnership") pays SIR Corp. ("SIR") for the net additional
royalties through the conversion of 134,354 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 ("License and Royalty
Agreement") is designed to be accretive to Fund unitholders.
    The three new Royalty Pool restaurants, which were opened during the
period from March 26, 2007 through October 15, 2007, include: the new Jack
Astor's in Hamilton, Ontario; the new Jack Astor's in Dartmouth, Nova Scotia
and the new Jack Astor's in Burlington, Ontario. With the addition of these
three new restaurant Royalty streams, less the two closed restaurants, the
Fund will indirectly receive Royalty payments from 39 restaurants effective
January 1, 2008. SIR closed the Jack Astor's in Burlington, Ontario during the
third quarter of 2007 and on October 15, 2007, a new Jack Astor's was opened
in Burlington. The new site is expected to generate higher guest counts and a
greater revenue stream to the Partnership. On December 22, 2007, Brasserie
Frisco(TM) was closed and SIR expects to open a new Jack Astor's in the former
Brasserie Frisco location during the first half of fiscal 2008.
    "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 these three new Jack Astor's will
contribute significantly to the Fund's distributable cash, as we maintain our
focus on delivering stable and growing levels of distribution income for
unitholders."
    The Royalty Pool is adjusted in January of each year to include sales
from any new SIR restaurants that have opened on or before November 1 of the
prior year, net of sales of any Royalty Pool restaurants that have closed. The
Fund (through the Partnership) pays SIR for the additional Royalty stream from
new restaurants, based upon a formula set out in the License and Royalty
Agreement. 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 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.

    2008 Initial Adjustment

    The estimated annualized revenue of the three new Jack Astor's(R)
restaurants in 2008 is anticipated to be $11.4 million, translating into an
estimated addition of $0.7 million to the Royalty Pool. The amount initially
paid by the Fund, through the Partnership, to SIR for this additional Royalty
stream is $3.5 million through the conversion of 392,400 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 $8.99 per Unit, representing the volume weighted average
price of the units of the Fund for the 20 trading days ending
December 20, 2007 ("Current Fund Unit Price"). The 392,400 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 2008.
The date of such Second Incremental Adjustment is January 1, 2009. The actual
payment from the Partnership to SIR for the additional Royalty stream is
calculated as follows:

    $0.7 million (the estimated annual addition to the Royalty Pool based on
6% of the $11.4 million in estimated revenue from the new additional
restaurants) multiplied by 92.5% (the accretive adjustment) multiplied by 80%
(the Initial Adjustment) divided by Current Yield(*) on the Fund units of 14.40%
(equal to the aggregate cash distribution paid per Fund unit during the
immediately preceding 12 calendar months of $1.295 divided by the Current Fund
Unit Price of $8.99).

    2008 Adjustment for Reduction

    The 392,400 Class A GP Units received for the three new restaurants are
partially off-set by 258,046 Class A GP Units that are associated with the
Adjustment for Reduction for the two restaurants that were closed on
September 29 and December 22, 2007. This results in a net increase in the
number of Class A GP units held by SIR of 134,354. The Adjustment for
Reduction repayment formula, as set out in the License and Royalty Agreement,
is designed to effectively cause SIR to return 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:

    $0.3 million (the estimated annual reduction to the Royalty Pool based on
6% of the $5.2 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 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.

    2008 Second Incremental Adjustment

    Also, the Second Incremental Adjustment for the January 1, 2007 addition
of new restaurants to the Royalty Pool has been finalized. The actual revenue,
for the 52-weeks ended December 31, 2007, of the three Canyon Creek
restaurants that were added to the Royalty Pool effective January 1, 2007 was
$9.8 million, which was approximately 7.6% unfavourable to the amount
originally estimated. This resulted in SIR receiving an additional 59,181
Class A GP Units. The Second Incremental Adjustment is calculated as follows:

    $0.6 million (the estimated annual addition to the Royalty Pool based on
6% of the $9.8 million in actual revenue for the 52-weeks ended
December 31, 2007) multiplied by 92.5% (the accretive adjustment) divided by
Current Yield(*) at the date of the Initial Adjustment on the Fund units of
14.38% (equal to the aggregate cash distribution paid per Fund unit during the
immediately preceding 12 calendar months of $1.235 divided by the volume
weighted average price of the Fund units for the 20 trading days ending
December 20, 2006 of $8.59 ("Current Fund Unit Price at the time of the
Initial Adjustment")) divided by Current Fund Unit Price at the time of the
Initial Adjustment ($8.59) minus the Initial Adjustment of 383,026 Class A GP
Units for the January 1, 2007 addition of new restaurants.

    Priority Special Conversion Distribution

    Also, the Priority Special Conversion Distribution ("Conversion
Distribution") payable to SIR from the Partnership for December 31, 2007 has
been finalized. The amount of the Conversion Distribution is $76,935. This
distribution can only be calculated after December 31, 2007 once the actual
revenue for the 52-weeks ended December 31, 2007 for the new restaurants added
to the Royalty Pool effective January 1, 2007 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, 2007 new additional
restaurants are known with certainty. The amount of the Conversion
Distribution is equal to the aggregate distributions declared per Fund unit
for the preceding calendar year of $1.30 multiplied by 59,181 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, 2007 and will be paid on January 31, 2008.

    2009 Second Incremental Adjustment

    Assuming the three additional new restaurants added to the Royalty Pool
effective January 1, 2008 achieve their estimated revenue for the 52-weeks
ended December 31, 2008, SIR would have the right to convert an additional
98,100 Class B GP Units to Class A GP Units effective January 1, 2009 as the
Second Incremental Adjustment for the January 1, 2008 additional new
restaurants. This would increase SIR's share of the Fund on a fully diluted
basis on January 1, 2008 to 24.6% assuming no other changes in the number of
outstanding Class A GP Units or Fund units occurred before that date. Further,
again assuming the three additional new restaurants added to the Royalty Pool
effective January 1, 2008 achieve their estimated revenue for the 52-weeks
ended December 31, 2008, a Conversion Distribution as of December 31, 2008
would be declared on the 98,100 Class B GP Units that would be converted into
Class A GP Units as a result of the Second Incremental Adjustment on
January 1, 2009. Assuming the monthly distributions per Fund unit remained at
the current level throughout 2008, the amount of the December 31, 2008
Conversion Distribution would be estimated to be $129,492.

    Capital Structure

    Following the: i) 2008 Initial Adjustment, ii) 2008 Adjustment for
Reduction, and iii) 2008 Second Incremental Adjustment, all effective
January 1, 2008, SIR will own, control and hold 1,648,544 Class A GP Units,
representing the equivalent of 23.5% of the units of the Fund on a fully
diluted basis. This 23.5% consists of:

    
    -   1,455,009 Class A GP Units held by SIR as at January 1, 2007, and
    -   193,535 in additional Class A GP Units received for the adjustments
        described above (392,400 for the 2008 Initial Adjustment minus
        258,046 for the 2008 Adjustment for Reduction plus 59,181 for the
        2008 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
98,946,641 Class B GP Units, which are convertible in certain circumstances
(based on the addition of further new restaurants to the Royalty Pool) into
Class A GP Units. 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), and also be exchangeable (without being
subject to any subordination provisions) on a one-for-one basis into units of
the Fund. The 98,946,641 Class B GP Units currently represent 100% of the
issued and outstanding Class B GP Units.
    The Partnership is majority-owned by the Fund.
    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 revenues via a
trade-mark 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.
    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 three new Jack Astor's restaurants added
to the Royalty Pool, 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.

    (*) Current Yield as defined in the Limited Partnership Agreement of the
    Partnership

    About SIR Corp.

    SIR is a privately held Canadian corporation that owns and operates a
portfolio of more than 40 restaurants in Canada. SIR's concept brands include:
Jack Astor's Bar and Grill(R), with 24 locations; Alice Fazooli's!(R), with
five locations; and Canyon Creek Chop House(R), with seven locations. SIR also
operates one-of-a-kind "signature" brands in downtown Toronto, which comprise
the upscale reds(R), Far Niente(R)/Soul of the Vine(R) & Petit Four(TM), and
the Loose Moose Tap & Grill(R). All trademarks related to the concept and
signature brands noted above are used by SIR under a license 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 39 restaurants
currently included in 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 in this news release may constitute "forward-looking"
statements which involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Fund to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. When
used in this document, such statements are such words as "may", "will",
"expect", "believe", "plan", "anticipate", "intend", "estimate" and other
similar terminology. These statements reflect SIR Management's current
expectations regarding future events and operating performance and speak only
as of the date of this document. The Fund and SIR expressly disclaim any
obligation or undertaking to publicly release any updates or revisions to any
forward-looking statements contained herein to reflect any change in
expectations with regard thereto or any changes in events, conditions or
circumstances on which any statement is based.
    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 industry conditions, general
levels of economic activity (including in downtown Toronto), regulations
(including regarding employees, food safety, tobacco and alcohol), weather,
taxes, foreign exchange rates and interest rates, that there will be no
pandemics or other 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. For more information concerning the Fund's risks and
uncertainties, please refer to the Fund's periodic interim filings, October,
or its March 31, 2007 Annual Information Form.

    %SEDAR: 00020914E




For further information:

For further information: Jeff Good, Chief Financial Officer, SIR Corp.,
5360 South Service Road, Suite 200, Burlington, Ontario, Canada, L7L 5L1, Tel:
(905) 681-2997; Bruce Wigle, Investor Relations, Tel: (416) 815-0700, ext.
228, Email: bwigle@equicomgroup.com


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