SRV.UN Sir Royalty Income Fund

BURLINGTON, ON, Jan. 31, 2024 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN) (the "Fund") today announced that, as of January 1, 2024, one new restaurant was added to the Royalty Pooled Restaurants (the "Royalty Pool") from which the Fund earns distribution income. SIR Corp. ("SIR") closed three restaurants during 2023, which were removed from the Royalty Pool effective January 1, 2024. The Royalty Pool now consists of 49 restaurants, including: 37 Jack Astor'sâ restaurants, 10 Scaddabush Italian Kitchen & Barâ ("Scaddabush") locations, Reds® Square One, and The Loose Moose®.

The new restaurant added to the Royalty Pool was the Scaddabush located in Whitby, Ontario. The three SIR restaurants that were closed during 2023 and no longer form part of the Royalty Pool were Reds® Wine Tavern on Adelaide Street in Toronto, Reds® Kitchen + Wine Bar in Niagara Falls and the Scaddabush in the Mimico neighbourhood of Etobicoke (collectively, the "Closed Restaurants").

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 prior year (the "Adjustment for Reduction"). In years when new restaurants are added to the Royalty Pool, the Fund, through the SIR Royalty Limited Partnership (the "Partnership"), pays SIR for the additional royalty stream from the 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, which are the economic equivalent of Fund units.  The payment formula is based on the royalties that are expected to be accrued on the sales of the new restaurant in its first full calendar year after being added to the Royalty Pool.

The estimated annualized net revenue of the one new Royalty Pool restaurant of $6.2 million is expected to result in a $0.4 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 170,561 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 $16.29 per Unit, representing the volume weighted average price ("VWAP") of the Fund units for the 20 trading days ended December 21, 2023 ("Current Fund Unit Price"). The 170,561 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 2024, 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 designed to be accretive to the Fund unitholders. The date of the Second Incremental Adjustment is January 1, 2024. The actual payment from the Partnership to SIR for the additional royalty stream entitlement is calculated as follows:

The 2024 Adjustment for Reduction related to the Closed Restaurants will result in SIR repaying the Partnership 351,014 Class A GP Units, reflecting the reduction in the Royalty stream. 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 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 were added to the Royalty Pool after the Closing Date of the Fund's IPO. One of the Closed Restaurants was added to the Royalty Pool at the IPO date. 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 closed Scaddabush in the Mimico neighbourhood of Etobicoke, which was added to the Royalty Pool on January 1, 2020: $0.1 million (the estimated annual reduction to the Royalty Pool based on 6% of the $1.2 million in Base Level Revenue of the closed restaurant) 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 19.8% (equal to the annual cash distributions paid during 2019 per Fund unit of $1.669 divided by the VWAP of the Fund units for the 20 trading days ended December 20, 2019 of $8.41) divided by the same VWAP of $8.41. Base Level Revenue is defined as the actual revenues of the former Scaddabush in Mimico for the 52-week period ended December 31, 2020.
• For the closed Reds® Kitchen + Wine Bar in Niagara Falls, which was added to the Royalty Pool on January 1, 2023: $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 restaurant) 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 10.8% (equal to the annual cash distributions paid during 2022 per Fund unit of $1.728 divided by the VWAP of the Fund units for the 20 trading days ended December 21, 2022 of $16.06) divided by the same VWAP of $16.06. Base Level Revenue is defined as the actual revenues of the former Reds® Kitchen + Wine Bar in Niagara Falls for the 52-week period ended December 31, 2023.
• For the closed Reds® Wine Tavern on Adelaide Street in Toronto , which was added to the Royalty Pool on the IPO date, $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 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 Second Incremental Adjustment for the January 1, 2023 addition of two new restaurants (Scaddabush located in Etobicoke, Ontario, in close proximity to Pearson International Airport, and the Reds® Kitchen + Wine Bar at the Fallsview Casino Resort in Niagara Falls, Ontario) to the Royalty Pool has been finalized. The actual revenue of these restaurants for the 52 weeks ended December 31, 2023 totaled $6.2 million, which was approximately 31.2% less than the amount originally estimated. This resulted in SIR effectively returning 32,372 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 2023 Second Incremental Adjustment is calculated as follows:

As the 2023 Second Incremental Adjustment resulted in SIR effectively returning 32,372 Class A GP Units to the Partnership, the Special Conversion Refund ("Conversion Refund") payable by SIR to the Partnership for December 31, 2023 has been finalized. The amount of the Conversion Refund is $52,099. The annual Special Conversion Distribution / Refund can only be calculated once the actual revenue for the 52 weeks ended December 31, 2023 for the new restaurants added to the Royalty Pool effective January 1, 2023, 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, 2023 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 $1.6094 multiplied by 32,372, which is the number of Class A GP Units that are effectively converted back into Class B GP Units as a result of the 2023 Second Incremental Adjustment. The Conversion Refund has been declared effective December 31, 2023 and will be paid on January 31, 2024.

Following the 2024 Initial Adjustment, the 2023 Second Incremental Adjustment and the 2024 Adjustment for Reduction, both effective January 1, 2024, SIR will own, control and hold 987,835 Class A GP Units, representing the equivalent of 10.55% of the units of the Fund on a fully diluted basis, compared to 12.54% as at December 31, 2023. 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 96,466,583 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 and restaurant closures), also be exchangeable on a one-for-one basis into units of the Fund. The 96,466,583 Class B GP Units currently represent 100% of the issued and outstanding Class B GP Units.

The Fund expects there will be a 2024 Second Incremental Adjustment effective January 1, 2025 and an associated Conversion Distribution or Refund declared effective December 31, 2024, as both related to the two new restaurants that that were added to the Royalty Pool effective January 1, 2024. The amount of such adjustment and distribution cannot be determined at this time.

SIR and Peter Fowler (who beneficially owns 31,500 units of the Fund apart from SIR'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 10.55% equivalent Fund unit holding, represented by SIR's Class A GP Units noted above would increase to 10.89%, 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 trademarks, 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.

SIR Corp. ("SIR") is a privately held Canadian corporation that owns a portfolio of 51 restaurants in Canada. SIR's Concept brands include: Jack Astor's Bar and Grill®, with 37 locations; and Scaddabush Italian Kitchen & Bar® with 10 locations. SIR also operates one-of-a-kind "Signature" brands including 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 one Duke's Refresher® & Bar location, 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.

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.

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", 'could", "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: 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; the ability to maintain staffing levels; the impact of inflation, including on input prices and wages; the impact of the war in the Ukraine; changes in tariffs and international trade; changes in foreign exchange and interest rates; 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 or other limits placed on restaurants and bars; laws affecting the sale and use of alcohol (including availability and enforcement); changes in cannabis laws; changes in environmental laws; privacy matters; accounting policies and practices; changes in tax laws; 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.

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.

For more information concerning the Fund's risks and uncertainties, please refer to the March 16, 2023 Annual Information Form, for the period ended December 31, 2022, and the Fund's Q3 2023 Management Discussion & Analysis, which are available under the Fund's profile at www.sedarplus.ca. 

SOURCE SIR Royalty Income Fund