SIR Royalty Income Fund Announces Adjustments to Royalty Pool

BURLINGTON, ON, Jan. 28, 2022 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN) (the "Fund") today announced that, as of January 1, 2022, no new restaurants were added to the Royalty Pooled Restaurants (the "Royalty Pool") from which the Fund earns distribution income. SIR Corp. ("SIR") did not open any new restaurants during 2021 and consequently, no new restaurants were eligible to be added to the Royalty Pool. SIR closed five restaurants during 2021, which were removed from the Royalty Pool effective January 1, 2022. The Fund's Royalty Pool now consists of 51 restaurants, including 37 Jack Astor's^® restaurants.

The five SIR restaurants that were closed during 2021 and no longer part of the Royalty Pool include: the former Canyon Creek Chop House^® ("Canyon Creek") locations in Mississauga, Scarborough, and Vaughan, Ontario; and the former Scaddabush Italian Kitchen & Bar^® ("Scaddabush") and REDS^® Midtown Tavern ("REDS") locations at the intersection of Gerrard Street and Yonge Street in downtown Toronto (collectively, the "Closed Restaurants").

"Since the onset of the pandemic and the related restaurant operating restrictions, our primary focus has been capital preservation in order to ensure the long-term viability of SIR and the Fund," said Peter Fowler, Chief Executive Officer of SIR Corp. "Our team has done an exceptional job in managing through this unprecedented challenge. We are pleased to have been able to re-start unitholder distributions in 2021 and look forward to returning to a more normalized operating environment where we can again look at adding new restaurants in attractive markets to enhance the Royalty Pool."  

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. 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 year after being added to the Royalty Pool. As no new restaurants were added to the Royalty Pool on January 1, 2022, the adjustments to the Royalty Pool only include the 2022 Adjustment for Reduction (reflecting the Closed Restaurants noted above), the 2021 Second Incremental Adjustment and the Special Conversion Distribution (as defined below).   

2022 Adjustment for Reduction
The 2022 Adjustment for Reduction related to the Closed Restaurants will result in SIR repaying the Partnership 769,163 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.

Four of the five Closed Restaurants (two of the three Canyon Creeks, the REDS and the Scaddabush), were added to the Royalty Pool after 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 is calculated as follows:

• For the closed Canyon Creek in Scarborough, Ontario, which was added to the Royalty Pool on January 1, 2007, $0.2 million (the estimated annual reduction to the Royalty Pool based on 6% of the $3.4 million in Base Level Revenue of the closed restaurants) 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 14.4% (equal to the annual cash distributions paid during 2007 per Fund unit of $1.235 divided by the weighted average Fund Unit Price for the 20 trading days ended December 20, 2006 of $8.59) divided by the same weighted average Fund Unit Price of $8.59. Base Level Revenue is defined as the actual revenues of the Canyon Creek in Scarborough, Ontario for the 52-week period ended December 31, 2007.
  
  
• For the closed Canyon Creek in Vaughan, Ontario, which was added to the Royalty Pool on January 1, 2007, $0.2 million (the estimated annual reduction to the Royalty Pool based on 6% of the $2.5 million in Base Level Revenue of the closed restaurants) 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 14.4% (equal to the annual cash distributions paid during 2007 per Fund unit of $1.235 divided by the weighted average  Fund Unit Price for the 20 trading days ended December 20, 2006 of $8.59) divided by the the same weighted average Fund Unit Price of $8.59. Base Level Revenue is defined as the actual revenues of the Canyon Creek in Vaughan, Ontario for the 52-week period ended December 31, 2007.
  
  
• For the closed Scaddabush at Gerrard and Yonge  in downtown Toronto, which was added to the Royalty Pool on January 1, 2015, $0.3 million (the estimated annual reduction to the Royalty Pool based on 6% of the $4.5 million in Base Level Revenue of the closed restaurants) 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 12.0% (equal to the annual  cash distributions paid during 2015 (adjusted for the SIFT tax paid or payable in relation to the cash distributions paid) per Fund unit of $1.54 divided by the weighted average Fund Unit Price for the 20 trading days ended December 22, 2014 of $12.85) divided by the same weighted average Fund Unit Price of $12.85. Base Level Revenue is defined as the actual revenues of the Scaddabush on Gerrard Street at Yonge Street in Toronto for the 52-week period ended December 31, 2015.
  
  
• For the closed REDS at Gerrard and Yonge in downtown Toronto, which was added to the Royalty Pool on January 1, 2014, $0.2 million (the estimated annual reduction to the Royalty Pool based on 6% of the $3.5 million in Base Level Revenue of the closed restaurants) 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 10.3% (equal to the annual cash distributions paid during 2014 (adjusted for the SIFT tax paid or payable in relation to the cash distributions paid) per Fund unit of $1.50 divided by the weighted average Fund Unit Price for the 20 trading days ended December 20, 2013 of $14.54) divided by the same weighted average Fund Unit Price of $14.54. Base Level Revenue is defined as the actual revenues of the REDS on Gerrard Street at Yonge Street in Toronto for the 52-week period ended December 31, 2014.

The fifth of the Closed Restaurants, the closed Canyon Creek in Mississauga, Ontario, 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:

• $0.3 million (the estimated annual reduction to the Royalty Pool based on 6% of the $4.2 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 initial targeted 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. As the Canyon Creek in Mississauga became part of the Royalty Pool at the time of the Fund's IPO on October 12, 2004, 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.

2021 Second Incremental Adjustment
The Second Incremental Adjustment for the January 1, 2021 addition of one new restaurant (Scaddabush in Burlington, Ontario) to the Royalty Pool has been finalized. Revenue in this location, like all other restaurants in the Royalty Pool, was negatively impacted by COVID-19 related business restrictions during 2021. The actual revenue of this restaurant for the 52-weeks ended December 31, 2021 totaled $2.6 million, which was approximately 2.2% more than the amount originally estimated, but significantly lower than this location's estimated potential sales in the absence of COVID-19 related business restrictions. This resulted in SIR receiving an additional 89,229 Class A GP Units. The 2021 Second Incremental Adjustment is calculated as follows:

Calculation of Payment Related to 2021 Second Incremental Adjustment
Actual annual net revenue from new restaurants added to the Royalty Pool					$	2,656,979
	Royalty rate on net revenue paid to the Fund				6%
	Net increase in restaurant Royalties				$	159,419
		Less:
		7.5% Accretion adjustment			$	11,956
Actual additional royalty stream subject to the 2021 Second Incremental Adjustment					$	147,462
Calculation of 2021 Second Incremental Adjustment
Actual additional royalty stream subject to the 2021 Second Incremental Adjustment					$	147,462
	Current Yield on Fund Units (Note 1)				11.88%
	Capitalized value of actual additions to royalty stream				$	1,240,906
	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				410,896
	Number of Units exchanged in the 2021 Initial Adjustment				(321,667)
2021 Second Incremental Adjustment					89,229
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
		Volume Weighted Average Price of Fund Units at December 22, 2020			$	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 Fund unitholders plus SIFT taxes paid or payable in the prior year, as well as the volume weighted average price for the Fund units traded for the 20 trading days ended December 22, 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.

Conversion Distribution
The Conversion Distribution ("Conversion Distribution") payable by the Partnership to SIR for December 31, 2021 has been finalized. The aggregate amount of the Conversion Distribution is $71,781. The annual Conversion Distribution (or Refund) can only be calculated once the actual revenue for the 52-weeks ended December 31, 2021 for the new restaurant added to the Royalty Pool effective January 1, 2021, 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, 2021 new additional restaurant, is 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 $0.8045 multiplied by 89,229, which is the number of Class B GP Units that are converted into Class A GP Units as a result of the 2021 Second Incremental Adjustment. The Conversion Distribution has been declared effective December 31, 2021 and will be paid on January 31, 2022.

Capital Structure
Following the 2022 Initial Adjustment, 2021 Second Incremental Adjustment and the 2022 Adjustment for Reduction, all effective January 1, 2022, SIR will own, control and hold 1,291,618 Class A GP Units, representing the equivalent of 13.36% of the units of the Fund on a fully diluted basis. This 13.36% consists of:

• 1,971,552 Class A GP Units held by SIR as at December 31, 2021, and
• The 679,934 in Class A GP Units returned for the adjustments described above (nil for the 2022 Initial Adjustment plus 89,229 returned for the 2021 Second Incremental Adjustment minus 769,163 returned for the 2022 Adjustment for Reduction). 679,934 Class A GP Units were exchanged for Class B GP Units effective January 1, 2022. This conversion decreases SIR's share of the fully diluted units from 19.05% to 13.36%.

								Issued and Outstanding Units, & Additional Units resulting from 2022 Adjustments to Royalty Pool
Calculation of SIR's share of the Fund on a Fully Diluted Basis
Public Float at December 31, 2021								8,375,567
Class A GP Units held by SIR as at December 31, 2021 (convertible
	to Units on a one-for-one basis)							1,971,552
Add / (Subtract):
	Class A GP Units per the 2022 Initial Adjustment							-
	Class A GP Units per the 2021 Second Incremental Adjustment							89,229
	Class A GP Units per the 2022 Adjustment for Reduction							(769,163)
Number of fully-diluted Units								9,667,185
Number of fully diluted Units available for exchange by
SIR effective January 1, 2022								1,291,618
Percentage of fully-diluted Units available for exchange
by SIR effective January 1, 2022								13.36%

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 96,284,667 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 96,284,667 Class B GP Units currently represent 100% of the issued and outstanding Class B GP Units.

The Fund does not expect there to be a 2022 Second Incremental Adjustment effective January 1, 2023 or an associated Conversion Distribution or Refund declared effective December 31, 2021, as both related to any new restaurants that that were added to the Royalty Pool effective January 1, 2022 and there were no new restaurants added to the Royalty Pool on this adjustment date. 

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 13.36% equivalent Fund unit holding, represented by SIR's Class A GP Units noted above would increase to 13.69%, 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.

About SIR Corp.
SIR Corp. ("SIR") is a privately held Canadian corporation that owns a portfolio of 53 restaurants in Canada. SIR's Concept brands include: Jack Astor's Bar and Grill®, with 37 locations; Scaddabush Italian Kitchen & Bar® with nine locations; and Canyon Creek®, with two locations. SIR also operates one-of-a-kind "Signature" brands including Reds® Wine 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 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.

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", "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; 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; 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.

In formulating the forward-looking statements contained herein, SIR Management has assumed that it will be successful in dealing with the effects of the COVID-19 pandemic and that business and economic conditions affecting SIR's restaurants and the Fund will return to normalcy within the short to medium term.

For more information concerning the Fund's risks and uncertainties, please refer to the March 31, 2021 Annual Information Form, for the period ended December 31, 2020, and the Fund's Management Discussion & Analysis for Q3 2021, which are 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

Jeff Good, Chief Financial Officer, Bay Street Communications, Tel: [phone]; Bruce Wigle, Bay Street Communications, Tel: [phone]