SIR Royalty Income Fund Reports 2018 Second Quarter Results

BURLINGTON, ON, Aug. 9, 2018 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN) (the "Fund") today reported its financial results for the three-month ("Q2 2018") and six-month ("YTD 2018") periods ended June 30, 2018. Percentage calculations are based on the numbers in the financial statements and may not correspond to rounded figures presented in this release.

Q2 2018 Highlights

• Net earnings for the Fund were $1.9 million, or $0.23 per Fund unit, for Q2 2018, compared to $2.6 million, or $0.31 per Fund unit, for the three-month period ended June 30, 2017 ("Q2 2017"). Net earnings for Q2 2018 reflect the adoption of International Financial Reporting Standard 9 ("IFRS 9"), which resulted in a reduction in net earnings of $0.9 million. Adjusted net earnings⁽¹⁾ were $2.8 million, or $0.34 per Fund unit, for Q2 2018, compared to $2.6 million, or $0.31 per Fund unit, for Q2 2017.
  
  
• Distributable cash⁽²⁾ totaled $2.8 million, or $0.34 per Fund unit (basic and diluted), and cash distributed to unitholders totaled $2.5 million, representing a payout ratio⁽²⁾ of 89.0%. The Fund's target payout ratio⁽²⁾ is 100% per annum.
  
  
• Pooled Revenue increased 6.2% to $79.1 million, compared to $74.5 million in Q2 2017, supported by overall same store sales growth ("SSSG")⁽³⁾ of 2.0% and the addition of the three new Scaddabush restaurants to Royalty Pooled Restaurants on January 1, 2018.
  
  
• The Fund's Board of Trustees approved a 5.3% increase to cash distributions, raising the Fund's monthly distribution from $0.095 per unit to $0.10 per unit, representing an annualized distribution of $1.20 per unit. The increase was effective for the Fund's monthly cash distribution paid on April 30, 2018.

"We are pleased with the positive impact from our investment in the ongoing, comprehensive renovation program for Jack Astor's, both in terms of the same store sales growth we are seeing and the favourable reception from both our guests and staff. We plan to continue the program in the second half of 2018," said Peter Fowler, President and CEO of SIR Corp. "Another important initiative is our system-wide rollout of tablets for our servers and hosts, which we just completed in the quarter. We are excited about the opportunities we see to leverage this technology to drive sales performance and operating efficiencies, while also enhancing our overall guest experience."   

Financial Results

($000s except restaurants and per Unit amounts) (unaudited)	Three-month  period ended June 30, 2018	Three-month  period ended June 30, 2017	Six-month  period ended June 30, 2018	Six-month  period ended June 30, 2017
Royalty Pooled Restaurants	57	57	57	57
Pooled Revenue generated by SIR Corp.	79,093	74,477	147,901	138,951
Royalty income to Partnership – 6% of Pooled Revenue	4,746	4,469	8,874	8,337
Make-Whole Payment	-	99	-	229
Total Royalty income to Partnership	4,746	4,568	8,874	8,566
Partnership other income	6	6	12	12
Partnership expenses	(20)	(21)	(41)	(44)
Partnership earnings	4,732	4,553	8,845	8,534
SIR Corp.'s interest (Class A, B, and C GP Units)	(1,645)	(1,599)	(3,171)	(3,088)
Partnership income allocated to Fund	3,087	2,954	5,674	5,446
Interest income in SIR Loan	-	750	-	1,500
Change in estimated fair value of the SIR Loan	(250)	-	(1,750)	-
Total income of the Fund	2,837	3,704	3,924	6,946
General & administrative expenses	(118)	(118)	(234)	(235)
Net earnings before income taxes of the Fund	2,719	3,586	3,690	6,711
Income tax expense	(774)	(961)	(346)	(1,795)
Net earnings for the period	1,945	2,625	3,344	4,916
Earnings per Fund Unit (basic and diluted)	$0.23	$0.31	$0.40	$0.59

Pooled Revenue increased 6.2% to $79.1 million in Q2 2018, up from $74.5 million in Q2 2017. The increase resulted from overall SSSG⁽³⁾ of 2.0% and the addition of three new Scaddabush restaurants to Royalty Pooled Restaurants on January 1, 2018. The increase in Pooled Revenue was partially offset by the closures of: Alice Fazooli's^® in Oakville, Ontario in Q1 2017, Alice Fazooli's in Vaughan, Ontario in Q2 2017, and Canyon Creek^® in Etobicoke, Ontario in Q4 2017.

Net earnings for Q2 2018 reflect the adoption of IFRS 9 on January 1, 2018. Under IFRS 9, the Fund is obligated to recognize the SIR Loan at fair value, with differences between the fair value and the carrying value being recorded in the statement of earnings. This resulted in a non-cash fair value adjustment to the statement of earnings in Q2 2018 that resulted in a reduction of net earnings of $0.9 million. Accordingly, the Fund's net earnings were $1.9 million, or $0.23 per Fund unit, for Q2 2018 compared to $2.6 million, or $0.31 per Fund unit, in Q2 2017. Adjusted Net Earnings⁽¹⁾ for Q2 2018 were $2.8 million, or $0.34 per Fund unit.

Distributable cash⁽²⁾ for Q2 2018 totaled $2.8 million, or $0.34 per Fund unit (basic and diluted), and distributions to Unitholders totaled $2.5 million, representing a payout ratio⁽²⁾ of 89.0%. Distributable cash⁽²⁾ for Q2 2017 totaled $2.6 million, or $0.32 per Fund unit (basic and diluted), and distributions to Unitholders totaled $2.4 million, representing a payout ratio⁽²⁾ of 90.4%. The decreased payout ratio⁽²⁾  in Q2 2018 is primarily the result of an increase in distributable cash⁽²⁾ compared to Q2 2017, partially offset by the Fund's increased monthly unitholder distributions, which was effective for the Fund's monthly cash distribution paid on April 30, 2018.

Since the Fund's inception in October 2004, up to and including Q2 2018, the Fund has generated $103.8 million in cumulative distributable cash⁽²⁾ and has paid cumulative cash distributions of $102.8 million, representing a cumulative payout ratio⁽²⁾ (the ratio of cumulative cash distributions paid since inception to cumulative distributable cash⁽²⁾ generated) of 99.0%.

Distributable Cash⁽²⁾
The following table reconciles the relationship between cash provided by operating activities and distributable cash⁽²⁾:           

(in thousands of dollars except per unit amounts and payout ratio²) (unaudited)		Three-month period ended June 30, 2018	Three-month period ended June 30, 2017	Six-month period ended June 30, 2018	Six-month period ended June 30, 2017
Cash provided by operating activities		2,492	2,250	4,803	4,723
Add/(deduct):
	Net change in non-cash working capital items	(124)	50	(579)	(252)
	Net change in income tax payable	39	(115)	553	25
	Net change in distribution receivable from the Partnership	417	454	505	448
Distributable cash^(2)		2,824	2,639	5,282	4,944
Cash distributed for the period		2,513	2,387	4,900	4,774
Surplus (shortfall) of distributable cash^(2)		311	252	382	170
Payout ratio^(2)		89.0%	90.4%	92.8%	96.6%
Distributable cash^(2) per Fund unit (basic and diluted)		$0.34	$0.32	$0.63	$0.59

Same Store Sales ("SSS") ⁽³⁾

SSSG^(3) for Royalty Pooled Restaurants	Three-month period ended June 30, 2018	Three-month period ended June 30, 2017	Six-month period ended June 30, 2018	Six-month period ended June 30, 2017
Jack Astor's^®	4.7%	(1.4%)	4.2%	0.4%
Canyon Creek^®	(5.5%)	1.4%	(1.9%)	(0.7%)
Scaddabush^®	(2.8%)	14.1%	0.1%	13.2%
Signature Restaurants	(12.7%)	7.7%	(6.4%)	6.5%
Overall SSSG^(3)	2.0%	0.4%	2.6%	1.5%

Jack Astor's, which accounted for approximately 74% of Pooled Revenue in Q2 2018, generated SSSG⁽³⁾ of 4.7% in the quarter, reflecting the improved sales performance at certain locations that were renovated in 2016 and 2017. Beverage sales increased at certain renovated locations as SIR implemented an enhanced beverage program as part of its renovation program, including the rollout of a new craft beer offering during Q4 2017. Jack Astor's SSSG⁽³⁾ in Q2 2018 also reflects that no Jack Astor's locations were renovated in the quarter, compared to the closure of three locations (Vaughan, Brampton, and Toronto, Ontario) for a combined total of 39 days in Q2 2017.

Canyon Creek had a decline in SSS⁽³⁾ of 5.5% in Q2 2018. SIR's management is actively considering options to update the Canyon Creek portfolio to improve performance.

Scaddabush SSS⁽³⁾ performance for Q2 2018 includes four locations (Richmond Hill, Mississauga, and Scarborough, Ontario, and Yonge and Gerrard in downtown Toronto). The new Scaddabush locations in Oakville, Vaughan and Etobicoke, Ontario and on Front Street in downtown Toronto are excluded from the calculation of SSS⁽³⁾ as they were not open for the entire comparable periods in 2018 and 2017. The 2.8% decline in SSS⁽³⁾ for Scaddabush compares to Q2 2017 when Scaddabush generated exceptional SSSG⁽³⁾ of 14.1%. 

The downtown Toronto Signature Restaurants had a decline in SSS⁽³⁾ of 12.7% in Q2 2018, which was primarily attributable to lower sales at the Loose Moose due to  lower event attendance at nearby sporting and entertainment venues in the quarter, along with increased competition, compared to Q2 2017. SSS⁽³⁾ performance for the Signature Restaurants does not include the new Reds restaurant at the Square One shopping centre in Mississauga, Ontario ("Reds Square One") which opened during Q4 2017.

Outlook
SIR continues to monitor economic conditions and consumer confidence. SIR recently secured additional long-term financing and has advised the Fund that it is considering new restaurant developments and renovations to existing restaurants. The timing of new restaurant construction and renovations, as well as related opening schedules, will be reviewed regularly by SIR and adjusted as necessary based on SIR's assessment of economic and industry conditions.  

The Ontario government has passed legislation that increase Ontario's general minimum wage on January 1, 2018, and plan to increase it again on January 1, 2019, followed by annual increases at the rate of inflation. These changes materially increase the cost of hourly labour at the majority of SIR's restaurants. SIR's Management is evaluating alternatives to offset the impact of these increases in an effort to reduce the price increases that otherwise may have to be implemented to mitigate anticipated cost increases.

In support of driving growth in Royalty Pooled Revenue and/or SSS⁽³⁾:  

• SIR commenced a Jack Astor's renovation program in 2016, completing renovations at six Jack Astor's locations in 2016, eight Jack Astor's locations in 2017, and two additional Jack Astor's locations in Q1 2018. SIR is pleased with the performance of the renovated Jack Astor's locations and intends to implement similar renovations at other Jack Astor's locations in the future.
  
  
• SIR completed the system-wide conversion of its Alice Fazooli's^® concept brand into the more popular Scaddabush concept brand during 2017. Scaddabush has generated strong sales performance at each location to date, and SIR and the Fund should benefit from the positive revenue contributions from Scaddabush going forward. SIR's eighth Scaddabush location in Etobicoke, Ontario will be added to Royalty Pooled Restaurants on January 1, 2019.
  
  
• The new Reds restaurant at the Square One shopping centre in Mississauga, Ontario will be added to Royalty Pooled Restaurants on January 1, 2019.
  
  
• SIR currently has one commitment in place to lease a property in the Mimico neighbourhood of Etobicoke, Ontario upon which it plans to build one new Scaddabush restaurant.

The Fund's consolidated unaudited Financial Statements and MD&A, and the Partnership's Financial Statements, for the three and six-month periods ended June 30, 2018, are available via the SEDAR website at www.sedar.com and SIR's website at www.sircorp.com.

(1) Adjusted Net Earnings (Loss) is calculated by replacing the change in estimated fair value of the SIR Loan as reported in the statement of earnings with the interest received on the SIR Loan during the period and the corresponding deferred tax expense or recovery from the net earnings for the period. Adjusted Earnings per Fund unit represents the portion of net earnings adjusted for the change in estimated fair value of the SIR Loan and the deferred tax expense or recovery for the period allocated to each outstanding Fund unit. Adjusted Net Earnings (Loss) and Adjusted Earnings per Fund unit are non-GAAP financial measures and do not have a standardized meaning prescribed by IFRS. Management believes that in addition to net earnings (loss), Adjusted Net Earnings (Loss) and Adjusted Earnings per Fund unit are useful supplemental measures to evaluate the Fund's performance. The change in estimated fair value of the SIR Loan is a non-cash fair value transaction resulting from the adoption of IFRS 9 on January 1, 2018 and varies with changes in a discount rate that fluctuates based on current market interest rates adjusted for SIR's credit risk. The replacement of the non-cash change in estimated fair value of the SIR Loan with the interest received, and the corresponding deferred tax amount, eliminates this non-cash impact. Management cautions investors that Adjusted Net Earnings (Loss) should not replace net earnings or loss or cash flows from operating, investing and financing activities (as determined in accordance with IFRS), as an indicator of the Fund's performance. The Fund's method of calculating Adjusted Net Earnings (Loss) may differ from the methods used by other issuers. Please refer to the reconciliations of net earnings (loss) for the period to Adjusted Net Earnings in the Fund's MD&A for the three-month and six-month periods ended June 30, 2018.

(2) Distributable cash and payout ratio are non-GAAP financial measures and do not have standardized meanings prescribed by IFRS.  However, the Fund believes that distributable cash and the payout ratio are useful measures as they provide investors with an indication of cash available for distribution.  The Fund's method of calculating distributable cash and the payout ratio may differ from that of other issuers and, accordingly, distributable cash and the payout ratio may not be comparable to measures used by other issuers.  Investors are cautioned that distributable cash and the payout ratio should not be construed as an alternative to the statement of cash flows as a measure of liquidity and cash flows of the Fund. The payout ratio is calculated as cash distributed for the period as a percentage of the distributable cash for the period.  Distributable cash represents the amount of money which the Fund expects to have available for distribution to Unitholders of the Fund, and is calculated as cash provided by operating activities of the Fund, adjusted for the net change in non-cash working capital items including a reserve for income taxes payable and the net change in the distribution receivable from the SIR Royalty Limited Partnership.  For a detailed explanation of how the Fund's distributable cash is calculated, please refer to the Fund's MD&A for the quarter ended June 30, 2018, which can be accessed via the SEDAR website (www.sedar.com).

(3) Same store sales ("SSS") and same store sales growth ("SSSG") are non-GAAP financial measures and do not have standardized meanings prescribed by IFRS.  However, the Fund believes that SSS and SSSG are useful measures and provide investors with an indication of the change in year-over-year sales.  The Fund's method of calculating SSS and SSSG may differ from those of other issuers and, accordingly, SSS and SSSG may not be comparable to measures used by other issuers. SSS includes revenue from all SIR Restaurants included in Pooled Revenue except for those locations that were not open for the entire comparable periods in fiscal 2018 and fiscal 2017. SSSG is the percentage increase in SSS over the prior comparable period.

About SIR Corp.
SIR is a privately held Canadian corporation that owns a portfolio of 61 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®, with eight locations; and Canyon Creek®, with seven locations. SIR also operates one-of-a-kind "Signature" brands in downtown Toronto, including Reds® Wine Tavern, Reds® Midtown 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 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 Duke's Refresher® & Bar in downtown Toronto, one seasonal Signature restaurant, Abbey's Bakehouse®, and one seasonal Abbey's Bakehouse retail outlet, 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", "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, including the cost and/or availability of labour as it relates to changes in minimum wage rates or other changes to labour legislation; 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. Recent changes in employment law, including announced increases in minimum wages, are factored into management's assumptions. 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 14, 2018 Annual Information Form, for the period ended December 31, 2017, 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

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

Related Links

http://www.sircorp.com