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(x) 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(x) 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.
(x) 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
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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.
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