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SIR Royalty Income Fund

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SIR Royalty Income Fund Reports 2019 First Quarter Results
SIR Royalty Income Fund Reports 2019 First Quarter Results

Canada NewsWire

BURLINGTON, ON, May 13, 2019 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN) (the "Fund") today reported its financial results for the three-month period ended March 31, 2019 ("Q1 2019"). Percentage calculations are based on the numbers in the financial statements and may not correspond to rounded figures presented in this release.

Q1 2019 Highlights

  • Pooled Revenue was $67.0 million, a decline of 2.6% compared to $68.8 million in Q1 2018.
  • Royalty income in the SIR Royalty Limited Partnership (the "Partnership") increased by 2.3% to $4.2 million, compared to $4.1 million for the three-month period ended March 31, 2018 ("Q1 2018").
  • Equity income from the Partnership, which represents the Fund's pro rata share of the residual distributions of the Partnership, was $2.6 million in both Q1 2019 and Q1 2018.
  • Net earnings for the Fund were $7.9 million, or $0.81 per Fund unit (diluted), compared to $1.4 million, or $0.17 per Fund unit (basic and diluted) in Q1 2018. Net earnings were impacted by IFRS 9, which resulted in an increase in net earnings of $5.6 million for Q1 2019, and a decrease in net earnings of $1.0 million for Q1 2018. Adjusted net earnings(1) were $2.3 million, or $0.27 per Fund unit, in Q1 2019, compared to $2.4 million, or $0.29 per Fund unit, in Q1 2018.
  • Distributable cash(2) totaled $2.3 million, or $0.28 per unit (basic and diluted), and cash distributed to unitholders totaled $2.6 million, representing a payout ratio(2) of 114.4%. The Fund's target payout ratio(2) is 100% per annum.
  • Effective January 1, 2019, two new restaurants, one Scaddabush Italian Kitchen & Bar® ("Scaddabush") and one Reds® restaurant, were added to the Royalty Pool.
  • SIR completed renovations of two Jack Astor's® locations, one Scaddabush location, and The Loose Moose® during the quarter.

"We continue make strategic investments in our restaurants to drive long-term growth in same store sales and Pooled Revenue. During the quarter, we completed major renovations of four restaurants. We also began the rollout of a refined pizza and pasta program for Scaddabush at our Square One location in Mississauga. We plan to introduce this program at each of our Scaddabush locations in 2019," said Peter Fowler, CEO of SIR Corp. "Our decline in Pooled Revenue and same store sales for the quarter reflect changes in consumer buying behavior and adverse weather conditions relative to the same quarter in the prior year. Same store sales were also impacted by the higher proportion of temporary restaurant closures in the period to complete value-enhancing renovations."

Financial Results

($000s except restaurants

and per Unit amounts)

 


Three-month

 period ended

March 31,
2019

Three-month

 period ended

March 31,
2018





Royalty Pooled Restaurants


58

57

Pooled Revenue generated by
SIR Corp.


67,016

68,808





Royalty income to Partnership –
6% of Pooled Revenue


4,021

 

4,128

Make-Whole Payment


203

-

Total Royalty income to
Partnership


4,224

4,128

Partnership other income


6

6

Partnership expenses


(23)

(21)

Partnership earnings


4,207

4,113

SIR Corp.'s interest
(Class A, B, and C GP Units)


(1,605)

 

(1,526)





Partnership income allocated
to Fund


2,602

2,587

Interest income in SIR Loan


-

-

Change in estimated fair value
of the SIR Loan


8,250

(1,500)

Total income (loss) of the
Fund


10,852

1,087

General & administrative
expenses


(118)

 

(116)





Net earnings (loss) before
income taxes of the Fund


10,734

971

Income tax expense


(2,813)

428

Net earnings (loss) for the
period


7,921

 

1,399

Diluted Earnings per Fund
Unit


$0.81

 

$0.17

 

Pooled Revenue in Q1 2019 declined 2.6% to $67.0 million, compared to $68.8 million in Q1 2018, primarily as a result of lower same store sales ("SSS")(3). Pooled Revenue in Q1 2019 was also impacted by the permanent closure of the Jack Astor's location in the St. Lawrence Market neighbourhood of downtown Toronto, effective February 4, 2019, and the closure of the Canyon Creek® location on Front Street in downtown Toronto during the fourth quarter of 2018. SIR is required to pay a Make-Whole Payment to the Fund, via the Partnership, for the closed Jack Astor's location from the date of closure until it ceases to be part of Royalty Pooled Restaurants on January 1, 2020. SIR is currently evaluating strategic alternatives for this location. The closed Canyon Creek restaurant ceased to be part of Royalty Pooled Restaurants on January 1, 2019.  

Net earnings for Q1 2019 were impacted by IFRS 9. 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 Q1 2019 that resulted in an increase in net earnings of $5.6 million. In Q1 2018, the non-cash fair value adjustment to the statement of earnings resulted in a decrease in net earnings of $1.0 million. Accordingly, the Fund's net earnings were $7.9 million, or $0.81 per Fund unit (diluted), for Q1 2019, compared to net earnings of $1.4 million, or $0.17 per Fund unit (basic and diluted), in Q1 2018. Adjusted Net Earnings(1) for Q1 2019 were $2.3 million, or $0.27 per Fund unit, compared to $2.4 million, or $0.29 per Fund unit, in Q1 2018.

Distributable cash(2) for Q1 2019 totaled $2.3 million, or $0.28 per Fund unit (basic and diluted), and distributions to Unitholders totaled $2.6 million, representing a payout ratio(2) of 114.4%. Distributable cash(2) for Q1 2018 totaled $2.5 million, or $0.29 per Fund unit (basic and diluted), and distributions to Unitholders totaled $2.4 million, representing a payout ratio(2) of 97.1%. The increased payout ratio(2) in Q1 2019 is primarily the result of a decrease in distributable cash and an increase in cash distributions paid compared to Q1 2018. The Fund's monthly unitholder distributions increased by 10.5% during 2018, with an increase from $0.095 per unit to $0.10 per unit effective for the Fund's monthly cash distribution paid in April 2018, and an increase from $0.10 per unit to $0.105 per unit effective for the Fund's monthly cash distribution paid in September 2018.

Since the Fund's inception in October 2004, up to and including Q1 2019, the Fund has generated $111.1 million in cumulative distributable cash(2) and has paid cumulative cash distributions of $110.6 million, representing a cumulative payout ratio(2) (the ratio of cumulative cash distributions paid since inception to cumulative distributable cash(2) generated) of 99.5%.

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 ratio
²)

 

Three-month

period ended

March 31,
2019

Three-month

period ended

March 31,
2018

Cash provided by operating activities

2,663

2,310

Add/(deduct):



Net change in non-cash working
capital items

(271)

(455)

Net change in income tax payable

153

514

Net change in distribution receivable
from the Partnership

(239)

89

Distributable cash(2)

2,306

2,458

Cash distributed for the period

2,638

2,387

Surplus (shortfall) of distributable cash(2)

(332)

71

Payout ratio(2)

114.4%

97.1%

Distributable cash(2) per Fund unit
(basic and diluted)

$0.28

$0.29

 

Same Store Sales  

SSS (3) for Royalty Pooled
Restaurants

Three-month
period ended

March 31,
2019

Three-month
period ended

March 31,

2018




Jack Astor's®

(3.4%)

3.7%

Canyon Creek®

(4.2%)

1.7%

Scaddabush®

(1.8%)

3.5%

Signature Restaurants

(8.3%)

0.9%

Overall SSSG(3)

(3.6%)

3.3%

 

Jack Astor's, which accounted for approximately 69% of Pooled Revenue in Q1 2019, had a SSS(3) decline of 3.4% in the quarter. SIR completed renovations at two Jack Astor's locations in both Q1 2019 (Etobicoke and North York, Ontario) and Q1 2018 (Toronto and Kingston, Ontario), which resulted in the closure of these restaurants for a combined total of 30 days in Q1 2019 and 20 days in Q1 2018. The 3.4% decline in SSS(3) for Jack Astor's in Q1 2019 compares to Q1 2018 when Jack Astor's generated strong Same Store Sales Growth ("SSSG")(3) of 3.7%. Sales from the Jack Astor's location in the St. Lawrence Market neighbourhood of downtown Toronto, which was permanently closed during Q1 2019, have been excluded from the calculation of SSS(3) for Q1 2019. 

Canyon Creek® had a decline in SSS(3) of 4.2% in Q1 2019. SIR's management is actively considering options for the Canyon Creek portfolio to improve performance.

Scaddabush SSS(3) performance for Q1 2019 includes seven locations, excluding only the location at Sherway Gardens in Etobicoke, Ontario. Scaddabush had a SSS(3) decline of 1.8% for Q1 2019, partially attributable to the six-day closure of the Scaddabush location at the Square One shopping centre in Mississauga, Ontario to complete a renovation. This location received a décor refresh and a major menu update, as part of SIR's new food program rollout for Scaddabush.

The downtown Toronto Signature Restaurants had a SSS(3) decline of 8.3% in Q1 2019, which was primarily attributable to the closure of The Loose Moose for 15 days for a major renovation. In addition, the Signature restaurants have been impacted by increased local competition in downtown Toronto. SSS(3) performance for the Signature Restaurants does not include the new Reds® restaurant at the Square One shopping centre ("Reds Square One") as it was not part of the Royalty Pool in the corresponding period a year ago.

Outlook
SIR secured additional long-term financing in 2018 to fund new restaurant developments and renovations to existing restaurants. SIR continues to assess changes in the marketplace, including economic conditions and consumer confidence, and has advised the Fund that it has adopted a more cautious stance toward new restaurant openings.  

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

  • SIR commenced a comprehensive Jack Astor's renovation program in 2016, completing renovations at six Jack Astor's locations in 2016, eight Jack Astor's locations in 2017, five Jack Astor's locations in 2018, and two additional Jack Astor's locations in Q1 2019. 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.

  • The refined pizza and pasta program implemented at the Scaddabush location in Mississauga, Ontario during Q1 2019 is expected to be rolled out to the remainder of the Scaddabush locations throughout 2019. The program was first tested at the Oakville, Ontario Scaddabush location and received positive customer reviews.

  • SIR is currently building one new Scaddabush location at a leased property in the Mimico neighbourhood of Etobicoke, Ontario.

  • SIR is evaluating future options for the site of the closed Jack Astor's restaurant in the St. Lawrence market neighbourhood of downtown Toronto.

The Fund's consolidated unaudited Financial Statements and MD&A, and the Partnership's Financial Statements, for the three-month period ended March 31, 2019, 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 IFRS 9 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 period ended March 31, 2019.

(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 March 31, 2019, 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 2019 and fiscal 2018. 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 59 restaurants and one seasonal retail outlet in Canada. SIR's Concept brands include: Jack Astor's Bar and Grill®, with 39 locations; Scaddabush Italian Kitchen & Bar® with eight locations; and Canyon Creek®, with six locations. SIR also operates one-of-a-kind "Signature" brands 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 58 restaurants (57 operating restaurants and one closed restaurant) currently included in the Royalty Pool. SIR also owns Duke's Refresher® & Bar 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", "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; regulations (including those regarding employees, food safety, tobacco, cannabis and alcohol); 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, delivery and takeout services, general levels of economic activity (including in downtown Toronto), regulations (including those regarding employees, food safety, tobacco, cannabis, 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 12, 2019 Annual Information Form, for the period ended December 31, 2018, 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

View original content: http://www.newswire.ca/en/releases/archive/May2019/13/c4477.html

Jeff Good, Chief Financial Officer, Tel: 905-681-2997; Bruce Wigle, Bay Street Communications, Tel: 647-496-7856Copyright CNW Group 2019

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