SIR Royalty Income Fund Reports 2018 Fourth Quarter and Year-End Results

BURLINGTON, ON, March 12, 2019 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN) (the "Fund") today reported its financial results for the fourth quarter ("Q4 2018") and year ended December 31, 2018. Percentage calculations are based on the numbers in the financial statements and may not correspond to rounded figures presented in this release.

2018 Highlights

• On January 1, 2018, three new Scaddabush Italian Kitchen & Bar® ("Scaddabush") restaurants were added to Royalty Pooled Restaurants.
• The Fund's Board of Trustees approved two separate increases to unitholder cash distributions during the year, resulting in the Fund's monthly cash distributions increasing from $0.095 per unit to $0.105 per unit, an increase of 10.5%.
• Royalty income in the SIR Royalty Limited Partnership (the "Partnership") increased by 4.3% to $18.0 million, compared to $17.3 million in 2017, primarily as a result of a 6.0% increase in Pooled Revenue to $300.1 million, compared to $283.0 million in 2017.
• Equity income from the Partnership, which represents the Fund's pro rata share of the residual distributions of the Partnership, increased by 4.0% to $11.5 million, compared to $11.1 million in 2017.
• Net earnings for the Fund were $5.1 million, or $0.61 per Fund unit (basic and diluted), compared to $9.8 million, or $1.17 per Fund unit (basic and diluted), for the year ended December 31, 2017.
• Net earnings for 2018 reflect the impact of the adoption of International Financial Reporting Standard 9 ("IFRS 9"), which resulted in a decrease in net earnings of $5.2 million. Adjusted net earnings⁽¹⁾  for 2018 were $10.3 million, or $1.23 per Fund unit, compared to $9.8 million, or $1.17 per Fund unit (basic and diluted), for 2017.
• Distributable cash⁽²⁾ totaled $10.3 million, or $1.23 per Fund unit (basic and diluted), compared to $9.9 million, or $1.18 per Fund unit (basic and diluted), in 2017. Cash distributed to unitholders in 2018 totaled $10.1 million, representing a payout ratio⁽²⁾ of 97.7%. The Fund's target payout ratio⁽²⁾ is 100% per annum.
• The Royalty Pooled Restaurants generated same store sales growth ("SSSG")⁽³⁾ of 1.2% in 2018. 
• SIR continued its Jack Astor's® renovation program in 2018, completing renovations at five additional locations.

Q4 2018 Financial Summary

• Pooled Revenue increased 4.9% to $72.9 million, compared to $69.5 million in Q4 2017.
• Net loss for the Fund was $2.8 million, or $0.33 per unit (basic and diluted), compared to net earnings of $2.3 million, or $0.28 per Fund unit (basic and diluted), for the three-month period ended December 31, 2017 ("Q4 2017"). Net earnings for Q4 2018 reflect the adoption of IFRS 9, which resulted in a decrease in net earnings of $4.9 million. Adjusted net earnings⁽¹⁾ were $2.2 million, or $0.26 per Fund unit in Q4 2018.
• Distributable cash⁽²⁾ totaled $2.2 million, or $0.26 per unit (basic and diluted), and cash distributed to unitholders totaled $2.6 million, representing a payout ratio⁽²⁾ of 120.5%. The Fund's payout ratio⁽²⁾ for Q4 2018 was impacted by an increase in income taxes paid and an increase in cash distributions paid compared to Q4 2017.

"We continued to invest in our Jack Astor's renovation program throughout 2018, completing renovations at five additional locations. We have now completed full or partial renovations to 19 Jack Astor's since the beginning of 2016. We are pleased with the positive reception from our guests and plan to continue the renovation program in 2019 to further elevate our flagship brand," said Peter Fowler, CEO of SIR Corp. "2018 also saw the rollout of tablets for our servers and hosts across all of our restaurants. We see strong opportunities to leverage this technology to enhance sales performance and operating efficiencies, while improving our overall guest experience. Another positive growth initiative was the implementation of delivery services across most of our Jack Astor's, Scaddabush and Canyon Creek locations. We now offer our guests the flexibility and convenience of experiencing their favourite service-inspired offerings anywhere they choose."

"We have a strong track record investing in our restaurants to strengthen our brands and build value for Fund unitholders," continued Mr. Fowler. "The two unitholder distribution increases that our Trustees approved this past year is a testament to both the strong performance of our brands and our commitment to building unitholder value."  

Financial Results

Pooled Revenue in Q4 2018 increased 4.9% to $72.9 million, compared to $69.5 million in Q4 2107. The increase is primarily attributable to the addition of three new Scaddabush restaurants to Royalty Pooled Restaurants on January 1, 2018.

Net earnings for Q4 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 Q4 2018 that resulted in a decrease in net earnings of $4.9 million. Accordingly, the Fund's net loss was $2.8 million, or $0.33 per Fund unit (basic and diluted), for Q4 2018, compared to net earnings of $2.3 million, or $0.28 per Fund unit (based and diluted), in Q4 2017. Adjusted Net Earnings⁽¹⁾ for Q4 2018 were $2.2 million, or $0.26 per Fund unit.

Distributable cash⁽²⁾ for Q4 2018 totaled $2.2 million, or $0.26 per Fund unit (basic and diluted), and distributions to Unitholders totaled $2.6 million, representing a payout ratio⁽²⁾ of 120.5%. Distributable cash⁽²⁾ for Q4 2017 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 109.6%. The increased payout ratio⁽²⁾ in Q4 2018 is primarily the result of increased income taxes paid and increased monthly unitholder distributions. 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 Q4 2018, the Fund has generated $108.8 million in cumulative distributable cash⁽²⁾ and has paid cumulative cash distributions of $107.9 million, representing a cumulative payout ratio⁽²⁾ (the ratio of cumulative cash distributions paid since inception to cumulative distributable cash⁽²⁾ generated) of 99.2%.

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

Same Store Sales ("SSS") ⁽³⁾  

Jack Astor's, which accounted for approximately 70% of Pooled Revenue in Q4 2018, had a SSS⁽³⁾ decline of 1.2% in the quarter. SIR completed renovations at two Jack Astor's locations in both Q4 2018 (Mississauga and Toronto) and Q4 2017 (two locations in London, Ontario), which resulted in the closure of these restaurants for a combined total of 18 days in Q4 2018 and 15 days in Q4 2017. The 1.2% decline in SSS⁽³⁾ for Jack Astor's in Q4 2018 compares to Q4 2017 when Jack Astor's generated strong Same Store Sales Growth ("SSSG")⁽³⁾ of 5.5%. 

Canyon Creek® had a decline in SSS⁽³⁾ of 3.5% in Q4 2018. SIR's management is actively considering options for the Canyon Creek portfolio to improve performance.

Scaddabush SSS⁽³⁾ performance for Q4 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 1.6% decline in SSS⁽³⁾ for Scaddabush in Q4 2018 compares to Q4 2017 when Scaddabush generated exceptional SSSG⁽³⁾ of 10.6%. 

The downtown Toronto Signature Restaurants generated SSSG⁽³⁾ of 4.2% in Q4 2018, which was primarily attributable to strong performance of the Loose Moose®, which benefited from increased event attendance at nearby sporting and entertainment venues in the quarter. 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 secured additional long-term financing in 2018 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.  

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 five additional Jack Astor's locations in 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. Subsequent to December 31, 2018, SIR completed major renovations at one additional Jack Astor's location.
  
  
• 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 future revenue contributions from the new Scaddabush restaurants.
  
  
• Subsequent to December 31, 2018, SIR closed the Scaddabush location at the Square One shopping centre in Mississauga, Ontario for six days to complete a renovation. This location, which was the first Scaddabush location (opened in July 2013), received a décor refresh and a major menu update. The new food program implemented at this location was first tested at the Oakville, Ontario Scaddabush location and is expected to be rolled-out to the remainder of the Scaddabush locations throughout 2019.
  
  
• The new Scaddabush restaurant in Etobicoke, Ontario and the Reds restaurant at the Square One shopping centre in Mississauga, Ontario were 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 audited consolidated Financial Statements and MD&A, and the Partnership's Financial Statements, for the year ended December 31, 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 year ended December 31, 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 year ended December 31, 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 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, 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