- SIR Corp and its Lenders enter into amended credit agreements providing extensions to existing waivers and access to capital -

BURLINGTON, ON, June 30, 2020 /CNW/ - SIR Royalty Income Fund (TSX: SRV.UN) (the "Fund") today reported its financial results for the first quarter ended March 31, 2020 ("Q1 2020") and provided an update on the impact of the COVID-19 pandemic on SIR Corp. ("SIR") and the Fund. Percentage calculations are based on the numbers in the financial statements and may not correspond to rounded figures presented in this release.

Summary Impact of the COVID-19 pandemic on SIR and the Fund

• Since the date of the Fund's last financial report, which was filed on March 12, 2020, the COVID-19 pandemic has significantly impacted the operations of SIR.
• Beginning March 16, 2020, SIR suspended dine-in operations at all of its restaurants and bars in accordance with the directives of public health authorities. SIR continued to offer takeout and delivery services at certain of its Jack Astor's® and Scaddabush Italian Kitchen & Bar® ("Scaddabush") restaurants, while all Canyon Creek® and Signature Restaurants were completely closed as of March 16, 2020.
• Reduced services, restaurant closures and / or partial restaurant closures have resulted, and are expected to continue to result, in material declines to sales at SIR restaurants.
• As a result of the significant decline in sales at SIR restaurants, Pooled Revenue and royalty income in the SIR Royalty Limited Partnership (the "Partnership"), along with the Fund's equity income from the Partnership, and cash available for distribution to unitholders of the Fund, has decreased significantly.
• The Partnership has deferred the collection of royalties and the Fund has deferred the collection of interest on the SIR Loan from SIR until August 31, 2020, in order to provide SIR with financial support during this challenging period.
• On March 23, 2020, the Fund announced that due to the temporary suspension of dine-in restaurant operations at all of SIR's restaurants, payment of unitholder distributions are suspended until further notice.
• As a result of the negative impact of the COVID-19 outbreak on the forecasted cash flows of SIR Restaurants, the Partnership recognized an impairment loss on the SIR Rights of $40.5 million in Q1 2020, resulting in an impairment loss on the Fund's investment in the Partnership of $15.5 million in Q1 2020.

"Leading up to the suspension of our dine-in operations at all of our restaurants starting March 16, we had undertaken multiple initiatives to respond to a decline in sales last year, with the introduction of healthier food options across our restaurant portfolio, promotional pricing during off-peak periods, the expansion of our take-out and delivery offering and an intensified focus on staff training and service excellence. We also launched our new "Service-Inspired Rewards" loyalty program and mobile application, which has proven to be very popular. We were seeing positive early customer response to these initiatives and were already generating improvement in year-over-year sales," said Peter Fowler, CEO of SIR Corp. "Following the suspension of our dine-in operations, we continued to offer delivery and takeout services at most of our Jack Astor's and Scaddabush locations and introduced enhanced programs such as Scaddabush Grocery, Jack's General Store, and other custom bundled food and beverage offerings, while working with our senior lenders, suppliers and landlords to maintain their continued support. Now that government restrictions on restaurant dine-in operations are being lifted, we look forward to re-opening our restaurants for sit-down dining, while adhering to strict operational procedures and sanitary guidelines to prioritize the safety of our guests and staff. With our strong brands, desirable locations and experienced management team, we are confident that we can meet the challenges that lie ahead, and emerge as an even stronger restaurant company."

"The Trustees of the Fund are closely monitoring SIR's ability to return to a position where it can once again pay appropriate and sustainable royalty payments to the Fund so that the Fund, in turn, can make predictable and sustainable distributions to unitholders," added Mr. Fowler.  

Q1 2020 Results  

Pooled Revenue in Q1 2020 was $50.3 million, a decline of 25% from $67 million in Q1 2019, reflecting lower Pooled Revenue and Same Store Sales ("SSS")⁽³⁾, which was attributable to the negative impact of the temporary closure of dine-in operations at SIR restaurants starting March 16, 2020, due to the COVID-19 pandemic. Pooled Revenue in Q1 2020 was also impacted by the permanent closure of three restaurants during 2019, including two Jack Astor's (the location on John Street and the location in the St. Lawrence Market neighbourhood in downtown Toronto), and the Canyon Creek in Burlington, Ontario. These restaurants ceased to be part of the Royalty Pool on January 1, 2020.

Net earnings were impacted by the Partnership's recognition of a $40.5 million impairment loss on the SIR Rights and an adjustment to the fair value of the SIR Loan. The Partnership impairment loss resulted in an impairment loss on the Fund's investment in the Partnership of $15.5 million in Q1 2020. Accordingly, the Fund's net loss for Q1 2020 was $30.8 million, or $3.67 per Fund unit (basic and diluted), compared to net income of $7.9 million, or $0.95 per Fund unit (basic) and $0.81 (diluted), in Q1 2019. Adjusted net earnings⁽¹⁾ for Q1 2020 were $1.9 million, or $0.23 per Fund unit, compared to $2.3 million, or $0.27 per Fund unit, in Q1 2019.

Amendment to Credit Agreement and Waivers

On June 1, 2020, effective April 1, 2020, SIR obtained a waiver with its senior lender on its covenants until June 30, 2020.

On June 30, 2020, SIR and its Lender entered into a fourth amending agreement to its Credit Agreement (the "Waiver and Amendment"). The Waiver and Amendment provides for the following:

• extension of the waivers of certain anticipated covenant breaches and events of default granted in the June 1, 2020 Third Amending Agreement effective April 1, 2020 until August 31, 2020 (the "Waiver Period"),
• waiving, for the Waiver Period and for the period September 1, 2020 to the Maturity Date, the financial covenants in the Credit Agreement,
• during the Waiver Period and the period September 1, 2020 until the Maturity Date, the two financial covenants in the Credit Agreement are replaced by a minimum quarterly EBITDA amount, and
• the addition of a new $6.25 million EDC guaranteed BCAP (the "EDC-Guaranteed Facility") to the Credit Agreement – the EDC-Guaranteed Facility is a 364 day revolving term credit facility and can be extended at the Lender's sole discretion by a further 12 months.

There can be no assurance that SIR will receive additional waivers or remain in compliance in the future.

On June 30, 2020, the Fund and the Partnership entered into an acknowledgement and consent agreement with the Lender acknowledging, among other things:

• receipt of a copy of the Waiver and Amendment,
• that none of: entering the agreement, borrowing under the agreement, or performing any of the obligations under the agreement shall breach any of the terms or constitute an event of default under any of the Fund's or the Partnership's existing agreements with SIR,
• any debt arising under the EDC-Guaranteed Facility constitutes Permitted Debt (as such term is defined in the SIR Loan Agreement).

On June 30, 2020, the Fund, the Partnership, and SIR entered into a waiver and extension agreement that, among other things:

• extends the period of the deferral of interest on the SIR Loan to the Fund and royalties to the Partnership from June 30, 2020 to August 31, 2020,
• waives any and all existing breaches of covenants and events of default under the various agreements between SIR, the Fund, and the Partnership until August 31, 2020.

In order to provide SIR with financial support, the Partnership deferred the collection of restaurant royalties and interest on the SIR Loan from SIR until August 31, 2020.

Distributable Cash⁽²⁾

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

Distributable cash⁽²⁾ for Q1 2020 totaled $2.0 million, or $0.23 per Fund unit (basic and diluted), and distributions to Unitholders totaled $2.2 million, representing a payout ratio⁽²⁾ of 112.3%. 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%. The decreased payout ratio⁽²⁾ in Q1 2020 is the result of a decrease in distributable cash⁽²⁾ resulting primarily from the material decline in SSS⁽³⁾ compared to Q1 2019, partially offset by a decline in cash distributed reflecting the decrease in monthly distributions in November 2019. The Fund reduced its monthly unitholder distributions from $0.105 per unit to $0.0875 per unit effective for the Fund's monthly cash distribution paid in November 2019.

Since the Fund's inception in October 2004, up to and including Q1 2020, the Fund has generated $120.2 million in cumulative distributable cash⁽²⁾ and has paid cumulative cash distributions of $120.4 million, representing a cumulative payout ratio⁽²⁾ (the ratio of cumulative cash distributions paid since inception to cumulative distributable cash⁽²⁾ generated) of 99.9%.

Same Store Sales⁽³⁾   

Jack Astor's, which accounted for approximately 68% of Pooled Revenue in Q1 2020, had a SSS⁽³⁾ decline of 24.9% in the quarter, primarily reflecting the impact of the temporary closure of dine-in operations at all Jack Astor's locations due to the COVID-19 pandemic starting March 16, 2020. 23 of the 38 Jack Astor's restaurants remained open for take-out and delivery services.

Scaddabush had a SSS⁽³⁾ decline of 15.9% in Q1 2020. Scaddabush SSS⁽³⁾ performance for Q1 2020 includes eight locations, excluding the locations in the Mimico neighbourhood of Etobicoke, and the recently opened location in Burlington, Ontario. The decline in SSS⁽³⁾ reflects the impact of the temporary closure of dine-in operations at the eight Scaddabush locations that are included in the calculation of SSS⁽³⁾ performance, due to the COVID-19 pandemic. Eight of 10 Scaddabush locations remained open for take-out and delivery services.

Canyon Creek had a decline in SSS⁽³⁾ of 31.4% in Q1 2020. Sales from the Canyon Creek location in Burlington, Ontario that was permanently closed during Q4 2019 were excluded from the calculation of SSS⁽³⁾ for Q1 2020. On March 16, 2020, SIR suspended all operations at its five Canyon Creek restaurants.

The downtown Toronto Signature Restaurants had a SSS⁽³⁾ decline of 18.1% in Q1 2020. On March 16, 2020, SIR suspended all operations at its Signature Restaurants.

Outlook

Beginning June 9, 2020, the provinces of Newfoundland, Nova Scotia, and Alberta permitted the gradual re-opening of dine-in operations at restaurants. SIR gradually reopened its Jack Astor's location in St. Johns, Newfoundland, and its two Jack Astor's locations in Halifax, Nova Scotia, adhering to strict operational procedures and sanitary guidelines to prioritize the safety of its guests and staff.

The province of Ontario has permitted the gradual re-opening of restaurant outdoor patios in select regions of the province. These patio re-openings are permitted by public health region. Adhering to the provincial guidelines, on June 12, 2020, SIR was permitted to re-open its restaurant patios in the Ottawa and London areas, as well as Kitchener-Waterloo, Barrie, and Kingston, following its strict operational procedures and sanitary guidelines to prioritize the safety of its guests and staff. SIR has nine restaurants in those areas. On June 19, 2020, patio openings were permitted in all other public health regions in Ontario except Toronto, Peel and Windsor-Essex. SIR has 15 restaurants located in the additional public health regions that were permitted to open on June 19, 2020. On June 24, 2020, restaurant patios located within the Toronto and Peel public health regions, where SIR has 26 restaurants, were permitted to open.

The province of Quebec permitted the gradual opening of dine-in operations at restaurants in certain regions of the province effective June 15, 2020. Restaurants in the Greater Montreal Area were permitted to gradually re-open dine-in operations effective June 22, 2020. Following strict operational procedures and sanitary guidelines to prioritize the safety of its guests and staff, SIR commenced gradually re-opened its four Jack Astor's locations in the Greater Montreal Area on June 22, 2020.

SIR was deemed eligible for the Canada Emergency Wage Subsidy program. As a result, SIR has received a subsidy from the federal government to partially offset certain of its wage costs from mid-March 2020 through to early-June 2020. SIR currently expects to continue to be eligible for this subsidy program through to the end of August 2020.

SIR has advised the Fund that its ability to meet its obligations for the next 12 to 18 months is dependent on its ability to obtain increased and extended financing through further amendments to its Credit Agreement and the availability of credit under the current Credit Agreement or other financing sources and/or additional government assistance to aid businesses.

SIR's ability to meet its obligations for the next 12 to 18 months also depends on, among other factors, the length of the closure of dine-in operations at certain of its restaurants due to COVID-19, the speed at which SIR is able to return to full operating capacity in the near future, Canadian economic conditions after bars and restaurants are able to re-open, the impact of new government mandated pandemic-related operating regulations, and SIR's ability to negotiate longer term extended credit terms from its suppliers, including negotiating deferrals of rent obligations over the terms of its leases. SIR is continuing to pursue insurance coverage, but there can be no assurance that it will be successful. 

Reduced services, restaurant closures and / or partial restaurant closures have resulted, and are expected to continue to result, in material declines to sales at SIR restaurants.

Q1 2020 Interim Filings

The Fund's unaudited interim consolidated Financial Statements and Management Discussion & Analysis ("MD&A"), and the Partnership's Financial Statements, for Q1 2020, 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 Q1 2020 MD&A.

(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 Q1 2020 MD&A.

(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 Q1 2020 and Q1 2019. SSSG is the percentage increase in SSS over the prior comparable period.

About SIR Corp.

SIR Corp. ("SIR") is a privately held Canadian corporation that owns a portfolio of 60 restaurants in Canada. SIR's Concept brands include: Jack Astor's Bar and Grill®, with 38 locations; Scaddabush Italian Kitchen & Bar® with 10 locations; and Canyon Creek®, with five 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. SIR also owns two Duke's Refresher® & Bar locations 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 indirectly has interests in the trademarks used by SIR.

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", "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; 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 restaurants and bars; laws affecting the sale and use of alcohol (including availability and enforcement); changes in cannabis laws; 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 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 medium term.

For more information concerning the Fund's risks and uncertainties, please refer to the March 12, 2020 Annual Information Form, for the period ended December 31, 2019, 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

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