- 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
($000s except
restaurants
and per Unit
amounts)
(unaudited)
|
Three-month
period
ended
March 31,
2020
|
Three-month
period
ended
March 31,
2019
|
|
|
|
Royalty Pooled
Restaurants
|
56
|
58
|
Pooled Revenue
generated by SIR Corp.
|
50,277
|
67,016
|
|
|
|
Royalty income to
Partnership – 6% of Pooled
Revenue
|
3,018
|
4,021
|
Make-Whole
Payment
|
-
|
203
|
Total Royalty income
to Partnership
|
3,018
|
4,224
|
Partnership other
income
|
6
|
6
|
Impairment of
intangible assets
|
(40,525)
|
-
|
Partnership
expenses
|
(23)
|
(23)
|
Partnership earnings
(loss)
|
(37,524)
|
4,207
|
SIR Corp.'s
interest
(Class A, B, and C GP Units)
|
(1,266)
|
(1,605)
|
SIR's
interest
(impairment of
intangible assets)
|
25,058
|
-
|
Partnership income
(loss) allocated to
Fund
|
(13,732)
|
2,602
|
Change in estimated
fair value of the SIR Loan
|
(16,500)
|
8,250
|
|
(30,232)
|
10,852
|
General &
administrative expenses
|
(106)
|
(118)
|
|
|
|
Net earnings
(loss) before income taxes of
the Fund
|
(30,338)
|
10,734
|
Income tax
expense
|
(430)
|
(2,813)
|
Net earnings
(loss) for the period
|
(30,768)
|
7,291
|
Net Earnings
(loss) per Fund Unit (basic)
|
($3.67)
|
$0.95
|
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):
|
|
|
(in thousands of
dollars except per unit
amounts and payout ratio²)
|
Three-month
period
ended
March 31,
2020
|
Three-month
period
ended
March 31,
2019
|
Cash provided by
operating activities
|
2,366
|
2,663
|
Add/(deduct):
|
|
|
Net change in non-cash
working
capital items
|
(106)
|
(271)
|
Net change in income
tax payable
|
203
|
153
|
Net change in
distribution receivable
from the Partnership
|
(505)
|
(239)
|
Distributable
cash(2)
|
1,958
|
2,306
|
Cash distributed for
the period
|
2,199
|
2,638
|
Surplus (shortfall)
of distributable cash(2)
|
(241)
|
(332)
|
Payout
ratio(2)
|
112.3%
|
114.4%
|
Distributable
cash(2) per Fund unit
(basic and diluted)
|
$0.23
|
$0.28
|
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)
SSS(3) for Royalty Pooled
Restaurants
|
Three-month
period ended
March 31,
2020
|
Three-month
period ended
March 31,
2019
|
|
|
|
Jack
Astor's®
|
(24.9%)
|
(3.4%)
|
Scaddabush®
|
(15.9%)
|
(1.8%)
|
Canyon
Creek®
|
(31.4%)
|
(4.2%)
|
Signature
Restaurants
|
(18.1%)
|
(8.3%)
|
Overall
SSS(3)
|
(23.3%)
|
(3.6%)
|
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