Mr. Jeff Good reports

SIR ROYALTY INCOME FUND ANNOUNCES ADJUSTMENTS TO ROYALTY POOL

As of Jan. 1, 2024, one new restaurant has been added to the royalty pooled restaurants from which SIR Royalty Income Fund earns distribution income. SIR Corp. (SIR) closed three restaurants during 2023, which were removed from the royalty pool effective Jan. 1, 2024. The royalty pool now consists of 49 restaurants, including: 37 Jack Astor's restaurants, 10 Scaddabush Italian Kitchen & Bara locations, Reds Square One, and The Loose Moose.

The new restaurant added to the royalty pool was the Scaddabush located in Whitby, Ont. The three SIR restaurants that were closed during 2023 and no longer form part of the royalty pool were Reds Wine Tavern on Adelaide Street in Toronto, Reds Kitchen + Wine Bar in Niagara Falls, and the Scaddabush in the Mimico neighbourhood of Etobicoke.

The royalty pool is adjusted in January of each year to include sales from any new SIR restaurants that opened on or before Nov. 2 of the prior year, net of sales of any royalty pooled restaurants that were closed the prior year. In years when new restaurants are added to the royalty pool, the fund, through the SIR Royalty LP, pays SIR for the additional royalty stream from the net new restaurants, based upon a formula set out in the licence and royalty agreement between SIR and the partnership. The payment formula, which is designed to be accretive to fund unitholders, is based on the 6-per-cent royalty from the estimated annualized revenue from the net new restaurants divided by the tax-adjusted current yield on the units of the fund. The accretion to fund unitholders is achieved by discounting the payment to SIR by 7.5 per cent. The payment to SIR is in the form of additional Class A GP (general partnership) units of the partnership, which are the economic equivalent of fund units. The payment formula is based on the royalties that are expected to be accrued on the sales of the new restaurant in its first full calendar year after being added to the royalty pool.

2024 initial adjustment

The estimated annualized net revenue of the one new royalty pool restaurant of $6.2-million is expected to result in a $400,000 increase to the royalty stream entitlement on the basis of the 6-per-cent royalty. The fund, through the partnership, will pay SIR for the additional royalty stream entitlement through the conversion of 170,561 Class B GP units currently held by SIR, into Class A GP units on a one-for-one basis. The Class A units received by SIR are valued at $2.8-million, or $16.29 per unit, representing the volume weighted average price (VWAP) of the fund units for the 20 trading days ended Dec. 21, 2023. The 170,561 Class A GP units represent 80 per cent of the estimated Class A GP units that SIR is expected to receive. The remaining amount, if any, will be issued in the second incremental adjustment, which will be based on the actual annual revenue for the new royalty pool restaurant in 2024, as opposed to the current annualized estimate. The valuation of the new royalty stream includes a 7.5-per-cent discount to the value paid to SIR, which is designed to be accretive to the fund unitholders. The date of the second incremental adjustment is Jan. 1, 2024. The actual payment from the partnership to SIR for the additional royalty stream entitlement is calculated as shown in an attached table.

2024 adjustment for reduction

The 2024 adjustment for reduction related to the closed restaurants will result in SIR repaying the partnership 351,014 Class A GP units, reflecting the reduction in the royalty stream. The adjustment for reduction repayment formula, as set out in the licence and royalty agreement, is designed to reflect the loss in value to the partnership of the decreased future royalty stream entitlement related to the closed restaurants. This is achieved by SIR returning the estimated number of units it received when the closed restaurants were initially added to the royalty pool.

Two of the three closed restaurants were added to the royalty pool after the closing date of the fund's initial public offering (IPO). One of the closed restaurants was added to the royalty pool at the IPO date. The actual repayment, in Class A GP units, from SIR to the partnership for the reduction in the royalty stream is calculated as follows:

• For the closed Scaddabush in the Mimico neighbourhood of Etobicoke, which was added to the royalty pool on Jan. 1, 2020: $100,000 (the estimated annual reduction to the royalty pool based on 6 per cent of the $1.2-million in base-level revenue of the closed restaurant) multiplied by 92.5 per cent (the accretive adjustment -- 100 per cent for restaurants added at the IPO or 92.5 per cent for restaurants added after the IPO) divided by the yield on the fund units of 19.8 per cent (equal to the annual cash distributions paid during 2019 per fund unit of $1.669 divided by the VWAP of the fund units for the 20 trading days ended Dec. 20, 2019, of $8.41) divided by the same VWAP of $8.41. Base-level revenue is defined as the actual revenues of the former Scaddabush in Mimico for the 52-week period ended Dec. 31, 2020;
• For the closed Reds Kitchen + Wine Bar in Niagara Falls, which was added to the royalty pool on Jan. 1, 2023: $100,000 (the estimated annual reduction to the royalty pool based on 6 per cent of the $2.2-million in base-level revenue of the closed restaurant) multiplied by 92.5 per cent (the accretive adjustment -- 100 per cent for restaurants added at the IPO or 92.5 per cent for restaurants added after the IPO) divided by the yield on the fund units of 10.8 per cent (equal to the annual cash distributions paid during 2022 per fund unit of $1.728 divided by the VWAP of the fund units for the 20 trading days ended Dec. 21, 2022, of $16.06) divided by the same VWAP of $16.06. Base-level revenue is defined as the actual revenues of the former Reds Kitchen + Wine Bar in Niagara Falls for the 52-week period ended Dec. 31, 2023;
• For the closed Reds Wine Tavern on Adelaide Street in Toronto, which was added to the royalty pool on the IPO date, $300,000 (the estimated annual reduction to the royalty pool based on 6 per cent of the $4.8-million in base-level revenue of the closed restaurants) multiplied by 100 per cent (the accretive adjustment -- 100 per cent for restaurants added at the IPO or 92.5 per cent for restaurants added after the IPO) divided by the initial yield on the fund units of 12 per cent (equal to the annual minimum cash distribution payable per fund unit of $1.20 divided by the initial fund unit price of $10) divided by the initial fund unit price of $10.

2023 second incremental adjustment

The second incremental adjustment for the Jan. 1, 2023, addition of two new restaurants (Scaddabush located in Etobicoke, Ont., in close proximity to Pearson International Airport, and the Reds Kitchen + Wine Bar at the Fallsview Casino Resort in Niagara Falls, Ont.) to the royalty pool has been finalized. The actual revenue of these restaurants for the 52 weeks ended Dec. 31, 2023, totalled $6.2-million, which was approximately 31.2 per cent less than the amount originally estimated. This resulted in SIR effectively returning 32,372 Class A GP units to the partnership, as the impact of actual revenue shortfall to estimate was more than the 20 per cent initial adjustment reduction. The 2023 second incremental adjustment is calculated as shown in an attached table.

Special conversion distribution/refund

As the 2023 second incremental adjustment resulted in SIR effectively returning 32,372 Class A GP units to the partnership, the special conversion refund payable by SIR to the partnership for Dec. 31, 2023, has been finalized. The amount of the conversion refund is $52,099. The annual special conversion distribution/refund can only be calculated once the actual revenue for the 52 weeks ended Dec. 31, 2023, for the new restaurants added to the royalty pool effective Jan. 1, 2023, and the number of additional Class B GP units that will be converted to Class A GP units for the second incremental adjustment related to the Jan. 1, 2023, new additional restaurants are known with certainty. The amount of the conversion refund is equal to the aggregate distributions declared per fund unit, adjusted for the impact of the SIFT tax paid or payable, for the preceding calendar year of $1.6094 multiplied by 32,372, which is the number of Class A GP units that are effectively converted back into Class B GP units as a result of the 2023 second incremental adjustment. The conversion refund has been declared effective Dec. 31, 2023, and will be paid on Jan. 31, 2024.

Capital structure

Following the 2024 initial adjustment, the 2023 second incremental adjustment and the 2024 adjustment for reduction, both effective Jan. 1, 2024, SIR will own, control and hold 987,835 Class A GP units, representing the equivalent of 10.55 per cent of the units of the fund on a fully diluted basis, compared with 12.54 per cent as at Dec. 31, 2023. SIR's Class A GP units currently represent 100 per cent of the issued and outstanding Class A GP units.

Subsequent to the aforementioned exchanges, SIR owns, controls and holds 96,466,583 Class B GP units, which are convertible in certain circumstances (based on the addition of further new restaurants to royalty pooled restaurants) into Class A GP units on a one-for-one basis. Other than as described herein, none are currently convertible. If converted, the resulting Class A GP units would, subject to the partnership's right to reconvert them back into Class B GP units in certain circumstances (based on the new restaurants' performance being below 80 per cent of the original expectations and restaurant closures), also be exchangeable on a one-for-one basis into units of the fund. The 96,466,583 Class B GP units currently represent 100 per cent of the issued and outstanding Class B GP units.

The fund expects there will be a 2024 second incremental adjustment effective Jan. 1, 2025, and an associated conversion distribution or refund declared effective Dec. 31, 2024, as both related to the two new restaurants that were added to the royalty pool effective Jan. 1, 2024. The amount of such adjustment and distribution cannot be determined at this time.

SIR and Peter Fowler (who beneficially owns 31,500 units of the fund apart from SIR's holdings), who are affiliated, may be considered under applicable securities laws to be acting jointly or in concert. This news release is not confirmation of same, and the 10.55-per-cent equivalent fund unitholding, represented by SIR's Class A GP units noted above would increase to 10.89 per cent, taking into account such additional units of the fund.

Except for the foregoing, SIR is not acting in concert with any other person, including any of its shareholders, directors or officers, in connection with its holdings of the fund or the partnership, and thus any holdings that they may have in the fund are not included in this report.

The transactions noted herein took place privately.

SIR holds its interests in the partnership for investment purposes and in connection with its operation of its restaurant business, which produces the revenues from which the partnership and the fund derive their income via a trademark licence and royalty agreement and loan entered into in connection with the fund's IPO.

SIR may, depending on market and other conditions, increase or decrease its beneficial ownership, control or direction over units of the fund, or (as applicable) securities of the partnership, through market transactions, private agreements, treasury issuances, exercise of options, convertible or exchangeable securities, or otherwise.

SIR has entered into a number of material agreements with the fund and/or the partnership, which are described in the final prospectus of the fund dated Oct. 1, 2004. In addition to the royalty generated by any new SIR restaurants added to royalty pooled restaurants, the consideration paid by SIR for its Class A GP units and Class B GP units was the transfer of certain trademarks, as described in the final prospectus of the fund. Certain amendments to the declaration of trust and other material agreements were approved at a special meeting of unitholders held on Dec. 20, 2010. They are filed on SEDAR+.

About SIR Corp.

SIR is a privately held Canadian corporation that owns a portfolio of 51 restaurants in Canada. SIR's Concept brands include: Jack Astor's Bar and Grill, with 37 locations; and Scaddabush Italian Kitchen & Bar, with 10 locations. SIR also operates one-of-a-kind Signature brands, including Reds Square One and The Loose Moose. All trademarks related to the Concept and Signature brands noted above are used by SIR under a licence and royalty agreement with SIR Royalty LP. SIR also owns one Duke's Refresher & Bar location, in downtown Toronto, and one seasonal Signature restaurant, Abbey's Bakehous, which are currently not in consideration to be part of the royalty pool. For more information on SIR or the SIR Royalty Income Fund, please visit the SIR website.

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 LP and interest income from the SIR loan. The fund intends to pay distributions to unitholders on a monthly basis.

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