Mr. Peter Fowler reports
SIR ROYALTY INCOME FUND REPORTS 2020 FIRST QUARTER RESULTS
SIR Royalty Income Fund has released its financial results for the first quarter ended March 31, 2020, and has provided an update on the impact of the COVID-19 pandemic on SIR Corp. 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 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, along with the fund's equity income from the partnership, and cash available for distribution to unitholders of the fund, have 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 Aug. 31, 2020, 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 is 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 first quarter 2020, resulting in an impairment loss on the fund's investment in the partnership of $15.5-million in first quarter 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 takeout 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, chief executive officer 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 reopening 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.
FIRST QUARTER RESULTS
($000s except restaurants and per-unit amounts)
period ended period ended
March 31, 2020 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
General and 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 first quarter 2020 was $50.3-million, a decline of 25 per cent from $67-million in first quarter 2019, reflecting lower pooled revenue and same-store sales (SSS) (3), which were 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 first quarter 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, Ont. These restaurants ceased to be part of the royalty pool on Jan. 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 first quarter 2020. Accordingly, the fund's net loss for first quarter 2020 was $30.8-million, or $3.67 per fund unit (basic and diluted), compared with net income of $7.9-million, or 95 cents per fund unit (basic) and 81 cents (diluted), in first quarter 2019. Adjusted net earnings (1) for first quarter 2020 were $1.9-million, or 23 cents per fund unit, compared with $2.3-million, or 27 cents per fund unit, in first quarter 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 provide 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 Aug. 31, 2020;
Waiving, for the waiver period and for the period from Sept. 1, 2020, to the maturity date, the financial covenants in the credit agreement;
- During the waiver period and the period from Sept. 1, 2020, until the maturity date, the two financial covenants in the credit agreement are replaced by a minimum quarterly EBITDA (earnings before interest, taxes, depreciation and amortization) amount;
The addition of a new $6.25-million EDC (Export Development Canada)-guaranteed BCAP (business credit availability program) 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 acknowledgment 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 Aug. 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 Aug. 31, 2020.
To provide SIR with financial support, the partnership deferred the collection of restaurant royalties and interest on the SIR loan from SIR until Aug. 31, 2020.
Distributable cash (2) for first quarter 2020 totalled $2.0-million, or 23 cents per fund unit (basic and diluted), and distributions to unitholders totalled $2.2-million, representing a payout ratio (2) of 112.3 per cent. Distributable cash (2) for first quarter 2019 totalled $2.3-million, or 28 cents per fund unit (basic and diluted), and distributions to unitholders totalled $2.6-million, representing a payout ratio (2) of 114.4 per cent. The decreased payout ratio (2) in first quarter 2020 is the result of a decrease in distributable cash (2) resulting primarily from the material decline in SSS (3) compared with first quarter 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 10.5 cents per unit to 8.75 cents 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 first quarter 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 per cent.
Jack Astor's, which accounted for approximately 68 per cent of pooled revenue in first quarter 2020, had an SSS (3) decline of 24.9 per cent 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. Twenty-three of the 38 Jack Astor's restaurants remained open for takeout and delivery services.
Scaddabush had an SSS (3) decline of 15.9 per cent in first quarter 2020. Scaddabush SSS (3) performance for first quarter 2020 includes eight locations, excluding the locations in the Mimico neighbourhood of Etobicoke and the recently opened location in Burlington, Ont. 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 takeout and delivery services.
Canyon Creek had a decline in SSS (3) of 31.4 per cent in first quarter 2020. Sales from the Canyon Creek location in Burlington, Ont., that was permanently closed during fourth quarter 2019 were excluded from the calculation of SSS (3) for first quarter 2020. On March 16, 2020, SIR suspended all operations at its five Canyon Creek restaurants.
The downtown Toronto Signature restaurants had an SSS (3) decline of 18.1 per cent in first quarter 2020. On March 16, 2020, SIR suspended all operations at its Signature restaurants.
Beginning June 9, 2020, the provinces of Newfoundland, Nova Scotia and Alberta permitted the gradual reopening of dine-in operations at restaurants. SIR gradually reopened its Jack Astor's location in St. Johns, Nfld., and its two Jack Astor's locations in Halifax, N.S., 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 reopening of restaurant outdoor patios in select regions of the province. These patio reopenings are permitted by the public health region. Adhering to the provincial guidelines, on June 12, 2020, SIR was permitted to reopen 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 reopen dine-in operations, effective June 22, 2020. Following strict operational procedures and sanitary guidelines to prioritize the safety of its guests and staff, SIR gradually reopened 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 reopen, 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.
First quarter 2020 interim filings
The fund's unaudited interim consolidated financial statements, management's discussion and analysis, and the partnership's financial statements for first quarter 2020 are available on the SEDAR website and SIR's website.
(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 represent 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-generally accepted accounting principle financial measures and do not have a standardized meaning prescribed by international financial reporting standards. 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 eliminate 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 first quarter 2020 MD&A.
(2) Distributable cash and payout ratio are non-generally accepted accounting principle 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 with 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 first quarter 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 with 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 first quarter 2020 and first quarter 2019. SSSG is the percentage increase in SSS over the prior comparable period.
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.
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