SIR Royalty Income Fund (TSX: SRV.UN) (“the Fund”) today announced that its Board of Trustees have elected to reduce the Fund’s monthly cash distributions to unitholders by 1.75 cents due to the recent and ongoing decline in SIR Corp.’s (“SIR”) food and beverage sales. The Fund’s monthly cash distributions will be reduced from $0.105 per unit to $0.0875 per unit, effective for the Fund’s cash distribution to be paid in November.

SIR has advised the Trustees of the Fund that same store sales¹ for its fiscal 2019 fourth quarter and year ended August 25, 2019 declined by 5.9% and 3.1%, respectively. SIR has further advised the Trustees of the Fund that its same store sales¹ performance has not improved in the first four weeks of its fiscal 2020 first quarter. The Trustees believe that the reduction in monthly cash distributions will position the Fund to meet its target payout ratio² of 100% per annum over the long term.

SIR’s Management believes that its sales performance and the overall performance in the full-service restaurant industry has been impacted by changing consumer behaviour. Consumer spending at full-service restaurants in Ontario, where the majority of SIR’s restaurants are located, has been restrained by a number of factors, including the impact of a minimum wage increase on menu pricing and an increasing number of consumers choosing to order through meal delivery services instead of in-restaurant dining, which has impacted beverage sales and resulted in SIR incurring selling commission obligations, among other things.

“We continue to focus our strategic efforts on capturing a greater share of the market,” said Peter Fowler, CEO of SIR Corp. “We are currently concentrating our efforts on new and healthier food options, improving everyday value, promotional pricing on food and beverage offerings in non-peak periods, and increasing our share in the delivery segment.”

Due to the royalty structure of the Fund, under which the Fund is indirectly entitled to receive a 6% royalty on sales by restaurants in the royalty pool, the Fund’s revenues will be directly affected by any reduction or increase in SIR’s applicable sales. As a result, if sales decline, the Fund’s distributable cash² will also be reduced and so distributions will have to decline. The Fund’s payout ratio², the ratio of cash distributed to unitholders to distributable cash² generated, is intended to average 100% per annum over the long term. The payout ratio² since the Fund’s inception in 2004 up to and including the second quarter of 2019 was 99.5%, in line with the Fund’s target. During 2018, the Trustees of the Fund approved two separate increases to unitholder distributions, resulting in the Fund’s monthly cash distributions increasing from $0.095 per unit to $0.105 per unit, representing an increase of 10.5%. These increases were implemented to enable the Fund to continue to meet its target payout ratio² of 100% per annum.

(1) 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 2019 and fiscal 2018. SSSG is the percentage increase in SSS over the prior comparable period.

 (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 three and six-month periods ended June 30, 2019, which can be accessed via the SEDAR website (www.sedar.com).

SOURCE SIR Royalty Income Fund