Sir Royalty Income Fund SIRZF

Balance sheet at CORP should improve

[logicandinertia]

THe last update from the CORP showed that govt CEWS cash had not been received, so the $40mm in debt is post the worst quarter in history (everything shut down for most of q) and no govt aid.  Watch the CORP cash flow statement when most recent quarter is filed.  Net debt at corp level should fall materially, from the receipt of govt CEWS cash and reopening of restaurants and patio activity thru the summer.   The $6.25 million EDC facility was untouched at end of September, so the picture around CORP balance sheet and capital availability will look much better this quarter than last.  For somebody like me who just needs them to stay on side with bankers and stay solvent for next few months, this is key.   

Near-term noise isn't great.   Ontario govt has shut down in-door dining in Toronto, Peel and Ottawa regions for 28 days.  Just gives investors more pause and more dissuasion from going near restaurant royalty companies.  More talk about restaurants going under, etc, etc.  

Market cap of SIR ROYALTY is $13.5 million.   From 2017-2019, the FUND distributed an AVERAGE of $10 million per annum to FUND HOLDERS.   That is PER YEAR.  

The FUND trustees have agreed to help the CORP by temporarily deferring the interest on SIR LOAN and royalty payments to help out CORP.   THe structure of this vehicle is such that once distributions from CORP to the FUND begin again, they are paid out to UNIT HOLDERS.   

I expect therapeutics and vaccines to become available late this year and into 1H/2021.  Restrictions will recede.   If SIR CORP can make it thru this current period, and the latest banking agreement with its principal lender, BNS, shows eagerness for BNS to work with SIR, then this is a good risk/reward from here.  Why?

Even if certain stores do not reopen in the base, make whole payments are required to the fund.  But in the instance that by late 2021, SIR's restaurants are running at 75% of pre-Covid levels, what would that mean?   Recall that monthly distributions were cut to $0.0875 at end of 2019 (due to competition, delivery and softer CDN economy), so off that base, the new run rate would be $0.0656 per month (75% x $0.0875), or $0.79 in annualized run-rate dividend.   Recall that SIR has some of their highest revenue generating units in the downtown Toronto business core (top store by far is Front and York), and without sporting events and office traffic, way down.  The snap back a unit like this could see in 2H/21 with live sports/events, office traffic could be material.   

What run-rate yield would investors put on SIR ROYALTY?   If it is 10%, then the unit price in this hypothetical is $7.90 (a 400% return and a 50% dividend yield, assuming one buys at current levels and holds until the what-if dividend of $0.79 reinstituted late 2021).   If 12%, then $6.56, and so on.    With interest rates at 0%, would SIR be a double digit yield?  Unlikely.   Boston Pizza just reinstituted a $0.065 per month distribution (same as the example for SIR above), and the unit price is over $8 (despite the intensifying covid overhang).  

The only thing to note here is even if you use fairly somber forecasts for post COVID, hard to create a scenario where the FUND market cap isn't up at least 100% from here 15 months from now.   Downside, of course, is 100% of capital if CORP goes broke, but i think that is remote, especially with continued CDN govt aid and CDN banks not eager to go this route with established clients.

good luck...

[BushweedJA]

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