Nuggets from the filingsSIR CORP filings should be out shortly. This will show how the operating company (SIR CORP which run the restaurants and incur all the costs) has been managing thru this crisis. The reason why the market cap of SIR ROYALTIES is so low is the probability investors have been attaching to the operating company going broke. I got interested here (luckily at lower levels) because the upside risk (+300%) versus downside risk (-100%) was appealing. With the effective vaccines coming, the downside risk gets chopped materially, which improved the upside/downside ratio considerably. But even looking at the company's current statements, which were done prior to the vaccine announcements, things didn't look too dire.
In the quarter ended May 3, 2020, most of the stores were closed for a chunk of the quarter. How much did SIR CORP burn thru managing these restaurants, also noting that Canadian government relief had yet to be paid? The cash flow from operations before the distribution to unit holders of $1.493 million was $-654,000. This isn't great, but it isn't a bleeding mess either. The upcoming statment for CORP should show government relief payments.
In the most recent filing for SIR ROYALTY FUND, the notes had the following statement:
"The Partnership continues to defer the collection of restaurant royalties and the Fund continues to defer the collection of interest on the SIR Loan in order to provide SIR with financial support. During the three-month and nine-month periods ended September 30, 2020, the Fund recognized an impairment loss on the interest receivable from SIR based on management’s assessment of the SIR-specific risk and an impairment loss on the distributions receivable from the Partnership. A rate of 6.5% was applied to the interest and distributions receivable at September 30, 2020."
With the way the share price had been going, i would have guessed that the market assumed a default risk that was materially higher than "6.5%". Put another way, a 93.5% chance they remain a going concern and distributions will continue into the future. And this was pre-vaccine announcement.
What about other sources of liquidity, besides the BNS facilities? As of September 30, 2020, SIR CORP had an EDC BCAP facility of $6.25 million, which was undrawn (not being used in any capacity). The conditions attached to these facilities are that they can be used for paying down other debt or dividends or buybacks, but can be used for day to day operations of the company. That this is completely undrawn would signify that SIR CORP is not in serious trouble.
What about optionality within SIR? SIR owns and operates all their stores, otherwise known as corporate stores. Unlike others, such as Boston Pizza, McDonalds, etc., where most of the stores are franchised, SIR elected not to do this, in order to ensure consistency in service levels (hence the company title "SERVICE" INSPIRED RESTAURANTS, or SIR). Statistical studies show that franchising done right increases the value of the organization. Where many franchisees have been obliterated by COVID, SIR has incurred everything themselves. So when looking at the capital structure of SIR vs franchised competitors, noteworthy that SIR has historically and is currently carrying all the restaurant capex/upgrades/new builds themselves, where others push much of this down to the franchisee. Could SIR elect to convert one or more of their brands to a franchise model? Yes, and that would be capital light and higher margin for the operating company, but Fowler would cede control over the day to day operations of some of the restaurants. Would his bankers like that? Affirmative, as it shifts costs off SIR and towards a franchisee. So this would be an option to more rapidly increase the store base at some point post Covid, which is good for the Unit holders (assuming new stores are rolled into the royalty trust).
With 8.3 million units outstanding, market cap is $20 million. THe per share distribution in 2017, 2018, and 2019 was $1.16, $1.205, and $1.225, respectively. Versus current $2.40 share price.