sir royalty income fund 2008 strategy and progress report

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SIR Royalty Income Fund / Strategy and Progress Report

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1

10

CEO’s Letter

Fiscal 2008 was a year of sustained growth for SIR Corp. (“SIR”) as we continued to expand our network of Concept Restaurants with the opening of five new Jack Astor’s® and one Canyon Creek® restaurant. Three new Jack Astor’s were opened in high profile, downtown Toronto locations, one new Jack Astor’s was opened in a ‘lifestyle mall’ near the corner of Don Mills Road and Lawrence Avenue in Toronto, and one new Jack Astor’s and a new Canyon Creek were opened near Toronto’s Pearson International Airport. These six new restaurants were added to the Royalty Pool, effective January 1, 2009. In addition to expanding our network of restaurants, we continued to invest in our Royalty Pooled Restaurants to strengthen

our brands and drive same store sales growth (“SSSG”). We invested in substantial renovations at our Alice Fazooli’s in

Mississauga and completed the transformation of Soul of the Vine into our exciting new concept FOUR™. FOUR™ is our

new , upscale restaurant focusing on guilt-free, health conscious dining where each dish has less than 650 calories, without

sacrificing taste. I am pleased to report that FOUR™ has been a resounding success.

In the fourth quarter of 2008, the global economic downturn negatively impacted consumers’ food and entertainment

decisions, and SIR, like most businesses, was not immune. We experienced same store sales declines within our Signature

Group, as well as our Canyon Creek, and Alice Fazooli’s® Concept restaurants. Our core concept brand, Jack Astor’s, which

generates approximately 64% of the Fund’s Royalty Pooled Revenue, demonstrated some resilience, reporting positive same

store sales growth of 2.3% during the quarter. We believe that Jack Astor’s positive performance resulted partially from its

lower average cheque amount.

In anticipation of continuing economic challenges, we have taken certain actions with regard to cost savings and undertaken

cash preservation strategies which include the previously announced slowing of our near-term growth plans. We have also

shifted some of our marketing focus from media-based concept advertising to individual restaurant marketing initiatives as

one of these undertakings.

Going forward, SIR has secured development sites for three new restaurants. One is located in Boisbriand, Quebec with an

expected opening in calendar 2009 or 2010, and two are located at the corner of Yonge and Gerrard Streets in Toronto, Ontario,

with expected openings in calendar 2011. While the current economic downturn could continue to negatively impact sales

and profit prospects in the near future, we believe that our brand diversity positions us well to continue to offer our guests a

wide range of choices to suit any mood or occasion.

SIR has been in the restaurant business since 1992, and has successfully navigated through a variety of different, and

sometimes challenging, business cycles. Through them all, we have maintained our focus on providing our guests with

exceptional dining experiences, and continued innovation – no matter what. Our success and commitment to excellence

has not gone unnoticed. In 2008, SIR was named winner of the Pinnacle Award for Company of the Year – Eastern Canada.

Thank you for your interest in SIR Royalty Income Fund and the dynamic and distinct brands that comprise Service

Inspired Restaurants.

Peter Fowler Chief Executive Officer, SIR Corp.

(2) See footnote (2) on page 12.

Message to Unitholders

CEO’s Letter

Fiscal 2008 was a year of sustained growth for SIR Corp. (“SIR”) as we continued to expand our network of Concept Restaurants with the opening of five new Jack Astor’s® and one Canyon Creek® restaurant. Three new Jack Astor’s were opened in high profile, downtown Toronto locations, one new Jack Astor’s was opened in a ‘lifestyle mall’ near the corner of Don Mills Road and Lawrence Avenue in Toronto, and one new Jack Astor’s and a new Canyon Creek were opened near Toronto’s Pearson International Airport. These six new restaurants were added to the Royalty Pool, effective January 1, 2009. In addition to expanding our network of restaurants, we continued to invest in our Royalty Pooled Restaurants to strengthen

our brands and drive same store sales growth (“SSSG”). We invested in substantial renovations at our Alice Fazooli’s in

Mississauga and completed the transformation of Soul of the Vine into our exciting new concept FOUR™. FOUR™ is our

new , upscale restaurant focusing on guilt-free, health conscious dining where each dish has less than 650 calories, without

sacrificing taste. I am pleased to report that FOUR™ has been a resounding success.

In the fourth quarter of 2008, the global economic downturn negatively impacted consumers’ food and entertainment

decisions, and SIR, like most businesses, was not immune. We experienced same store sales declines within our Signature

Group, as well as our Canyon Creek, and Alice Fazooli’s® Concept restaurants. Our core concept brand, Jack Astor’s, which

generates approximately 64% of the Fund’s Royalty Pooled Revenue, demonstrated some resilience, reporting positive same

store sales growth of 2.3% during the quarter. We believe that Jack Astor’s positive performance resulted partially from its

lower average cheque amount.

In anticipation of continuing economic challenges, we have taken certain actions with regard to cost savings and undertaken

cash preservation strategies which include the previously announced slowing of our near-term growth plans. We have also

shifted some of our marketing focus from media-based concept advertising to individual restaurant marketing initiatives as

one of these undertakings.

Going forward, SIR has secured development sites for three new restaurants. One is located in Boisbriand, Quebec with an

expected opening in calendar 2009 or 2010, and two are located at the corner of Yonge and Gerrard Streets in Toronto, Ontario,

with expected openings in calendar 2011. While the current economic downturn could continue to negatively impact sales

and profit prospects in the near future, we believe that our brand diversity positions us well to continue to offer our guests a

wide range of choices to suit any mood or occasion.

SIR has been in the restaurant business since 1992, and has successfully navigated through a variety of different, and

sometimes challenging, business cycles. Through them all, we have maintained our focus on providing our guests with

exceptional dining experiences, and continued innovation – no matter what. Our success and commitment to excellence

has not gone unnoticed. In 2008, SIR was named winner of the Pinnacle Award for Company of the Year – Eastern Canada.

Thank you for your interest in SIR Royalty Income Fund and the dynamic and distinct brands that comprise Service

Inspired Restaurants.

Peter Fowler Chief Executive Officer, SIR Corp.


Message to Unitholders

11

Chairman’s Letter

On behalf of the SIR Royalty Income Fund (the “Fund”), I am pleased to present our 2008 annual report.

Despite a turbulent economy in 2008, the Fund delivered record levels of Royalty Pooled Revenue, distributable cash(1) and distributions declared, while maintaining a payout ratio of less than 100%. The record results were primarily attributable to the addition of three new Jack Astor’s® restaurants to the Royalty Pool in 2008, as well as system-wide Same Store Sales Growth (“SSSG(2)”) of 2.3%. Both Pooled Revenue and distributable cash(1) increased to $175.0 million and $7.5 million respectively in 2008, compared

to $163.4 million and $7.2 million respectively in 2007. With additional cash available to the Fund, the Trustees authorized

a 4.5% distribution increase to unitholders effective with the distribution paid in June 2008. The monthly distributions

increased from $0.110 per unit to $0.115 per unit, with annualized distribution increasing from $1.32 to $1.38. This

represented the third consecutive year the Fund has increased unitholder distributions. Distributions declared in 2008

totaled $7.3 million (or $1.36 per unit) compared to $6.9 million (or $1.30 per unit) in 2007. Despite the increased

distributions, 2008 payout ratio was 96.8%, less than the intended long-term average of 100% per annum for royalty

trust structures.

SIR’s flagship Concept restaurant, Jack Astor’s which represents approximately 64% of Royalty Pooled Revenue, reported

positive SSSG(2) each quarter throughout 2008. We believe that SIR’s continued focus on innovation and providing

exceptional guest experiences were largely responsible for driving SSSG(2). Although many restaurants in the industry,

including SIR’s Signature group, Canyon Creek Chophouse®, and Alice Fazooli’s®, were negatively impacted in the fourth

quarter of 2008 by a weakened economy, Jack Astor’s reported SSSG(2) of 2.3%.

Although we expect continued economic uncertainty in 2009, we can assure Fund unitholders that SIR will not stray from

its commitment to operate best-in-class restaurants and constantly improve and innovate to meet guests’ evolving tastes.

We are confident that SIR’s ongoing initiatives to attract and retain guests, combined with its multi-brand approach

covering different segments and price points will help to mitigate some of the economic challenges, allowing the Fund to

maintain stable and sustainable cash distributions to unitholders. In addition, five new Jack Astor’s and one new Canyon

Creek restaurant were added to the Royalty Pooled Restaurants on January 1, 2009, which we expect will further support

the stability of distributions.

The Trustees of the Fund remain committed to governing the Fund in the best interests of unitholders, and we will continue

to oversee discipline in managing Fund operating costs, strict compliance with regulatory policies, and best practices in

disclosure. We look forward to reporting to you on SIR’s continued progress in building value for Fund unitholders. On behalf

of the Trustees of the SIR Royalty Income Fund, thank you for your support.

John McLaughlin

Chairman, SIR Royalty Income Fund

(1) See footnote (1) on page 12.(2) See footnote (2) on page 12.

Chairman’s Letter

On behalf of the SIR Royalty Income Fund (the “Fund”), I am pleased to present our 2008 annual report.

Despite a turbulent economy in 2008, the Fund delivered record levels of Royalty Pooled Revenue, distributable cash(1) and distributions declared, while maintaining a payout ratio of less than 100%. The record results were primarily attributable to the addition of three new Jack Astor’s® restaurants to the Royalty Pool in 2008, as well as system-wide Same Store Sales Growth (“SSSG(2)”) of 2.3%. Both Pooled Revenue and distributable cash(1) increased to $175.0 million and $7.5 million respectively in 2008, compared

to $163.4 million and $7.2 million respectively in 2007. With additional cash available to the Fund, the Trustees authorized

a 4.5% distribution increase to unitholders effective with the distribution paid in June 2008. The monthly distributions

increased from $0.110 per unit to $0.115 per unit, with annualized distribution increasing from $1.32 to $1.38. This

represented the third consecutive year the Fund has increased unitholder distributions. Distributions declared in 2008

totaled $7.3 million (or $1.36 per unit) compared to $6.9 million (or $1.30 per unit) in 2007. Despite the increased

distributions, 2008 payout ratio was 96.8%, less than the intended long-term average of 100% per annum for royalty

trust structures.

SIR’s flagship Concept restaurant, Jack Astor’s which represents approximately 64% of Royalty Pooled Revenue, reported

positive SSSG(2) each quarter throughout 2008. We believe that SIR’s continued focus on innovation and providing

exceptional guest experiences were largely responsible for driving SSSG(2). Although many restaurants in the industry,

including SIR’s Signature group, Canyon Creek Chophouse®, and Alice Fazooli’s®, were negatively impacted in the fourth

quarter of 2008 by a weakened economy, Jack Astor’s reported SSSG(2) of 2.3%.

Although we expect continued economic uncertainty in 2009, we can assure Fund unitholders that SIR will not stray from

its commitment to operate best-in-class restaurants and constantly improve and innovate to meet guests’ evolving tastes.

We are confident that SIR’s ongoing initiatives to attract and retain guests, combined with its multi-brand approach

covering different segments and price points will help to mitigate some of the economic challenges, allowing the Fund to

maintain stable and sustainable cash distributions to unitholders. In addition, five new Jack Astor’s and one new Canyon

Creek restaurant were added to the Royalty Pooled Restaurants on January 1, 2009, which we expect will further support

the stability of distributions.

The Trustees of the Fund remain committed to governing the Fund in the best interests of unitholders, and we will continue

to oversee discipline in managing Fund operating costs, strict compliance with regulatory policies, and best practices in

disclosure. We look forward to reporting to you on SIR’s continued progress in building value for Fund unitholders. On behalf

of the Trustees of the SIR Royalty Income Fund, thank you for your support.

John McLaughlin

Chairman, SIR Royalty Income Fund


12

Executive Summary

Highlights for the 3-month period ended December 31, 2008 (“Q4”) and 12-month period ended December 31, 2008 (“YTD”) for SIR Royalty Income Fund (the “Fund”) include:

Net earnings were $1.8 million and $7.5 million for Q4 and Year to Date (“YTD”) 2008,

respectively, as compared to $1.9 million and $6.4 million for Q4 2007 and YTD 2007,

respectively. Net earnings per Fund Unit were $0.33 and $1.40 for Q4 2008 and YTD 2008,

respectively as compared to $0.36 and $1.20 for Q4 2007 and YTD 2007, respectively.

YTD 2007 net earnings were affected by future income taxes of $0.8 million as a result

of new legislation to the taxation of certain publicly listed flow-through entities that

became substantively enacted during 2007.

Distributable cash(1) per Fund Unit, both on a basic and diluted basis was $0.33 for Q4

2008 and $1.40 for YTD 2008, compared to $0.35 for Q4 2007 and $1.35 for YTD 2007.

The payout ratio(1) was 103.6% in Q4 of 2008 and 96.8% for YTD 2008, as compared to

94.7% in Q4 of 2007 and 95.8% for YTD 2007.

Pooled Revenue increased by 4.2% in Q4 of 2008 to $43.9 million, from $42.1 million in

Q4 of 2007. YTD Pooled Revenue increased 7.1% to $175.0 million from $163.4 million in

the same period last year.

Same store sales for restaurants in the Royalty pool experienced a decline of 2.1% in Q4.

YTD SSSG(2) remained positive with an increase of 2.3%

Same store sales growth (“SSSG”)(2) for Jack Astor’s®, SIR Corp’s (“SIR”) flagship Concept

Restaurant brand that generates approximately 64% of YTD Pooled Revenue, remained

positive at 2.3% for Q4 and 3.6% for YTD. SSS(2) for Alice Fazooli’s declined 6.1% for Q4

but SSSG(2) was positive at 2.0% for YTD.

The remaining operating segments experienced Q4 and YTD declines. Canyon Creek’s

SSS(2) declined 4.9% and 0.4%, in Q4 and YTD, respectively and the downtown Toronto

Signature Restaurants’ SSS(2) declined 13.9% and 0.6% in Q4 and YTD, respectively.

Management believes that the recent weaker economic conditions are the primary

driver of the observed reduction in the velocity of growth for Jack Astor’s, and the year-

over-year SSSG(2) declines in Alice Fazooli’s, Canyon Creek and the downtown Toronto

Signature Restaurants. Jack Astor’s, with its somewhat lower average cheque has also

been affected, but to a lesser extent than the other concepts. Restaurants with a higher

average cheque such as Canyon Creek and the downtown Toronto Signature Restaurants

tend to experience a greater decline in sales volumes. Management is not expecting an

improvement in these conditions in the near future, which may be expected to negatively

impact sales and profit.

In Q4, SIR closed the Alice Fazooli’s near the Square One shopping mall in Mississauga,

Ontario, for 10 days to complete a repositioning and renovation. The intent of these

changes was to broaden Alice Fazooli’s market penetration, similar to the previously

completed evolutions of the Jack Astor’s (2004 through 2007). Initial response to the

changes have been favourable. Management is reviewing the performance of this

repositioning to assess its applicability across the rest of the Alice Fazooli’s restaurants.

SIR was awarded the Pinnacle Award from Foodservice and Hospitality magazine as

Company of the Year for 2008 for Eastern Canada.

FOUR™ restaurant, a new healthy upscale restaurant focusing on guilt-free dining

with each dish having less than 650 calories, was introduced by SIR during Q1 of 2008.

The opening of FOUR marked the completion of the Soul of the Vine® renovation which

began at the end of fiscal 2007, with the introduction of an innovative bakery concept,

Petit Four™.

On May 28, 2008, the Trustees authorized a 4.5% distribution increase to Unitholders.

The monthly distributions increased from $0.110 per unit to $0.115 per unit beginning

with the distribution paid in June 2008. Going forward, this will increase the estimated

annualized distribution from $1.32 to $1.38.

Effective January 1, 2009, the five new Jack Astor’s restaurants and one new Canyon Creek

restaurant that opened in 2008 were added to the Royalty Pooled Restaurants. Two Jack

Astor’s and one Canyon Creek opened in Q2, one Jack Astor’s opened in Q3 and two Jack

Astor’s opened in Q4.

In addition to the five new Jack Astor’s and one new Canyon Creek mentioned above, SIR

has secured sites for three additional new restaurants: one with an expected opening in

2009 or 2010 and two with expected openings in 2011.

SIR has advised the Fund of its intention to slow its growth from the previously stated

goal of 68 restaurants by December 2010 (see Outlook section of this document).

While SIR is not owned by the Fund, the Fund is economically dependent upon SIR.

SIR files its unaudited interim and audited annual consolidated financial statements and

Management’s Discussion and Analysis which can be found on SEDAR under the Fund’s

listing named “Other”. SIR’s Q1 unaudited consolidated financial statements and MD&A

are listed having a filing date of December 23, 2008.

Same Store Sales Growth(2) (unaudited)

Same Store Sales Growth(2) for the 3-month period ended December 31, 2008

-15

-10

-5

0

5

SignatureAliceFazooli’s

CanyonCreek

JackAstor’s

Total SIRRestaurants

2.3%-6.1%-4.9% -13.9% -2.1%

Same Store Sales Growth(2) for the 12-month period ended December 31, 2008

-5

0

5

SignatureAliceFazooli’s

CanyonCreek

JackAstor’s

Total SIRRestaurants

3.6%

2.0%

-0.4% -0.6%

2.3%

SIR reported to the Fund that SSSG(2) was 2.3% for YTD 2008, as compared to the SSSG(2) of 4.2%

experienced in the prior year (please see the table below). Management believes that the recent

weaker economic conditions are the primary driver of the observed Q4 reduction in the velocity of

growth for Jack Astor’s and the year-over-year SSS(2) declines in Canyon Creek, Alice Fazooli’s and

the downtown Toronto Signature Restaurants. Management believes that Jack Astor’s somewhat

lower average cheque has contributed to reducing the impact of the economy and consumer

confidence on Jack Astor’s revenue, in 2008. Restaurants with a higher average cheque such as

Canyon Creek and the downtown Toronto Signature Restaurants tend to experience a greater

decline in sales volumes. The Canadian Restaurant and Foodservices Association (“CRFA”) in

its Long Term Foodservice Forecast, prepared in January 2009, projected sales in the full service

restaurant category will decline by 3.1% in 2009. SIR’s SSS(2) results for the 12-week period ended

February 15, 2009 were filed on SEDAR on April 1, 2009. For the 12-week period SSS(2) for SIR

declined by 3.2%. For the 12-week period, Jack Astor’s, Canyon Creek, Alice Fazooli’s and Signature

all experienced SSS(2) declines ( 0.1%, 4.9%, 6.7% and 12.9% respectively). Management is not

expecting an improvement in these conditions in the near future, which may be expected to

negatively impact revenue and profit.

SSSG(2) for Jack Astor’s was 3.6% YTD 2008. This growth was achieved on top of the SSSG(2) of 2.9%

experienced in the prior year. All the existing Jack Astor’s restaurants originally in the Royalty

pool have now been evolved. Alice Fazooli’s experienced SSSG(2) of 2.0% during YTD 2008 as

compared to SSSG(2) of 5.5% in YTD 2007. Alice Fazooli’s Square One was closed for 10 days in

Q4 for renovations, which had a negative impact on YTD 2008 SSSG(2). Canyon Creek experienced

SSSG(2) of negative 0.4% during YTD 2008 as compared to SSSG(2) of 6.4% in YTD 2007. The Canyon

Creek same store sales decline in Q3 is due in part to last year’s sales being supported by Canyon

Creek’s 10th Anniversary Celebration. This promotion included both a $20.00 complimentary

gift card drop and radio support, neither of which was repeated in Q3 of 2008. YTD 2008, the

Signature Restaurants, which are located in downtown Toronto, had a SSSG(2) decline of 0.6% as

compared to an increase of 7.6% for YTD 2007. Brasserie Frisco was closed in December 2007 and

is not included in the SSSG(2) calculation for Q4 and YTD 2008.

SSSG(2) for Restaurants in the Royalty pool

12-month period ended December 31, 2008

(unaudited)


(unaudited)

Jack Astor’s 3.6% 2.9%

Canyon Creek -0.4% 6.4%

Alice Fazooli’s 2.0% 5.5%

Signature Restaurants -0.6% 7.6%

Overall SSSG(2) 2.3% 4.2%

(1) Distributable cash and payout ratio are non-GAAP financial measures and do not have a standardized meaning prescribed by GAAP. 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.

(2) Same store sales (“SSS”) and same store sales growth (“SSSG”) are non-GAAP financial measures that do not have standardized meanings prescribed by GAAP. 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 Brasserie Frisco® and the Jack Astor’s located in Hamilton, Ontario, Dartmouth, Nova Scotia and both the former and existing Burlington, Ontario locations as they were not open for the entire comparable periods in fiscal 2008 and fiscal 2007. The U.S. restaurant is not part of SSS.

Management’s Discussion and Analysis(For the 12-month period ended December 31, 2008)

13

Restaurant Renovations

SIR used a significant portion of the proceeds of the Fund’s IPO to invest in its existing restaurants

to drive SSSG(2). Evolutions of all the Jack Astor’s restaurants originally in the Royalty pool have

been completed, with the last one completed in Q4 of 2007. These evolutions have resulted in

increased sales since the IPO. During Q4 of 2007, renovations were completed at Soul of the

Vine in order to introduce an innovative bakery concept, Petit Four, which targets the lucrative

catering and take-out markets in the downtown Toronto core. Petit Four replaced the take-out

portion of Soul of the Vine. In Q1 of 2008, the remaining portion of Soul of the Vine was closed

for 33 days for renovations, converting it into FOUR restaurant. FOUR opened on February 27,

2008 and is a new healthy upscale restaurant focusing on guilt-free dining with each dish having

less than 650 calories. Neither FOUR or Petit Four are being treated as New Restaurants under

the License and Royalty Agreement. The revenues of Petit Four and FOUR were added to Pooled

Revenue from their dates of opening and SIR did not convert any Class B GP Units into Class A GP

Units of the SIR Royalty Limited Partnership (the “Partnership”) in exchange for these additional

revenue streams. During Q3, SIR closed the Jack Astor’s near the Square One shopping mall in

Mississauga, Ontario, for two days, to make exterior and audio visual updates and modifications

to the bar and lobby area. In Q4, SIR closed the Alice Fazooli’s near the Square One shopping mall in

Mississauga, Ontario, for 10 days to complete a repositioning and renovation. The intent of these

changes was to broaden Alice Fazooli’s market penetration, similar to the previously completed

Evolutions of the Jack Astor’s (2004 through 2007). Management will review the performance of

this repositioning to assess its applicability across the rest of the Alice Fazooli’s restaurants.

New and Closed Restaurants

In Q2, a Jack Astor’s and a Canyon Creek restaurant were opened on April 7 and April 8, 2008,

respectively, near the Toronto Pearson International Airport and a Jack Astor’s was opened at the

corner of Yonge and Dundas Streets in Toronto, Ontario, on May 5, 2008. In Q3, on July 7, 2008, a

Jack Astor’s was opened in the former Brasserie Frisco location on John Street in Toronto, Ontario in

the heart of the entertainment district. In Q4, on October 6, 2008, a Jack Astor’s was opened near

the corner of Don Mills Road and Lawrence Avenue in Toronto, Ontario in a “lifestyle mall” where

a former Jack Astor’s restaurant existed. This former Jack Astor’s was closed in fiscal 2006 and

removed from the Royalty pool effective January 1, 2007. Also in Q4, on October 31, 2008, a Jack

Astor’s was opened at the corner of Yonge and Bloor Streets in Toronto. These six restaurants were

added to the Royalty Pooled Restaurants effective January 1, 2009 as New Additional Restaurants.

In addition to the six restaurants mentioned above, SIR has secured three new sites for SIR Corp.

restaurants. A Jack Astor’s in Boisbriand, Quebec is expected to open in fiscal 2009 or 2010.

Two new restaurants at the corner of Yonge and Gerrard Streets in Toronto, Ontario are expected

to open in fiscal 2011. SIR has advised the Trustees of its intention not to proceed with one

previously announced site (a Canyon Creek restaurant in Brampton, Ontario). SIR Management

continues to monitor current economic conditions and consumer confidence. Based on its

assessment of these conditions, the timing of restaurant construction and opening schedules

will be reviewed regularly by SIR Management and adjusted as necessary.

During fiscal 2007, SIR opened three new Jack Astor’s restaurants (Hamilton, Ontario in Q1,

Dartmouth, Nova Scotia in Q2 and Burlington, Ontario in Q4). Each of these new restaurants was

added to the Royalty Pooled Restaurants on January 1, 2008. The former Jack Astor’s restaurant

in Burlington, Ontario and the Brasserie Frisco restaurant were closed on September 29, 2007

and December 22, 2007, respectively. SIR was required to pay a Make-Whole Payment from their

date of closure to December 31, 2007 and these closed restaurants were removed from the

Royalty Pooled Restaurants as New Closed Restaurants, on January 1, 2008. The new Burlington

site has provided higher revenues and therefore an increased Royalty stream to the Partnership.

Management is encouraged by initial sales results of the new Jack Astor’s that opened in Q3, in

the former Brasserie Frisco location.

Distributions

Distributions to Unitholders are intended to be made monthly in arrears based on distributable

cash(1) and cash redemptions of Fund Units and subject to the Fund retaining such reasonable

working capital and other reserves as may be considered appropriate by the Trustees of the Fund.

The Fund’s intention, with the assistance of SIR, is to pay even distributions, and if possible, allow

the Fund to maintain consistent monthly distributions to Unitholders. The Fund intends to make

monthly distributions of its available distributable cash(1) to the extent possible and has paid its

expected monthly cash distribution of $0.10 per Unit per month, or more, since inception. Please

refer to the chart on page 15 for a summary of monthly distributions since inception.

The payout ratio(1) of cash distributed to distributable cash(1) is intended to average 100% per

annum over the longer term. Since the Fund pays even monthly distributions when its underlying

cash flow from the Partnership is subject to seasonal fluctuations (as experienced by SIR), there

are times during the year when the payout ratio(1) may exceed 100%. The payout ratio(1) in Q4

of 2008 was 103.6% as compared to 94.7% for Q4 of 2007. These payout ratios were affected

by the $0.18 million and $0.08 million Priority Special Conversion Distribution (“Conversion

Distribution”), declared by the Partnership in December 2008 and December 2007, respectively.

YTD, the payout ratio in 2008 was 96.8% compared to 95.8% for the same period in 2007.

Overview and Business of the Fund

On October 1, 2004, the Fund filed a final prospectus for a public offering of Units of the Fund.

The net proceeds of the Offering of $51.2 million were used by the Fund to acquire, directly,

certain bank debt of SIR and indirectly, through SIR Holdings Trust (the “Trust”), all of the Ordinary

LP Units of the Partnership. The Partnership owns the Canadian trademarks (the “SIR Rights”)

formerly owned or licensed by SIR or its subsidiaries and used in connection with the operation

of the majority of SIR’s restaurants in Canada. The Partnership has granted SIR a 99-year license

to use the SIR Rights in most of Canada in consideration for a Royalty, payable by SIR to the

Partnership, equal to 6% of the revenue of the restaurants included in the Royalty pool (the

“License and Royalty Agreement”). The Partnership also issued its own securities to SIR in return

for the SIR Rights acquired. The Fund indirectly participates in the revenue generated under the

License and Royalty Agreement through its investment in the Partnership. The Partnership’s

financial statements are provided separately at www.sedar.com under the SIR Royalty Income

Fund profile “other” category and on SIR’s website at www.sircorp.com.

The Fund intends to make monthly distributions of its available cash to the extent possible. During

the quarter, monthly distributions of $0.6 million or $0.115 per Unit were declared and paid for

each of the months of September, October and November 2008. Subsequent to December 31,

2008, a distribution of $0.115 per Unit was declared and paid for the month of December 2008 and

January 2009; a distribution of $0.115 per Unit was declared for the month of February 2009.

The Units of the Fund are publicly traded on the Toronto Stock Exchange under the symbol SRV.UN.

Overview and Business of SIR and the Partnership

SIR is a private company amalgamated under the Business Corporations Act of Ontario. As at

December 31, 2008, SIR operated 45 Concept Restaurants and Signature Restaurants in Canada

(in Ontario, Quebec, Alberta and Nova Scotia). The Concept Restaurants are Jack Astor’s Bar and

Grill, Canyon Creek Chophouse® and Alice Fazooli’s. The Signature Restaurants are reds®, Far

Niente®/Petit Four and FOUR, and the Loose Moose Tap & Grill. As at December 31, 2008, 39 SIR

Restaurants were included in the SIR Royalty Pooled Restaurants. On January 1, 2009, the five new

Jack Astor’s restaurants and one new Canyon Creek restaurant that opened in 2008 were added

to the Royalty Pooled Restaurants.

SIR also owns one Jack Astor’s restaurant in the U.S., which is not included in the SIR Royalty

Pooled Restaurants. In 2004, the Partnership granted SIR a 99-year license to use the SIR Rights in

most of Canada in consideration for a Royalty, payable by SIR to the Partnership, equal to 6.0% of

the revenue of the restaurants included in the Royalty pool. The Partnership also issued its own

securities to SIR in return for the SIR Rights acquired.

On January 1 of each year (the “Adjustment Date”), the restaurants subject to the License and

Royalty Agreement are adjusted for new restaurants that have been open for at least 60 days

prior to the Adjustment Date and which were not previously included in the Royalty Pooled

Restaurants. Under the formula as defined in the Partnership Agreement, the number of Class A GP

Units issued to SIR on the Initial Adjustment date is equal to 80% of the estimated value of the

additional Royalty revenue. Additional Class B GP Units may be converted to Class A GP Units in

respect of these new SIR Restaurants if the actual revenues of the new SIR Restaurants exceed

80% of the January 1 Initial Adjustment’s estimated revenue applied to the formula defined

in the Partnership Agreement. Conversely, Class A GP Units would be converted to Class B GP

Units by SIR if the actual revenues of the new SIR Restaurants are less than 80% of the January 1

Initial Adjustment’s estimated revenue. In December of each year, a Conversion Distribution will

be payable to the Class B GP Unitholders based on actual revenues of the new SIR Restaurants

exceeding 80% of the Initial Adjustment’s estimated revenue or there will be a reduction in

the cash distributions to the Class A GP Unitholders if revenues are less than 80% of the Initial

Adjustment’s estimated revenue. The Conversion Distribution results in an adjustment to SIR’s

share of the Partnership income to reflect the actual contribution of the revenues of the new

SIR Restaurants for the fiscal year. As this amount is not declared until December 31st, when the

actual revenues for the New Additional Restaurants are known, the effect of this adjustment is

not included in the results of quarters one through three.

The revenues of the new SIR Restaurants added to the Royalty pool on January 1, 2008 exceeded

80% of the Initial Adjustment’s estimated revenue and, as a result, a Conversion Distribution of

$0.18 million (2008 – $0.08 million) was declared in December 2008 and paid in cash to SIR in

January 2009. Assuming the revenues of the six new SIR Restaurants added to the Royalty pool

on January 1, 2009 exceed 80% of the Initial Adjustment’s estimated revenue, additional Class

A GP Units would be expected to be issued to SIR effective January 1, 2010 and a Conversion

Distribution would be expected to be declared in December 2009, and paid in cash to SIR in

January 2010.

As at December 31, 2008, SIR retained a 23.5% (2007 – 21.4%) interest in the Partnership as

the holder of the 1,648,544 (2007 – 1,455,009) Class A GP Units of the Partnership, representing

SIR’s initial retained interest as at the closing date of the Offering plus the Class A GP Units that

were received as part of the conversions that took place on January 1, 2006, January 1, 2007 and

January 1, 2008 when the net new restaurants were vended into the Royalty Pooled Restaurants.

The Class A GP Units are entitled to receive a pro rata share of all residual distributions of the

Partnership and are exchangeable into Units of the Fund on a one-for-one basis. SIR is obligated

to pay the Partnership a “Make- Whole Payment”, subject to certain terms, initially equal to the

amount of the Royalty that otherwise would have been paid to the Partnership in the event of a

permanent closure of a restaurant in the Royalty pool. SIR is not required to pay any “Make-Whole

Payment” in respect of a closed restaurant in the Royalty pool following the date on which the

number of restaurants in the Royalty pool is equal to or greater than 68, or following October 12,

2019, whichever occurs first. However, other adjustments or payments may still be required in

respect of closed restaurants after such date by SIR, depending upon the circumstances.

On January 1, 2009, six (2008 – three) new SIR Restaurants were added to the Royalty Pooled

Restaurants in accordance with the License and Royalty Agreement. As consideration for the

additional Royalty associated with the addition of six (2008 – three) new restaurants on January 1,

2009, as well as the Second Incremental Adjustment for the three (2007 – three) new SIR

Restaurants added to the Royalty Pooled Restaurants on January 1, 2008, SIR converted a portion

of its Class B GP Units into Class A GP Units based on the formula defined in the Partnership

Agreement. The number of Class B GP Units that SIR converted into Class A GP Units was reduced

by an adjustment for the closure of nil (2007 – two) SIR Restaurants during the prior year. The net

effect of these adjustments to the Royalty Pooled Restaurants was that SIR converted 1,076,871

(2008 – 193,535) Class B GP Units of the Partnership into 1,076,871 (2008 – 193,535) Class A GP

Units of the Partnership on January 1, 2009 at an estimated fair value of $6.0 million (2008 –

$1.5 million). As a result of this exchange, SIR’s interest in the Partnership increased to 33.7%

effective January 1, 2009 (2008 – 23.5%).

SIR’s fiscal year is comprised of 13 periods of four weeks each, ending on the last Sunday in

August. To preserve this year-end, an additional week must be added approximately every five

years. Fiscal quarters of SIR consist of accounting periods of 12, 12, 12 and 16 (or 17) weeks. SIR’s

fiscal 2008 year consisted of 53 weeks while SIR’s fiscal 2009 year will consist of 52 weeks.

Consolidated financial statements of SIR can be found at www.sedar.com under the SIR Royalty

Income Fund profile, “other” category and on SIR’s website at www.sircorp.com.


14

Seasonality

The full service restaurant sector of the Canadian foodservice industry, in which SIR operates,

experiences seasonal fluctuations in revenues. Favourable summer weather generally results

in increased revenues during SIR’s fourth quarter (ending on the last Sunday in August) when

patios have been open for an extended period. Additionally, certain holidays and observances also

affect guest dining patterns both favourably and unfavourably. Accordingly, distribution income

recognized by the Fund will vary in conjunction with the seasonality in revenue experienced

by SIR. The Fund’s intention, with the assistance of SIR, is to pay even distributions in order to

reduce the effect of seasonality, and if possible, allow the Fund to maintain consistent monthly

distributions to Unitholders.

Selected Consolidated Financial Information

The unaudited consolidated financial statements of the Fund are presented in Canadian dollars,

and prepared in accordance with Canadian generally accepted accounting principles (“GAAP”)

and include the accounts of the Fund and its subsidiaries, namely the Trust and SIR GP Inc.

The information in this Management’s Discussion and Analysis should be read in conjunction

with the annual consolidated financial statements of the Fund, including the notes thereto. The

Fund has been in existence since August 23, 2004, and began operating on October 12, 2004 upon

closing of the Offering.

The following tables set out selected financial information of the Fund and the Partnership:

Financial Highlights

(in thousands of dollars, except restaurants and per Unit amounts) (unaudited)

12-month period ended

December 31, 2008


Restaurants in the Royalty pool 39 38

Pooled Revenue generated by SIR 175,030 163,353

6% of Pooled Revenue 10,502 9,801

Make-Whole Payment – 34

Total Royalty income to Partnership 10,502 9,835

Partnership other income 60 58

Partnership expenses (112) (104)

Partnership earnings 10,450 9,789

SIR Corp.’s interest (Class A, B and C GP Units) (5,484) (5,065)

Partnership income allocated to Fund(3) 4,966 4,724

Interest income(4) 3,000 3,000

Total income of the Fund 7,966 7,724

General & administrative expenses (471) (483)

Net earnings before income taxes of the Fund 7,495 7,241

Future income taxes – (797)

Net earnings for the period 7,495 6,444

Basic earnings per Fund Unit (5,356,667 Units) $1.40 $1.20

Diluted earnings per Fund Unit (2008 – 7,005,211 Units, 2007 – 6,811,676 Units (5) $1.40 $1.20

For the 12-month period from January 1 to December 31, 2008, the Fund declared and paid a

distribution of $0.110 per Unit for each of the months from December 2007 through April 2008.

Monthly distributions of $0.115 per Unit were declared and Paid to each of the months of

May 2008 through November 2008. Subsequent to December 31, 2008, the Fund declared and paid

a distribution of $0.115 per Unit for the month of December 2008 and January 2009 and declared a

distribution of $0.115 per Unit for the month of February 2009, payable in March 2009.

Summary of Quarterly Financial Information

(in thousands of dollars except restaurants and per Unit amounts) (unaudited)

3-month periods ended

December 31, 2008 September 30, 2008 June 30, 2008 March 31, 2008 December 31, 2007 September 30, 2007 June 30, 2007 March 31, 2007

Restaurants in the Royalty pool 39 39 39 39 38 38 38 38

Pooled Revenue generated by SIR 43,902 43,680 45,424 42,024 42,132 40,814 40,956 39,451

6% of Pooled Revenue 2,635 2,621 2,725 2,521 2,528 2,449 2,457 2,367

Make-Whole Payment(6) – – – – 34 – – –

Total Royalty income to Partnership 2,635 2,621 2,725 2,521 2,562 2,449 2,457 2,367

Partnership other income 13 15 15 17 15 15 14 14

Partnership expenses (24) (21) (24) (43) (16) (27) (22) (39)

Partnership earnings 2,624 2,615 2,716 2,495 2,561 2,437 2,449 2,342

SIR’s interest (Class A, B and C GP Units) (1,477) (1,339) (1,360) (1,308) (1,355) (1,252) (1,238) (1,220)

Partnership income allocated to Fund(3) 1,147 1,276 1,356 1,187 1,206 1,185 1,211 1,122

Interest income(4) 750 750 750 750 750 750 750 750

Total income of the Fund 1,897 2,026 2,106 1,937 1,956 1,935 1,961 1,872

General & administrative expenses (113) (110) (124) (124) (89) (85) (167) (142)

Net earnings before income taxes of the Fund 1,784 1,916 1,982 1,813 1,867 1,850 1,794 1,730

Future income taxes – – – – 56 – (853) –

Net earnings for the period 1,784 1,916 1,982 1,813 1,923 1,850 941 1,730

Basic earnings per Fund Unit (5,356,667 Units) $0.33 $0.36 $0.37 $0.34 $0.36 $0.35 $0.18 $0.32

Diluted earnings per Fund Unit (2008 – 7,005,211 Units; 2007 – 6,811,676 Units)(7) $0.33 $0.36 $0.37 $0.34 $0.36 $0.35 $0.18 $0.32

Distributable Cash(1)

(in thousands of dollars, except per Unit amounts and payout ratio(1)) (unaudited)

12-month period ended December 31, 2008 12-month period ended December 31, 2007

Cash provided by operating activities 7,258 6,937

Add (deduct): Net change in non-cash working capital items(8) 237 304

Distributable cash(1) 7,495 7,241

Cash distributed for the period 7,258 6,937

Surplus of distributable cash(1) 237 304

Payout ratio(1)(9) 96.8% 95.8%

Distributable cash(1) per Fund Unit basic (5,356,667 Units) $1.40 $1.35

Distributable cash(1) per Fund Unit diluted (2008 – 7,005,211 Units; 2007 – 6,811,676 Units)(10) $1.40 $1.35

(1) See footnote (1) on page 12.(3) On October 12, 2004, the Fund, indirectly through the Trust, acquired all of the Ordinary LP Units of the Partnership. The holders of the Ordinary LP Units and Class A GP Units are entitled to receive a pro rata share of all residual distributions of the Partnership.

The holders of the Ordinary LP Units had the right to receive distributions in priority to the initial 595,185 Class A GP Units until August 26, 2007.(4) Interest income is the interest earned during the periods from the $40.0 million SIR Loan, which bears interest at 7.5% per annum.(5) Diluted earnings per Fund Unit is calculated as follows: Net earnings for the period plus the distributions related to the Class A GP Units which together total $9.8 million for the 12-month period ended December 31, 2008, respectively, divided by the weighted

average number of Fund Units outstanding of 7,005,211 Units. The weighted average number of Fund Units outstanding for the 12-month period ended December 31, 2008 represent Fund Units of 5,356,667 plus the convertible Class A GP Units of 1,648,544. Diluted earnings per Fund Unit for 2007 is calculated as follows: Net earnings for the period plus the distributions related to the Class A GP Units and less future income tax expense, which together total $8.2 million for the 12-month period ended December 31, 2007, respectively divided by the weighted average number of Fund Units outstanding of 6,811,676. Weighted average number of Fund Units outstanding for fiscal 2007 represents Fund Units of 5,356,667 plus the convertible Class A GP Units of 1,455,009.

(6) The Jack Astor’s in Burlington, Ontario, and the Brasserie Frisco, were closed on September 29, 2007 and December 22, 2007, respectively, and on May 27, 2006 the Jack Astor’s in Toronto, Ontario was closed. Under the terms of the License and Royalty Agreement, SIR is required to pay a Make-Whole Payment for these locations from the date of the closure until December 31st of the year of closure.

(7) Diluted earnings per Fund Unit for 2008 is calculated as follows: Net earnings for the period plus the distributions related to the Class A GP Units, which together total $2.3 million, $2.5 million, $2.6 million and 2.4 million for the 3-month periods ended December 31, 2008, September 30, 2008, June 30, 2008 and March 31, 2008 divided by the weighted average number of Fund Units outstanding of 7,005,211. The weighted average number of Fund Units outstanding represents Fund Units of 5,356,667 plus the convertible Class A GP Units of 1,648,544. Diluted earnings per Fund Unit for 2007 is calculated as follows: Net earnings for the period plus the distributions related to the Class A GP Units plus/(less) future income tax recovery/(expense), which together total $2.4 million, $2.4 million, $1.2 million and $2.2 million for the 3-month periods ended December 31, 2007, September 30, 2007, June 30, 2007 and March 31, 2007 respectively, divided by the weighted average number of Fund Units outstanding of 6,811,676 Units. The weighted average number of Fund Units outstanding represents Fund Units of 5,356,667 plus the convertible Class A GP Units of 1,455,009.

(8) Distributable cash is adjusted to exclude changes in non-cash working capital items as the Fund’s working capital requirements are not permanent and are primarily due to the timing of payments between related parties.(9) It is the Fund’s intention, with the assistance of SIR, to pay even distributions to reduce the effect of seasonality. Higher payout ratios during the colder months of the year are expected with the pattern of seasonality in the business, and it is anticipated that the

payout ratio will decrease on average during the warm weather months.(10) Diluted distributable cash per Fund Unit for the 12-month periods ended December 31, 2008 and December 31, 2007 is calculated as follows: Distributable cash for the period plus the distributions related to the Class A GP Units, which together total $9.8 million

and $9.2 million respectively divided by the weighted average number of Fund Units outstanding of 7,005,211 (2007 – 6,811,676) units. The weighted average number of Fund Units outstanding represents Fund Units of 5,356,667 plus the convertible Class A GP units of 1,648,544 (2007 – 1,455.009).

15

Distributable Cash(1)

(in thousands of dollars, except per Unit amounts and payout ratio(1)) (unaudited)

3-month periods ended


Cash provided by operating activities 1,848 1,848 1,794 1,768 1,768 1,768 1,714 1,687

Add/(deduct): Net change in non-cash working capital items(8) (64) 68 188 45 99 82 80 43

Distributable cash(1) 1,784 1,916 1,982 1,813 1,867 1,850 1,794 1,730

Cash distributed for the period 1,848 1,848 1,794 1,768 1,768 1,768 1,714 1,687

Surplus/ (shortfall) of distributable cash(1) (64) 68 188 45 99 82 80 43

Payout ratio(1)(9) 103.6%(12) 96.4% 90.6% 97.5% 94.7%(12) 95.6% 95.5% 97.5%

Distributable cash(1) per Fund Unit basic (5,356,667 Units) $0.33 $0.36 $0.37 $0.34 $0.35 $0.35 $0.33 $0.32

Distributable cash(1) per Fund Unit diluted (2008 – 7,005,211 Units; 2007 – 6,811,676 Units)(11) $0.33 $0.36 $0.37 $0.34 $0.35 $0.35 $0.33 $0.32

Results of Operations – Fund

The Fund’s revenue of $8.0 million for the 12-month period ended December 31, 2008 ($7.7 million

for the 12-month period ended December 31, 2007) is comprised of distribution income from the

Partnership of $5.0 million ($4.7 million for the 12-month period ended December 31, 2007) and

interest income of $3.0 million ($3.0 million for the 12-month period ended December 31, 2007).

Distribution income from the Partnership is the pro rata share of the residual distributions of the

Partnership for the 12-month periods ended December 31, 2008 and December 31, 2007. Interest

income is interest earned for the 12-month periods ended December 31, 2008 and December 31,

2007 from the $40.0 million SIR Loan which bears interest at 7.5% per annum.

The Fund’s operating expenses are limited to general and administration expenses which

totalled $0.5 million and $0.5 million for the 12-month periods ended December 31, 2008

and December 31, 2007, respectively. These expenses include professional fees, directors’ and

officers’ liability insurance premiums, Trustees’ fees, certain public company costs and other

administrative fees.

In fiscal 2007, the legislation to tax certain publicly traded income trusts was substantively

enacted, which required the Fund to record future income taxes in respect of the temporary

differences related to the Fund’s investment in the Partnership. As a result, the Fund recorded a

future income tax expense of $0.8 million YTD 2007.

Net earnings were $7.5 million or $1.40 per Fund Unit (basic and diluted basis) for the 12-month

period ended December 31, 2008 and $6.4 million or $1.20 per Fund Unit (basic and diluted basis)

for the 12-month period ended December 31, 2007.

Pooled Revenue

The Fund is indirectly dependent on the amount of the Royalty paid by SIR to the Partnership.

The amount of this Royalty is dependent on Pooled Revenue. Pooled Revenue is the revenue of

the SIR Restaurants included in the Royalty Pooled Restaurants. As at December 31, 2008, there

were 39 restaurants included in Pooled Revenue. Increases or decreases in Pooled Revenue are

derived from same store revenue growth or decline, and new or closed SIR Restaurants subject to

the SIR Rights. Pooled Revenue is affected by the risks associated with the operations and financial

condition of SIR, the commercial foodservice industry in general and the casual and fine dining

segment of the commercial foodservice industry in particular. The following table sets out Pooled

Revenue for the 3- and 12-month periods ended December 31, 2008 and December 31, 2007:

Distributions to Unitholders are intended to be made monthly in arrears based on distributable

cash(1) and cash redemptions of Fund Units and subject to the Fund retaining such reasonable

working capital and other reserves as may be considered appropriate by the Trustees of the Fund.

The Fund’s intention, with the assistance of SIR, is to pay even distributions, and if possible, allow

the Fund to maintain consistent monthly distributions to Unitholders. The Fund intends to make

monthly distributions of its available distributable cash(1) to the extent possible and has paid its

expected minimum monthly cash distribution of $0.10 per Unit per month since inception.

A history of monthly distributions is as follows:

Months PaidMonthly Distribution

per UnitAnnualized

Distribution per UnitIncrease in

Monthly Distribution

Inception to May 2006 $0.100 $1.20 –

June 2006 to May 2007 $0.105 $1.26 5.0%

June 2007 to May 2008 $0.110 $1.32 4.8%

June 2008 to date $0.115 $1.38 4.5%

The payout ratio(1) of cash distributed to distributable cash(1) is intended to average 100% per

annum. Since the Fund pays even monthly distributions when its underlying cash flow from the

Partnership is subject to seasonal fluctuations (as experienced by SIR), there are times during the

year when the payout ratio may exceed 100%. For the 12-month periods ended December 31,

2008 and December 31, 2007, the payout ratio(1) was 96.8% and 95.8%, respectively.

The following table provides disclosure regarding the relationship between cash flows from

operating activities and net income, and historical distributed cash amounts:

(in thousands of dollars)


December 31, 2008


December 31, 2007

Cash provided by operating activities 7,258 6,937

Net income 7,495 6,444

Cash distributed for the period 7,258 6,937

Excess (shortfall) of cash provided by operating activities over cash distributed for the period(13) – –

Excess (shortfall) of net income over cash distributions paid(14) 237 (493)

In the 12-month period ended December 31, 2007, there was a shortfall of net income over cash

distributions paid of $0.5 million as a result of the Fund recording a non-cash future income tax

expense of $0.8 million in YTD 2007.

Balance Sheet

The following table shows total assets and Unitholders’ equity of the Fund:

(in thousands of dollars) (unaudited)


Total assets 52,660 52,691 52,596 52,432 52,406 52,306 52,229 52,104

Unitholders’ equity 51,726 51,790 51,722 51,534 51,489 51,334 51,252 52,025

Summary of Pooled Revenue(in thousands of dollars, except number of restaurants included in Pooled Revenue) (Unaudited)

3-month period

ended December 31, 2008




Pooled RevenueRestaurants included

in Pooled Revenue Pooled RevenueRestaurants included



in Pooled Revenue

Jack Astor’s 27,133 24 23,523 21 111,219 24 97,124 22

Canyon Creek 7,246 7 7,618 7 27,019 7 27,138 7

Alice Fazooli’s 5,026 5 5,351 5 20,167 5 19,778 5

Signature 4,497 3 5,640 4 16,625 3 19,313 4

Total included in Pooled Revenue 43,902 39 42,132 37 175,030 39 163,353 38

(1) See footnote (1) on page 12.(8) See footnote (8) on page 14.(9) See footnote (9) on page 14.(10) See footnote (10) on page 14.(11) Diluted distributable cash per Fund Unit for 2008 is calculated as follows: Distributable cash for the period plus the distributions related to the Class A GP Units, which together total $2.3 million, $2.5 million, $2.6 million and $2.4 million for the 3-month periods

ended December 31, 2008, September 30, 2008, June 30, 2008 and March 31, 2008, respectively, divided by the weighted average number of Fund Units outstanding of 7,005,211 units. The weighted average number of Fund Units outstanding represents Fund Units of 5,356,667 plus the convertible Class A GP units of 1,648,544. Diluted distributable cash per Fund Unit for 2007 is as follows: Distributable cash for the period plus the distributions related to the Class A GP Units, which together total $2.4 million, $2.4 million, $2.2 million, $2.2 million, for the 3-month periods ended December 31, 2007, September 30, 2007, June 30, 2007 and March 31, 2007, respectively, divided by the weighted average number of Fund Units outstanding of 6,811,676 units. The weighted average number of Fund Units outstanding represents Fund Units of 5,356,667 plus the convertible Class A GP Units of 1,455,009.

(12) The payout ratio for the fourth quarter of 2008 was affected by the $0.18 million (2007 – $0.08 million) Priority Special Conversion Distribution paid by the Partnership. This distribution was paid on the Class B GP Units that were converted to Class A GP Units, effective January 1, 2009 (January 1, 2008) related to the Second Incremental Adjustment for the restaurants added to the Royalty pool effective January 1, 2009 (January 1, 2008).

(13) Excess (shortfall) of cash provided by operating activities over cash distributed for the period is calculated by subtracting the cash distributed for the period from cash provided by operating activities.(14) Excess (shortfall) of net income over cash distributions paid is calculated by subtracting cash distributed for the period from net income.

16

Liquidity and Capital Resources

The Fund has no third-party debt. SIR currently has the $40.0 million SIR Loan owed to the Fund

(which SIR can surrender its Class C GP Units in the Partnership as consideration for principal

payments under the loan), certain debt related to U.S. operations which is recorded on the

consolidated financial statements of SIR, and also a credit agreement with a Canadian Schedule 1

bank, a copy which has been filed on SEDAR. The bank debt is “permitted indebtedness” within

the meaning of the agreements between the Fund, the Partnership and SIR, and as a result, the

Fund and the Partnership have, as contemplated in the existing agreements, subordinated and

postponed their claims against SIR to the claims of the bank. This subordination, which includes

a subordination of the Partnership’s rights under the License and Royalty Agreement between the

Partnership and SIR, whereby the Partnership licenses to SIR the right to use trademarks and related

intellectual property in return for royalty payments based on revenues, has been effected pursuant

to the terms of an Interlender Agreement, a copy of which has also been filed on SEDAR.

The Credit Agreement is a 7-year facility for a maximum principal amount of $16.0 million, and

was designed primarily to facilitate construction of new restaurants by SIR. The new restaurants

have become part of the Royalty pool, subject to the License and Royalty Agreement, and thus

benefit the Fund both as a result of diversification, increased scale and because new restaurant

growth is designed to be accretive to Fund Unitholders. The loan is secured by substantially all of

the assets of SIR and most of its subsidiaries, which are also guarantors. The Partnership and the

Fund have not guaranteed the Credit Facility.

The credit agreement provides, as part of the total $16.0 million availability, for a $2.0 million

revolving facility and a $1.0 million treasury management facility to hedge the construction

facility, leaving $13.0 million for construction purposes. The construction component provides

for interest payments only during the first two years of the facility, absent, among other things,

default, asset dispositions or further equity or debt issues by SIR. The structure of the facility

may be in the form of direct advances, Bankers’ Acceptances, Letters of Credit or Guarantee, and

a fixed term loan (up to a five-year term). The rates of interest on the financing are Bankers’

Acceptance rate plus 1.75% and Prime rate plus 0.25%. Certain financial covenants will apply to

SIR, including a maximum senior cash flow leverage ratio and a minimum fixed charge coverage

ratio. Annual capital expenditures by SIR are also subject to a cap. As at February 15, 2009, SIR is

in compliance with these covenants and expects to remain in compliance with the covenants to

the end of SIR’s fiscal year. As at February 15, 2009, SIR had drawn an aggregate of $12.7 million

under these facilities.

Under the Interlender Agreement, absent an event of default under the credit agreement, ordinary

payments to the Partnership and the Fund can continue. However, if an event of default were

to occur, then payments to the Fund and the Partnership could cease and the related rights of

the Fund and the Partnership could be subject to a “standstill” obligation for a period of up to

120 days (which may be extended if the bank is pursuing remedies). The Interlender Agreement

also contains various other typical covenants of the Fund and the Partnership.

The Fund does not have bank lines of credit. The Fund therefore relies on the payments of the

distributions from the Partnership and interest income from SIR to meet its obligations to

pay the distributions. The Fund believes that the level of distributions from the Partnership

and interest payments will be sufficient to meet its current distribution intentions, subject to

seasonal fluctuations. However, the actual amounts distributed will depend upon numerous

factors, including the payment of the distributions from the Partnership and interest by SIR, and

could fluctuate based on performance. The Fund intends, with the assistance of SIR, to maintain

even distributions in order to reduce the effect of fluctuations in revenue and, if possible, allow

the Fund to maintain consistent monthly distributions to Unitholders. Under the terms of the

License and Royalty Agreement, SIR is required to pay the 6.0% Royalty to the Partnership 21 days

after the end of the four-week period for which the Royalty is determined.

During the 12-month periods ended December 31, 2008 and December 31, 2007, the Fund

distributed $7.3 million and $6.9 million to Unitholders, respectively. Subsequent to December 31,

2008, a distribution of $0.6 million ($0.115 per Unit) was declared and paid for the month of

December 2008 and January 2009 and a distribution of $0.6 million ($0.115 per Unit) was declared

for the month of February 2009.

The Fund did not have any capital expenditures in YTD 2008 and by its nature is not expected to

have significant capital expenditures in the future. Capital expenditures related to the Royalty

Pooled Restaurants are borne at the operating company (SIR) level. The Fund’s operating and

administrative expenses are expected to be fairly stable and predictable and are considered to be

in the ordinary course of business.

Management believes that there are sufficient cash resources retained in the Partnership in order

to meet its current obligations. The Fund intends to continue to pay monthly distributions at the

current level for the near future. However, should the distributions from the Partnership decline

significantly and for an extended period of time, the Fund may have to reduce distributions.

While SIR is not owned by the Fund, the Fund’s income is derived from interest income on the SIR

Loan and distributions from the Partnership. Accordingly, the Fund is economically dependent

upon SIR. Credit risk arises from the potential default of SIR on the SIR Loan. Management

monitors the SIR Loan for credit risk and to date a provision for uncollectible amounts has not

been necessary. For information regarding SIR and its liquidity, SIR files its interim unaudited

and annual audited consolidated financial statements and MD&A, which can be found on SEDAR

under the Fund’s listing named “Other”. The most recent unaudited consolidated financial

statements and MD&A for SIR’s first quarter are listed having a filing date of December 23, 2008.

The following table is an excerpt of the previous eight quarters of SIR’s consolidated statement

of cash flows information:

SIR’s Selected Consolidated Statement of Cash Flows Information(15)

(in thousands of dollars) (unaudited)

1st Quarter Ended November 23, 2008

(12 weeks)

4th Quarter Ended August 31, 2008

(17 weeks)

3rd Quarter Ended May 4, 2008

(12 weeks)

2nd Quarter Ended February 10, 2007

(12 weeks)

1st Quarter Ended November 18, 2007

(12 weeks)

4th Quarter Ended August 26, 2007

(16 weeks)

3rd Quarter Ended May 6, 2007

(12 weeks)

2nd Quarter Ended February 11, 2007

(12 weeks)

Net cash provided by operations 2,816 4,355 1,841 1,876 594 3,902 457 3,087

Net cash used in investing activities (4,665) (10,897) (3,391) (2,746) (2,722) (3,202) (2,765) (2,309)

Net cash provided by (used in) financing activities 2,601 5,005 1,890 285 2,016 (650) 39 (122)

Increase (decrease) in cash and cash equivalents during the period 764 (1,536) 340 (583) (115) (186) (1,953) 661

Cash and cash equivalents – Beginning of period 1,483 3,019 2,679 3,262 3,377 3,563 5,516 4,855

Cash and cash equivalents – End of period 2,247 1,483 3,019 2,679 3,262 3,377 3,563 5,516

(15) Information presented is derived solely from documents filed with the Canadian securities regulatory authorities by SIR in its interim Q1 MD&A filed on December 23 , 2008 and has not been approved by the Fund or its trustees, officers, SIR GP Inc., or SIR Holdings Trust, or their respective trustees, managing general partners, directors, or officers.

Controls and Procedures

Disclosure controls and procedures:

Disclosure controls and procedures are designed to provide reasonable assurance that information

required to be disclosed under securities legislation is recorded, processed, summarized and

reported within the time periods specified in the securities legislation, and includes controls and

procedures designed to ensure that information required to be disclosed is accumulated and

communicated to management, including the Chief Executive Officer and Chief Financial Officer,

as appropriate to allow timely decisions regarding required disclosures.

Management carried out an evaluation of the effectiveness of the design and operation of

the Fund’s disclosures controls and procedures, as defined in National Instrument 52-109,

“Certification of Disclosure in Issuer’s Annual and Interim Filings”, as at December 31, 2008

under the supervision and with the participation of the Fund’s Chief Executive Officer and Chief

Financial Officer.

Based on that evaluation, the Fund’s Chief Executive Officer and Chief Financial Officer concluded

that the disclosure controls and procedures are effective as at December 31, 2008.

Internal controls over financial reporting:

Internal controls over financial reporting are designed to provide reasonable assurance regarding

the reliability of financial reporting and the preparation of financial statements for external

purposes in accordance with Canadian GAAP and includes those policies and procedures that:

a) pertain to the maintenance of records that in reasonable detail accurately and fairly

reflect the transactions and dispositions of assets;

b) are designed to provide reasonable assurance that transactions are recorded as necessary

to permit preparation of financial statements in accordance with Canadian GAAP, and

that receipts and expenditures are being made only in accordance with authorizations of

management and directors; and

c) are designed to provide reasonable assurance regarding prevention or timely detection of

unauthorized acquisition, use or disposition of assets that could have a material effect on

the financial statements.

Management carried out an evaluation of the effectiveness of the design and operation of the

Fund’s internal controls over financial reporting, as defined in National Instrument 52-109,

“Certification of Disclosure in Issuer’s Annual and Interim Filings”, as at December 31, 2008 and

under the supervision and with the participation of the Fund’s Chief Executive Officer and Chief

Financial Officer. The evaluation was conducted using the framework and criteria established in

Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations

of the Treadway Commission.

Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that

internal controls over financial reporting are effective and there are no material weaknesses in

the Fund’s internal controls over financial reporting as at December 31, 2008.

There have been no substantive changes in the Fund’s internal control over financial reporting

that occurred during the most recent interim period beginning October 1, 2008 and ending

December 31, 2008, that have materially affected, or are reasonably likely to materially affect the

Fund’s internal control over financial reporting.

The Fund does not own, control or consolidate SIR and therefore, the Fund’s disclosure controls

and procedures and the internal controls over financial reporting do not encompass SIR or SIR’s

disclosure controls and procedures or SIR’s internal controls over financial reporting.

17

Off-Balance Sheet Arrangements

The Fund does not have any off-balance sheet arrangements.

Transactions with Related Parties

During the 12-month period ended December 31, 2008, the Fund earned distribution income

of $5.0 million from the Partnership ($4.7 million for the 12-month period ended December 31,

2007). The Fund, indirectly through the Trust, is entitled to receive a pro rata share of all residual

distributions. The Fund’s distribution income is dependent upon the revenue generated by the

SIR Restaurants subject to the License and Royalty Agreement.

During the 12-month period ended December 31, 2008, the Fund earned interest income of $3.0 million

from the SIR Loan ($3.0 million for the 12-month period ended December 31, 2007). A description of

the terms of the SIR Loan is included in the notes to the consolidated financial statements of the

Fund for the 12-month periods ended December 31, 2008 and December 31, 2007.

As at December 31, 2008, the Fund had amounts receivable from SIR of $0.2 million (December 31,

2007 – $0.2 million) and amounts receivable from the Partnership of $1.2 million (December 31,

2007 – $1.0 million). The amounts receivable from SIR consist mainly of interest owing to the Fund

on the SIR Loan for the month of December. The amounts due from the Partnership represent

distributions receivable of $2.4 million (December 31, 2007 – $2.2 million) partially offset by

advances payable of $1.2 million (December 31, 2007 – $1.2 million). All advances were conducted

as part of the normal course of business operations.

Critical Accounting Estimates

Income taxes

The Fund is a Unit Trust for income tax purposes. As such, the Fund is currently only taxable

on income not distributed to Unitholders. As substantially all taxable income is intended to be

allocated to Unitholders, no provision for current income taxes has been made for earnings of the

Fund. During the three-month period ended June 30, 2007, the proposed legislation relating to

the Federal income taxation of certain publicly traded income trusts commencing with taxation

years ending on or after 2011 became substantively enacted. The Fund now accounts for income

taxes using the asset and liability method whereby future income tax assets are recognized for

deductible temporary differences and future income tax liabilities are recognized for taxable

temporary differences. Temporary differences are the differences between the amounts of assets

and liabilities recorded for income tax and financial reporting purposes. Future income tax assets

are recognized only to the extent that management determines that it is more likely than not that

the future income tax assets will be realized. Future income tax assets and liabilities are adjusted for

the effects of changes in tax laws and rates on the date of enactment or substantive enactment.

Investment in Partnership and loan receivable

The investment in the Partnership is recorded at cost and written down to its estimated

realizable amount when there is evidence of impairment. Investment income is recorded to the

extent of distributions declared by the Partnership. The loan receivable from SIR is reviewed for

impairment. If impairment were identified, the loan would be reduced to its estimated recoverable

amount measured by expected future cash flows. The accrual of interest would be suspended

if collections become doubtful. This review includes a review of the earnings, cash flow, and

available cash of SIR on a prospective basis within the expected range of outcomes anticipated by

SIR Management. The distributions from the Partnership and interest payments are both funded

from the operations of SIR, so the review must conclude that SIR’s operations would be able to

support its Royalty obligations in the short and long term to support the value of the SIR Loan

and the investment in the Partnership. Management believes that there is no impairment of the

investment or loan receivable at December 31, 2008 and December 31, 2007.

Changes in Accounting Policies, Including Initial Adoption

Effective January 1, 2008, the Fund adopted CICA Handbook Section 1535, Capital Disclosures,

Section 3862, Financial Instruments – Disclosures and Section 3863, Financial Instruments –

Presentation.

CICA Handbook Section 1535, Capital Disclosures, requires disclosure of an entity’s objectives,

policies and processes for managing capital, quantitative data about what the entity regards

as capital and whether the entity has complied with any capital requirements and, if it has not

complied, the consequences of such non-compliance. The disclosures required in Section 1535

are contained in the Fund’s notes to consolidated financial statements for the year ended

December 31, 2008.

CICA Handbook Section 3862, Financial Instruments – Disclosures, modifies the disclosure

requirements for financial instruments that were included in Section 3861, Financial Instruments

– Disclosure and Presentation. The new standard places greater emphasis on disclosure about

risks related to recognized and unrecognized financial instruments and how those risks are

managed. The disclosures required in Section 3862 are contained in the Funds notes to financial

statements for the year ended December 31, 2008.

CICA Handbook Section 3863, Financial Instruments – Presentation, replaces the existing

requirements on presentation of financial instruments which have been carried forward

unchanged to this new section. There has been no impact in the year ended December 31, 2008.

Recently Issued Accounting Standards

Handbook Section 3064, Goodwill and intangible assets replaces Handbook Section 3062,

Goodwill and intangible assets and Handbook Section 3450, Research and development costs

and establishes standards for the recognition, measurement and disclosure of goodwill and

intangible assets. The provisions relating to the definition and initial recognition of intangible

assets, including internally generating intangible assets, are equivalent to the corresponding

provisions of IFRS IAS 38, Intangible assets. This standard is effective for the Fund for interim and

annual financial statements beginning on January 1, 2009. Management has not yet determined

the impact of the adoption of this change on its consolidated financial statements.

The CICA plans to converge Canadian GAAP with International Financial Reporting Standards

(“IFRS”) over a transition period expected to end in 2011. Management is reviewing the transition

to IFRS on the Fund’s financial statements and has not yet determined the impact. The Fund is

in the planning phase of its IFRS conversion and has completed an IFRS diagnostic review. This

review highlights the key differences between Canadian GAAP as currently applied by the Fund

and IFRS as well as their estimated level of impact, without quantification of financial impact

on the consolidated financial statements. Key issues identified to date will be analyzed in detail.

The impacts on the Fund’s consolidated financial statements, systems and internal control over

financial reporting will be determined. The Fund intends to complete this analysis during fiscal

2009. In addition the Fund will continue to invest in training and resources where necessary

throughout the transition period to facilitate a timely conversion.

Financial Instruments and Other Instruments

The Fund’s financial instruments consist of cash and cash equivalents, amounts due from

related parties, the loan receivable from SIR Corp. (the “SIR Loan”), investment in the Partnership,

accounts payable and accrued liabilities. Management estimates that the fair values of these

financial instruments approximate their carrying values due to their short-term maturity except

for the SIR Loan and the investment in the Partnership. The SIR Loan and the investment in the

Partnership are accounted for under the cost method. The carrying value of the SIR Loan and the

investment in the Partnership at December 31, 2008 is $40,000,000 and $11,166,671 respectively.

The fair values of the SIR Loan and the investment in the Partnership could only be determined

through a valuation of the individual assets. The aggregate fair value of the SIR Loan and the

investment in the Partnership is approximately $30.0 million based on the market value of the

Fund Units as of the close of business on December 31, 2008.

The SIR Loan has a fixed interest rate of 7.5% per annum and therefore changes in interest rates

would not impact interest income on the consolidated statements of earnings and comprehensive

income. However, the fair value of the SIR Loan will vary with changes in interest rates.

Disclosure of Outstanding Unit Data

The following summarizes the ownership structure of the Fund as at March 26, 2009 and

December 31, 2008:

March 26, 2009 December 31, 2008

Number of Fund Units

Amount $

Number of Fund Units

Amount $

Units issued 5,356,667 51,166,670 5,356,667 51,166,670

Risks and Uncertainties

The performance of the Fund is dependent upon distributions from the Partnership and indirectly

the Royalty that the Partnership receives from SIR. The amount of the Royalty is dependent upon

the revenue of the SIR Restaurants in the Royalty pool. Pooled Revenue is affected by the risks

associated with the operations and financial condition of SIR, the commercial foodservice industry

generally, and the casual and fine dining segment of the commercial foodservice industry in

particular. The restaurant industry generally, and in particular, the casual and fine dining segment

of this industry, is intensely competitive with respect to price, service, location, food quality and

qualified staff. Recently, competition has increased in the mid-price, full-service, casual and

fine dining sectors in which many of the SIR Restaurants operate. In addition, factors such as

economic conditions (particularly as they relate to the unprecedented recent deterioration of the

economic environment and consumer confidence), availability of credit (particularly as it relates

to the recent disruption in global credit markets), inflation, increased food, labour and benefits

costs, taxes, government regulations (including those governing alcoholic beverages), weather,

seasonality, public safety issues and the availability and quality of food, services and products

sold in the restaurants affect the restaurant industry in general and therefore SIR and the Fund.

If SIR is unable to successfully compete in the casual and fine dining sectors of the restaurant

industry, Pooled Revenue may be adversely affected, the amount of the Royalty reduced and the

ability of SIR to pay the Royalty may be impaired. Please refer to the prospectus dated October 1,

2004 and the March 31, 2009 Annual Information Form for further discussion on risks and

uncertainties related to the Fund and SIR.

The income of the Fund must be computed and will be taxed in accordance with Canadian tax

laws. There is no assurance that Canadian federal income tax laws respecting the treatment of

trusts will not be changed in a manner which adversely affects Unitholders. On October 31, 2006,

the Federal Department of Finance announced a plan that proposes changes to the manner in

which distributions from certain publicly listed specified investment flow-through (“SIFT”) trusts

including income funds, are taxed. The proposed changes to the current legislation would have

certain distributions of SIFT trusts’ income subject to tax at corporate income tax rates and

investors in the SIFT trusts would be taxed as though the distributions were dividends. Existing

Income Trusts would not be subject to this proposed taxation of distributions until the 2011

taxation year as long as the Fund meets the requirements for “normal growth”. On December 15,

2006, the Federal Department of Finance released guidance provisioning the amount of growth

that SIFT trust’s are permitted to experience without jeopardizing its deferral of these new

proposed taxation rules. The 2011 date will hold for those SIFT trusts whose equity capital growth

does not exceed the greater of $50.0 million and the SIFT trust’s market capitalization as of the

end of trading on October 31, 2006. The proposed legislation has since received a third reading

and therefore is considered to be substantively enacted. On July 14, 2008, further draft legislation

relating to the conversion of SIFT trusts to corporations was proposed that will allow certain

conversions, that occur within a specified time period, to occur on a tax deferred basis without

any undue tax consequences to the SIFT trust or its Unitholders.

The Fund is considering the possible impact of the proposed rules to the Fund. The proposed rules

may adversely affect the value and marketability of the Fund’s Units and the ability to undertake

financings, and at such time as the proposed rules apply to the Fund, the distributable cash of the

Fund may be materially reduced. The proposed rules may, as a result, adversely affect the Fund

and its Unitholders as well as SIR, as the holder of Partnership interests, and the Fund intends to

continue to assess and plan for their expected impact. Changes may prove necessary to seek to

adapt to any new tax laws with a view to attempting, where practicable, to minimize their overall

adverse effects.

18

Outlook

Management believes that the weaker economic conditions during 2008 have contributed to an

observed reduction in the velocity of growth for Jack Astor’s and the year-over-year SSS(2) declines

in Canyon Creek, Alice Fazooli’s and the downtown Signature Restaurants. Management believes

that Jack Astor’s somewhat lower average cheque has contributed to reducing the impact of the

economy and consumer confidence on Jack Astor’s revenue in 2008. Restaurants with a higher

average cheque such as Canyon Creek and the downtown Toronto Signature Restaurants tend

to experience a greater decline in sales volumes. The Canadian Restaurant and Foodservices

Association (“CRFA”) in its Long Term Foodservice Forecast, prepared in January 2009, projected

sales in the full service restaurant category will decline by 3.1% in 2009. SIR’s SSS(2) results for the

12-week period ended February 15, 2009 were filed on SEDAR on April 1, 2009. For the 12-week

period SSS(2) for SIR declined by 3.2%. For the 12-week period, Jack Astor’s, Canyon Creek, Alice

Fazooli’s and Signature all experienced SSS(2) declines ( 0.1%, 4.9%, 6.7% and 12.9% respectively).

Management is not expecting an improvement in these conditions in the near future.

Management is carefully monitoring the effects on SIR’s business of the recent deterioration in

economic conditions and consumer confidence. SIR, like most businesses, expects the current

economic downturn could significantly negatively affect its sales and profit prospects in the

near future. In anticipation of a continuing economic downturn, SIR has taken certain actions

with regard to cost savings and undertaking cash preservation strategies which include the

previously announced slowing of growth plans. SIR has shifted some of its marketing focus

from media based concept marketing to individual restaurant marketing initiatives as one of

these undertakings. SIR has advised the Fund that it intends to continue to focus on sustaining

and growing restaurant sales and profits while managing costs in light of the current economic

conditions in Canada.

SIR has advised the Fund of its intention to slow its growth from its previously stated goal of

reaching a total restaurant count of 68 restaurants by December 2010. SIR currently has 45

restaurants open in Canada and since October 2004, the Fund’s Initial Public Offering, SIR has

opened fourteen new restaurants to date. Two Jack Astor’s restaurants were opened in fiscal 2005,

three Canyon Creek restaurants were opened in fiscal 2006, and three Jack Astor’s restaurants

were opened in fiscal 2007. In fiscal 2008, SIR opened the following six locations; a new Jack

Astor’s and a new Canyon Creek restaurant both located near the Toronto Pearson International

Airport, a Jack Astor’s at the corner of Yonge and Dundas Streets in Toronto, Ontario, a Jack Astor’s

on John Street in Toronto in the former Brasserie Frisco location, a Jack Astor’s near the corner of

Don Mills Road and Lawrence Avenue in Toronto, Ontario and a new Jack Astor’s restaurant at one

of Toronto’s busiest and most highly visible locations; the corner of Yonge and Bloor Streets.

On January 1, 2009, six (2008 – three) new restaurants were added to the Royalty Pool in accordance

with the License and Royalty Agreement. As consideration for the additional Royalty associated

with the addition of six (2008 – three) new restaurants on January 1, 2009, as well as the Second

Incremental Adjustment for the three (2007 – three) new SIR restaurants added to the Royalty

Pooled Restaurants on January 1, 2008, SIR converted its Class B GP Units into Class A GP Units

based on the formula in the Partnership agreement. The number of Class B GP Units that were

converted to Class A GP Units on January 1, 2009 was reduced by an adjustment for the closure of

nil (2007 – two) SIR Restaurants during the prior calendar year. The net effect of these adjustments

to the Royalty Pooled Restaurants was that SIR converted 1,076,871 (2008 – 193,535) Class B GP

Units of the Partnership into 1,076,871 (2008 – 193,535) Class A GP Units of the Partnership. The

adjustments for new revenues that will be part of the Royalty pool are designed to be accretive

for Fund Unitholders.

SIR has secured 3 additional sites. SIR has plans to construct a Jack Astor’s in Boisbriand,

Quebec with an estimated opening in fiscal 2009 or 2010. The remaining two new sites at the

corner of Yonge and Gerrard Streets, in Toronto, Ontario are estimated to open in 2011. Given

the current economic environment, SIR has determined the most prudent course of action is

to reduce its growth plans and control its leverage. SIR has advised the Trustees of its intention

not to proceed with one previously announced site (a Canyon Creek restaurant in Brampton,

Ontario). Additional sites will be considered, however growth is expected to be slowed for at

least the next calendar year.

In Q4, the Alice Fazooli’s located near Square One was closed for 10 days to complete a

repositioning and renovation. The intent of these changes was to broaden Alice Fazooli’s market

penetration, similar to the previously completed evolutions of the Jack Astor’s (2004 through

2007). Initial guest response to the changes have been favourable. Management continues to

review the performance of this repositioning to access its applicability across the rest of the Alice

Fazooli’s restaurants.

During the last five years, SIR has made significant investments in both new and existing

restaurants. All but two of SIR’s 45 restaurants have either been newly constructed or renovated

within the past five years. This leaves SIR well positioned with modern and relevant concepts, which

Management believes will help position SIR to work through the current economic downturn.

SIR management is committed to maximizing the performance of all of its restaurants.

Forward Looking Information

Statements in this report, including the information set forth as to the future financial or operating

performance of the Fund or SIR, that are not current or historical factual statements may constitute

“forward-looking” information within the meaning of securities laws. Such forward-looking

statements involve known and unknown risks, uncertainties and other factors which may cause

the actual results, performance or achievements of the Fund, the Trust, the Partnership, SIR, the

SIR Restaurants, or industry results, to be materially different from any future results, performance

or achievements expressed or implied by such forward-looking statements. When used in this

document, such statements may include, among other language, such words as “may”, “will”,

“expect”, “believe”, “plan”, “anticipate”, “intend”, “estimate” and other similar terminology. These

statements reflect Management’s current expectations, estimates and projections regarding

future events and operating performance and speak only as of the date of this document. Readers

should not place undue importance on forward-looking statements and should not rely upon this

information as of any other date. These forward-looking statements involve a number of risks

and uncertainties. The following are some of the factors that could cause actual results to differ

materially from those expressed in or underlying such forward-looking statements: competition;

changes in demographic trends; changing consumer preferences and discretionary spending

patterns; changes in national and local business and economic conditions; legal proceedings and

challenges to intellectual property rights; dependence of the Fund on the financial condition of

SIR; legislation and governmental regulation; accounting policies and practices; and the results

of operations and financial condition of SIR. The foregoing list of factors is not exhaustive. Many

of these issues can affect the Fund’s or SIR’s actual results and could cause their actual results

to differ materially from those expressed or implied in any forward-looking statements made by,

or on behalf of, the Fund or SIR. Readers are cautioned that forward-looking statements are not

guarantees of future performance, and should not place undue reliance on them. The Fund and SIR

expressly disclaim any obligation or undertaking to publicly release any updates or revisions to any

forward-looking statements contained herein to reflect any change in expectations, estimates and

projections with regard thereto or any changes in events, conditions or circumstances on which

any statement is based, except as expressly required by law.

In formulating the forward-looking statements contained herein, Management has assumed

that business and economic conditions affecting SIR’s restaurants and the Fund will continue

substantially in the ordinary course, including without limitation with respect to industry

conditions, general levels of economic activity (including in downtown Toronto), regulations

(including those regarding employees, food safety, tobacco and alcohol), weather, taxes, foreign

exchange rates and interest rates, that there will be no pandemics or other material outbreaks

of disease or safety issues affecting humans or animals or food products, and that there will be

no unplanned material changes in its facilities, equipment, customer and employee relations, or

credit arrangements. These assumptions, although considered reasonable by Management at the

time of preparation, may prove to be incorrect. In particular, in estimating the revenues for the five

new Jack Astor’s restaurants, and the one Canyon Creek restaurant, Management has assumed

that they will operate consistent with other Jack Astor’s and Canyon Creek restaurants. For more

information concerning the Fund’s risks and uncertainties, please refer to the October 2004 final

prospectus, and/or its March 31, 2009 Annual Information Form, all of which are available under

the Fund’s profile at www.sedar.com.

Additional information related to the Fund, the Partnership and SIR can be found at www.sedar.com

under SIR Royalty Income Fund and on SIR’s website at www.sircorp.com.


19

Management’s Responsibility for Financial ReportingMarch 24, 2009

These consolidated financial statements have been prepared by management in accordance with

Canadian generally accepted accounting principles. Management is responsible for their integrity,

objectivity and reliability, and for the maintenance of financial and operating systems, which

include effective controls, to provide reasonable assurance that the Fund’s assets are safeguarded

and that reliable financial information is produced.

The Board of Trustees is responsible for ensuring that management fulfills its responsibilities

for financial reporting and internal control. The Board exercises these responsibilities through

its Audit Committee, all members of which are not involved in the daily activities of the Fund.

The Audit Committee meets with management and, as necessary, with the independent auditors,

PricewaterhouseCoopers LLP, to satisfy itself that management’s responsibilities are properly

discharged and to review and report to the Board on the consolidated financial statements.

In accordance with Canadian generally accepted auditing standards, the independent auditors

conduct an examination each year in order to express a professional opinion on the consolidated

financial statements.

Peter Fowler Jeff Good

Chief Executive Officer Chief Financial Officer

Auditors’ Report to the Unitholders of SIR Royalty Income FundMarch 24, 2009

We have audited the consolidated balance sheets of SIR Royalty Income Fund as at December 31,

2008 and 2007 and the consolidated statements of earnings and comprehensive income,

unitholders’ equity and cash flows for the years then ended. These financial statements are the

responsibility of the Fund’s management. Our responsibility is to express an opinion on these

financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards.

Those standards require that we plan and perform an audit to obtain reasonable assurance

whether the financial statements are free of material misstatement. An audit includes examining,

on a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made

by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the

financial position of the Fund as at December 31, 2008 and 2007 and the results of its operations

and its cash flows for the years then ended in accordance with Canadian generally accepted

accounting principles.

Chartered Accountants, Licensed Public Accountants

Hamilton, Ontario

Consolidated Financial StatementsDecember 31, 2008 and 2007

Consolidated Balance SheetsAs at December 31, 2008 and 2007

2008

$2007

$

Assets

Current assets

Cash and cash equivalents 230 105

Prepaid expenses and other assets 70,033 67,985

Amounts due from related parties (note 9) 1,422,690 1,171,353

1,492,953 1,239,443

Loan receivable from SIR Corp. (note 4) 40,000,000 40,000,000

Investment in SIR Royalty Limited Partnership (note 5) 11,166,671 11,166,671

52,659,624 52,406,114

Liabilities

Current liabilities

Accounts payable and accrued liabilities 136,771 120,313

Future income taxes (note 12) 797,000 797,000

933,771 917,313

Unitholders’ Equity (note 7) 51,725,853 51,488,801

52,659,624 52,406,114

Subsequent events (notes 7 and 9)

Approved by the Board of Trustees

Peter Fowler Peter LuitTrustee Trustee

The accompanying notes are an integral part of these consolidated financial statements

20

Consolidated Statements of Earnings and Comprehensive IncomeFor the years ended December 31, 2008 and 2007

2008

$2007

$

Investment income

Distribution income from Partnership (notes 5 and 9) 4,965,627 4,724,263

Interest income (note 4) 3,000,000 3,000,000

7,965,627 7,724,263

Expenses

General and administrative (note 9) 470,291 483,749

Future income taxes (note 12) – 797,000

470,291 1,280,749

Net earnings and comprehensive income for the year 7,495,336 6,443,514

Basic and diluted earnings per Fund unit (note 8) $1.40 $1.20

Consolidated Statements of Unitholders’ Equity For the years ended December 31, 2008 and 2007

2008

$2007

$

Balance – Beginning of year 51,488,801 51,982,171

Net earnings for the year 7,495,336 6,443,514

Distributions declared and paid (note 7) (7,258,284) (6,936,884)

Balance – End of year 51,725,853 51,488,801

Consolidated Statements of Cash Flows For the years ended December 31, 2008 and 2007

2008

$2007

$

Cash provided by (used in)

Operating activities

Net earnings for the year 7,495,336 6,443,514

Item not affecting cash

Future income taxes (note 12) – 797,000

Net change in non-cash working capital items (note 11) (236,927) (303,543)

7,258,409 6,936,971

Financing activities

Distributions paid (7,258,284) (6,936,884)

Change in cash and cash equivalents 125 87

Cash and cash equivalents – Beginning of year 105 18

Cash and cash equivalents – End of year 230 105

The accompanying notes are an integral part of these consolidated financial statements

21

Notes to Consolidated Financial StatementsDecember 31, 2008 and 2007

1 Nature of operations and seasonality

Nature of operations

SIR Royalty Income Fund is a trust established on August 23, 2004 under the laws of the Province

of Ontario.

On October 1, 2004, SIR Royalty Income Fund (the “Fund”) filed a final prospectus for a public

offering of units of the Fund. The net proceeds of the offering to the Fund of $51,166,670 were

used by the Fund to acquire, directly, certain bank debt of SIR Corp. (the “SIR loan”) and indirectly,

through SIR Holdings Trust (the “Trust”), all of the Ordinary LP units of SIR Royalty Limited

Partnership (the “Partnership”). The Partnership owns the Canadian trademarks (the “SIR Rights”)

formerly owned or licensed by SIR Corp. (“SIR”) or its subsidiaries and used in connection with the

operation of the majority of SIR’s restaurants in Canada (the “SIR Restaurants”). The Partnership

has granted SIR a 99-year license to use the SIR Rights in most of Canada in consideration for a

Royalty, payable by SIR to the Partnership, equal to 6% of the revenue of the restaurants included

in the Royalty pool (the “License and Royalty Agreement”). The Fund, indirectly, participates in

the revenue generated under the License and Royalty Agreement through its investment in the

Partnership (see note 5).

Seasonality

The full service restaurant sector of the Canadian foodservice industry in which SIR operates

experiences seasonal fluctuations in revenues. Favourable summer weather generally results in

increased revenue during SIR’s fourth quarter (ending the last Sunday in August) when patios

can be open. Additionally, certain holidays and observances also affect dining patterns both

favourably and unfavourably. Accordingly, distribution income recognized by the Fund will vary in

conjunction with the seasonality in revenue experienced by SIR.

2 Summary of significant accounting policies and changes in accounting policies

These consolidated financial statements are prepared in accordance with Canadian generally

accepted accounting principles (“GAAP”) and include the accounts of the Fund and its

subsidiaries, namely the Trust and SIR GP Inc. All intercompany accounts and transactions

have been eliminated.

Use of estimates

The preparation of these financial statements requires management to make estimates and

assumptions that affect income and expenses during the reporting periods, in addition to the

reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the

financial statements. Actual results could differ materially from those estimates in the near term.

Cash and cash equivalents

Cash is defined as cash and short-term investments with original maturities of three months

or less.

Earnings per Fund unit

The earnings per Fund unit are based on the weighted average number of Fund units outstanding

during the period. Diluted earnings per Fund unit are calculated to reflect the dilutive effect, if

any, of SIR exercising its right to exchange its Class A GP units of the Partnership into Fund units

at the beginning of the period.

Distributions

Distributions to unitholders are intended to be made monthly in arrears and are recorded when

declared by the Trustees of the Fund.

Capital disclosures and financial instruments

Effective January 1, 2008, the Fund adopted Canadian Institute of Chartered Accountants (“CICA”)

Handbook Section 1535, “Capital Disclosures”, Section 3862, “Financial Instruments – Disclosures”

and Section 3863, “Financial Instruments – Presentation”. As required, these standards have been

adopted on a prospective basis. Accordingly, the consolidated financial statements for 2007 have

not been restated.

Capital Disclosures – Handbook Section 1535

Section 1535 of the CICA Handbook establishes standards for disclosing information about

an entity’s objectives, policies and processes for managing capital. The disclosures required in

Section 1535 are contained in note 10 – Capital management.

Financial Instruments – Disclosures – Handbook Section 3862 Financial Instruments – Presentation – Handbook Section 3863

Section 3862 of the CICA Handbook modifies the disclosure requirements for financial instruments

that were included in Section 3861, “Financial Instruments – Disclosure and Presentation”.

The new standard places greater emphasis on disclosure about risks related to recognized and

unrecognized financial instruments and how those risks are managed. Section 3863 carries

forward the same presentation standards as Section 3861; therefore there has been no impact

in the year ended December 31, 2008. The disclosures required in Section 3862 are contained in

note 6 – Financial instruments.

Income taxes

The Fund is a unit trust for income tax purposes. As such, the Fund is currently only taxable

on income not distributed to unitholders. As substantially all taxable income is allocated to

unitholders, no provision for current income taxes has been made for earnings of the Fund.

During the three-month period ended June 30, 2007, the proposed legislation relating to the

Federal income taxation of certain publicly traded income trusts commencing with taxation

years ending on or after 2011 became substantively enacted. The Fund now accounts for income

taxes using the asset and liability method whereby future income tax assets are recognized for

deductible temporary differences and future income tax liabilities are recognized for taxable

temporary differences. Temporary differences are the differences between the amounts of

assets and liabilities recorded for income tax and financial reporting purposes. Future income

tax assets are recognized only to the extent that management determines that it is more

likely than not that the future income tax assets will be realized. Future income tax assets and

liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment

or substantive enactment.

Investment and loan receivable

The investment in the Partnership is recorded at cost. The investment is reviewed for impairment

and written down to its estimated realizable amount when there is a loss that is other than

temporary. Distribution income from the Partnership is recorded when distributions are declared

by the Partnership. Distributions in excess of the Fund’s share of the Partnership’s income are

recorded as a reduction in the amount of the investment.

The loan receivable from SIR is reviewed for reasonable assurance of timely collection. If there is no

reasonable assurance of collection, the loan would be reduced to its estimated realizable amount

measured by the present value of expected future cash flows using the original effective interest

rate on the loan. The accrual of interest would be suspended if collection becomes doubtful.

At December 31, 2008 there is no impairment of the investment or loan receivable.

3 Recently issued accounting pronouncements

Goodwill and intangible assets – Handbook Section 3064

Handbook Section 3064 replaces Handbook Section 3062, “Goodwill and Intangible Assets”

and Handbook Section 3450, “Research and Development Costs” and establishes standards for

the recognition, measurement and disclosure of goodwill and intangible assets. The provisions

relating to the definition and initial recognition of intangible assets, including internally generated

intangible assets, are equivalent to the corresponding provisions of IFRS IAS 38, “Intangible

Assets”. This standard is effective for the Fund for interim and annual financial statements

beginning on January 1, 2009. Management has not yet determined the impact of the adoption

of this change on the disclosure in its financial statements.

International Financial Reporting Standards

The CICA plans to converge Canadian GAAP with International Financial Reporting Standards

(“IFRS”) over a transition period expected to end in 2011. Management is reviewing the transition

to IFRS on the Fund’s consolidated financial statements and has not yet determined the impact.

4 Loan receivable from SIR Corp.

The SIR loan bears interest at 7.5% per annum, is due October 12, 2044 and is collateralized by

a general security agreement covering substantially all of the assets of SIR and its subsidiaries

in Canada. Interest income of $3,000,000 was earned during the year ended December 31, 2008

(December 31, 2007 – $3,000,000).

The bank debt is “permitted indebtedness” within the meaning of the agreements between

the Fund, the Partnership and SIR, and as a result the Fund and the Partnership have, as

contemplated in the existing agreements, subordinated and postponed their claims against

SIR to the claims of the bank. This subordination, which includes a subordination of the

Partnership’s rights under the License and Royalty Agreement between the Partnership and SIR

whereby the Partnership licenses to SIR the right to use the trademarks and related intellectual

property in return for royalty payments based on revenues, has been effected pursuant to the

terms of an Interlender Agreement.

Under the Interlender Agreement, absent a default or event of default under the Credit Agreement,

ordinary payments to the Partnership and the Fund can continue and the Partnership can exercise

any and all of its rights to preserve the trademarks and related intellectual property governed by

the License and Royalty Agreement. However, if a default or an event of default were to occur,

then payments to the Fund and the Partnership could cease and the related rights of the Fund and

the Partnership could be subject to a “standstill” obligation for a period of up to 120 days (which

may be extended if the bank is pursuing remedies). The Interlender Agreement also contains

various other typical covenants of the Fund and the Partnership.

SIR has the right to require the Fund to, indirectly, purchase the Class C GP units of the Partnership

and assume a portion of the SIR loan as consideration for the acquisition of the Class C GP units.

22

5 Investment in SIR Royalty Limited Partnership

On October 12, 2004, the Fund, indirectly through the Trust, acquired all of the Ordinary LP units

of the Partnership. The holders of the Ordinary LP and Class A GP units are entitled to receive a pro

rata share of distributions of the Partnership.

The distributions from the Partnership primarily comprise revenue earned by the Partnership

under the License and Royalty Agreement (note 1) less certain general and administrative

expenses. Distributions for the year ended December 31, 2008 amount to $4,965,627 (December 31,

2007 – $4,724,263).

6 Financial instruments

Classification

As at December 31, 2008, the classifications of the financial instruments, as well as their carrying

and fair values are as follows:

Carrying and fair value

ClassificationDecember 31, 2008

$December 31, 2007

$

Cash and cash equivalents Held for trading 230 105

Amounts due from related parties Loans and receivables 1,422,690 1,171,353

Loan receivable from SIR Corp. Held to maturity see below see below

Investment in SIR Royalty Limited Partnership Available for sale see below see below

Accounts payable and accrued liabilities Other financial liabilities 136,771 120,313

Carrying and fair value

Cash and cash equivalents, amounts due from related parties and accounts payable and accrued

liabilities are short term financial instruments whose fair value approximates the carrying

amount given that they will mature in the short term. The SIR loan and the investment in the

Partnership are accounted for under the cost method. The carrying value of the SIR loan and the

investment in the Partnership at December 31, 2008 is $40,000,000 and $11,166,671, respectively

(December 31, 2007 – $40,000,000 and $11,166,671, respectively). The fair values of the SIR loan

and the investment in the Partnership could only be determined through the valuation of the

individual assets. The aggregate fair value of the SIR loan and the investment in the Partnership

is approximately $30,000,000 based on the market value of the Fund units as of the close of

business on December 31, 2008.

Objectives and policy relating to financial risk management.

Financial risk management is carried out by the management and Trustees of the Fund. The

Fund’s main financial risk exposure, as well as its risk management policy, is detailed as follows:

Interest rate risk

The SIR loan has a fixed interest rate of 7.5% per annum and has been designated as a held to

maturity financial asset. Accordingly, changes in interest rates would not impact the consolidated

statements of earnings and comprehensive income or the carrying value of the SIR loan. However,

the fair value of the SIR loan will vary with changes in interest rates. The Fund is restricted to

investing excess cash in short-term investments and it is not the Fund’s practice to hedge against

changes in interest rates.

Credit risk

The Fund is exposed to credit risk in its cash and cash equivalents, amounts due from related

parties and the SIR loan. The maximum exposure to credit risk is the full carrying value of

the financial instrument. The Fund minimizes the credit risk of cash and cash equivalents by

depositing funds with reputable financial institutions and minimizes the credit risk of its due

from related parties by managing and analyzing the cash flow of these related parties through

the preparation of budgets and forecasts of these related parties. As at December 31, 2008,

no amounts due from related parties are past due. Credit risk also arises from the potential

default of SIR on the SIR loan. Management monitors the SIR loan for impairment. To date, a

provision for uncollectible amounts has not been necessary.

SIR has certain restrictions related to its bank financing which could affect payments to the Fund,

if a default or an event of default were to occur (see note 4).

Liquidity risk

Liquidity risk is the risk that the Fund will not be able to meet its financial obligations as they

fall due and meet expected distributions to its unitholders. The Fund currently settles these

obligations out of cash and cash equivalents. The ability to do this relies on the Fund collecting

its distributions from the Partnership and interest on the SIR loan. The Fund intends to maintain

equal monthly distributions to its unitholders. However, the Trustees of the Fund may authorize

increased or decreased distributions from time to time or halt distributions entirely, as they see

fit, in their sole discretion and failure to pay a distribution is not an event of default. Both the

Fund and the Partnership prepare budgets and forecasts to evaluate their ability to meet future

cash obligations.

7 Fund units

An unlimited number of Fund units may be issued pursuant to the declaration of trust. Fund units

are redeemable by the holder at a price equal to the lesser of 90% of the market price of a unit

during the 10 consecutive trading day period ending on the trading day immediately prior to the

date on which the units were surrendered for redemption and an amount based on the closing

price on the redemption date, subject to certain restrictions. Each holder of units of the Fund

participates pro rata in any distributions from the Fund. Income tax obligations related to the

distributions by the Fund are obligations of the unitholders.

As at December 31, 2008 and December 31, 2007, there are 5,356,667 units issued and outstanding.

Each unit is entitled to one vote at any meeting of unitholders.

During the year ended December 31, 2008, the Fund declared distributions of $1.355 per unit

(December 31, 2007 – $1.295 per unit). Subsequent to December 31, 2008, the Fund declared a

distribution of $0.115 per unit for the month of December 2008.

The distribution policy of the Fund is, at the discretion of the Trustees, to make distributions of

its available cash to the fullest extent possible, taking into account trends in revenue, earnings

and cash flows.

8 Earnings per Fund unit

Basic earnings per Fund unit is computed by dividing net earnings by the weighted average

number of Fund units outstanding during the period.

SIR has the right to convert the Class A GP units of the Partnership into units of the Fund. Diluted

earnings per Fund unit is calculated using the weighted average number of Fund units outstanding

adjusted to include the effect of the conversion of the Class A GP units of the Partnership into

Fund units.

The following table reconciles the basic and diluted weighted average number of Fund units

outstanding and basic and diluted earnings per Fund unit:

Basic earnings per

Fund unit

Adjustments for conversion of Class A

GP unitsDiluted earnings per

Fund unit

Net earnings for the year ended December 31, 2008 $7,495,336 $2,306,713 $9,802,049

Net earnings per Fund unit for the year ended December 31, 2008 $1.40 – $1.40

Weighted average number of Fund units outstanding for the year

ended December 31, 2008 5,356,667 1,648,544 7,005,211

Net earnings for the year ended December 31, 2007 $6,443,514 $1,771,106 $8,214,620

Net earnings per Fund unit for the year ended December 31, 2007 $1.20 – $1.20

Weighted average number of Fund units outstanding for the year

ended December 31, 2007 5,356,667 1,455,009 6,811,676

9 Related party transactions and balances

During the year ended December 31, 2008, the Fund received distribution income of $4,965,627

from the Partnership (2007 – $4,724,263). The Fund, indirectly through the Trust, is entitled to

receive a pro rata share of all residual distributions. The Fund’s distribution income is dependent

upon the revenue generated by SIR for the restaurants subject to the License and Royalty

Agreement. Under the terms of the License and Royalty Agreement, SIR may be required to pay

a Make-Whole Payment in respect of the reduction in revenue for restaurants closed during

a reporting period. SIR is not required to pay any Make-Whole Payment in respect of a closed

restaurant following the date on which the number of restaurants in the Royalty pool is equal

to or greater than 68 or following October 12, 2019, whichever occurs first. On January 1 of each

year (the adjustment date), following December 31, 2005, the restaurants subject to the License

and Royalty Agreement are adjusted for new restaurants opened for at least 60 days preceding

such adjustment date in the previous fiscal year. At each adjustment date, SIR will be entitled to

convert its Class B GP units of the Partnership to Class A GP units of the Partnership based on a

conversion formula defined in the License and Royalty Agreement.

On January 1 of each year, Class B GP units are converted into Class A GP units for new SIR

Restaurants added to the Royalty pool based on 80% of the initial estimated revenue and the

formula defined in the Partnership Agreement. Additional Class B GP units may be converted

to Class A GP units in respect of these new SIR Restaurants if actual revenues of the new SIR

Restaurants exceeded 80% of the initial estimated revenue and the formula defined in the

Partnership Agreement. Conversely, converted Class A GP units may be returned by SIR if the

actual revenues of the new SIR Restaurants are less than 80% of the initial estimated revenue.

In December of each year, an Additional Distribution will be payable to the Class B GP unitholders

provided that actual revenues of the new SIR Restaurants exceed 80% of the initial estimated

revenue or there will be a reduction in the distributions to the Class A GP unitholders if revenues

are less than 80% of the initial estimated revenue.

On January 1, 2008, three (2007 – three) new SIR Restaurants were added and two (2007 – one)

closed SIR Restaurants were removed from the Royalty Pooled Restaurants in accordance with

the License and Royalty Agreement. As consideration for the additional Royalty associated with

the addition of three (2007 – three) new restaurants on January 1, 2008, as well as the second

incremental adjustment for the three new SIR Restaurants added to the Royalty Pooled Restaurants

on January 1, 2007, SIR converted its Class B GP units into Class A GP units based on the formula

defined in the Partnership Agreement. The number of Class B GP units that SIR converted to

Class A GP units was reduced by an adjustment for the closure of two (2007 – one) SIR Restaurants

during the prior year. The net effect of these adjustments to the Royalty Pooled Restaurants was

that SIR converted 193,535 (2007 – 421,004) Class B GP units of the Partnership into 193,535

(2007 – 421,004) Class A GP units of the Partnership on January 1, 2008 at an estimated fair value

of $1,455,577 (2007 – $3,531,911).

On January 1, 2009, six new SIR Restaurants were added to the Royalty Pooled Restaurants

in accordance with the License and Royalty Agreement. As consideration for the additional

Royalty associated with the addition of six new restaurants on January 1, 2009, as well as the

second incremental adjustment for the three new SIR Restaurants added to the Royalty Pooled

Restaurants on January 1, 2008, SIR converted its Class B GP units into Class A GP units based on

the formula defined in the Partnership Agreement. The net effect of these adjustments to the

Royalty Pooled Restaurants was that SIR converted 1,076,871 Class B GP units of the Partnership

into 1,076,871 Class A GP units of the Partnership effective January 1, 2009 at an estimated fair

value of $5,972,477.

23

In addition, the revenues of the three (2007 – three) new SIR Restaurants added to the Royalty

pool on January 1, 2008 exceeded 80% of the Initial Adjustment’s estimated revenue and, as a

result, an Additional Distribution of $177,888 (2007 – $76,935) was declared in December 2008

and paid in cash to SIR the following January.

Class A GP units and Class B GP units are held by SIR.

The Partnership has entered into an arrangement with the Fund and the Trust whereby the

Partnership will provide or arrange for the provision of services required in the administration of

the Fund and the Trust. The Partnership has arranged for these services to be provided by SIR GP

Inc. in its capacity as the Managing General Partner, or SIR as General Partner, of the Partnership.

SIR, on behalf of SIR GP Inc., also provides services to the Partnership for its administration.

For the year ended December 31, 2008, the Partnership provided these services to the Fund and

the Trust for consideration of $24,000 (December 31, 2007 – $24,000), which was the amount of

consideration agreed to by the related parties.

Amounts due from (to) related parties consist of:

2008

$2007

$

SIR Royalty Limited Partnership

Distribution receivable 2,431,584 2,174,240

Advances payable (1,190,744) (1,214,178)

Amounts receivable from SIR Royalty Limited Partnership 1,240,840 960,062

SIR Corp.

Interest receivable 250,000 250,000

Advances payable (68,150) (38,709)

Amounts receivable from SIR Corp. 181,850 211,291

Amounts due from related parties – net 1,422,690 1,171,353

Amounts (due to) from related parties are non-interest bearing and due on demand. All advances

were conducted as part of the normal course of business operations.

10 Capital management

The Fund’s capital consists of units of the Fund as described in note 7. The objectives in managing

the capital are to safeguard the Fund’s ability to continue as a going concern, to provide an

adequate return to unitholders appropriate for the level of risk and to distribute excess cash to

the unitholders. The Fund has no third party debt or bank lines of credit. The Fund had no capital

expenditures during the year ended December 31, 2008 and by its nature is not expected to have

significant capital expenditures in the future.

In 2007, SIR entered into a credit agreement which required the Fund and the Partnership to

subordinate and postpone their claims against SIR to the claims of the bank, in the event of a

default (see note 4).

11 Net change in non-cash working capital items

Net change in non-cash working capital items comprises:

2008

$2007

$

Prepaid expenses and other assets (2,048) 9,087

Amounts due from related parties (251,337) (308,760)

Accounts payable and accrued liabilities 16,458 (3,870)

(236,927) (303,543)

12 Future income taxes

During the three-month period ended June 30, 2007, the proposed legislation relating to the

taxation of certain publicly traded income trusts commencing with taxation years ending on or

after 2011 became substantively enacted. Accordingly, the Fund recorded the future tax liability

of $797,000 related to the estimated difference between the accounting basis and tax basis of the

Fund’s investment in the Partnership which is expected to reverse after January 1, 2011.

13 Economic dependence

The Fund’s income is derived from interest income on the SIR loan and distributions from the

Partnership and accordingly, the Fund is economically dependent upon SIR.

Unitholder information

Corporate Head Office SIR Royalty Income Fund and SIR Corp. 5360 South Service Road, Suite 200 Burlington, Ontario L7L 5L1Tel: (905) 681-2997Fax: (905) 681-0394Email: [email protected]: www.sircorp.com

Board of TrusteesJohn McLaughlin, Chairman Peter Fowler Ken Fowler Peter Luit William Rogers

Transfer Agent Computershare Trust Company 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 Tel: (416) 263-9534

AuditorsPricewaterhouseCoopers LLP

Legal CounselStikeman Elliott LLP

Market Data Units of SIR Royalty Income Fund are listed on the Toronto Stock Exchange under the Symbol: SRV.UNUnits issued and outstanding as at December 31, 2008: 5,356,667

Investor ContactBruce Wigle The Equicom Group Inc. Tel: (416) 815-0700 ext. 228 Email: [email protected]

Alice DunningThe Equicom Group Inc. Tel: (416) 815-0700 ext. 255 Email: [email protected]

Annual General Meeting4:00 p.m., Wednesday, May 27, 2009Alice Fazooli’s®

294 Adelaide Street WestToronto, Ontario M5V 1P6

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sir royalty income fund 2008 strategy and progress report

Investor Relations

new jack astors restaurants

new restaurants

new jack astorsand

royalty pooled restaurants

exciting new concept

new canyon creek

network of restaurants

increased distributions