RBC Cap Mark best oen- The Keg 2009

8/7/2019 RBC Cap Mark best oen- The Keg 2009

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April 13, 2007 |COMMEN

The Keg Royalties Income FundKEG ROYALTIES INCOME FUND/THE

KEG.UN.T

125 WEEKS 26NOV04 - 12APR07HI-15APR05

HI/LO DIFF

111.586

-42.83%

L O- 15D EC 06 63 .79 2

CLOSE 73.068

KEG ROYALTIES INCOME FUND/THE Rel. S&P/TSX COMPOSITE INDEX

80.00

100.00

D J F M A M J J A S O N D J F M A M J J A S O N D J F M A2005 2006 2007

HI-3NOV06

LO/HI DIFF

14.800

44.25%

LO-21OCT05 10.260

CLOSE 13.340

KEG ROYALTIES INCOME FUND/THE

10.50

11.20

11.90

12.60

13.30

14.00

PEAK VOL.

VOLUME

774.4

52.1300

600

RBC Dominion Securities Inc.

Walter Spracklin, CFA (Analyst)(416) 842-7877 [email protected]

Dmitry Kushnir, CFA (Associate)(416) 842-7862 [email protected]

Price: $13.34 Price Target: $14.00

Implied Total Return 14.0%

52-Wk High: $14.80 52-Wk Low: $10.75

Units O/S (MM): 12.1Mkt Cap (MM): $162

Float (MM units): 9.7Conv Debs (MM): $0

Float ($MM): $129 Oth Debt (MM): $14

Debt/EV: 8.0%EV (MM): $176

Debt/06 EBITDA: 0.7x

Avg Daily Vol (10 day): 14,191

Strategic Unitholders: KRL - 20.1%

(FY Dec 31) 2005 2006 2007E 2008E

EBITDA (MM): $17.0 $18.9 $20.4 $21.7

EV/EBITDA: 10.4x 9.3x 8.6x 8.1x

Maint Capex (MM): $0.0 $0.0 $0.0 $0.0

FFO/Unit: $1.13 $1.20 $1.27 $1.32

AFFO/Unit: $1.13 $1.20 $1.27 $1.32

P/AFFO 11.8x 11.2x 10.5x 10.1x

Dist/Unit: $1.09 $1.12 $1.21 $1.26

Yield: 8.2% 8.4% 9.0% 9.4%

Payout Ratio: 97% 94% 95% 95%

Taxable Portion: 80% 85% n.a. n.a.

All values in $Cunless otherwise noted.

(TSX: KEG.UN)

OutperformAverage Risk

Sales Growth Momentum Continues in 2007;Positive Indicator for Restaurant Group

EventKEG reports Q1/07 same store sales growth (SSSG).

Investment Opinion

Strong SSSG continues despite difficult comparables. The Kegreported stronger than expected Q1 SSSG of 7.6% and substantially higherthan our forecast of 5.0% over the same period in the prior year. We

believe this strong result is particularly noteworthy given the difficult2006 comparable of 8.1%. Although full financials were not provided,

based on this growth rate we expect that FFO/unit in Q1/07 will come in at$0.33, in-line with our estimate.

Canadian strength drives sales growth. In discussions, managementmentioned that Q1 sales growth was driven mainly by Canadianoperations, with 8.1% SSSG in the quarter. Seeing as this result is on the

back of a difficult 9.4% SSSG in Canada in Q1/06, we are particularlypleased with this indication of the Kegs strong brand appeal as a leadingsteakhouse in Canada.

No F/X translation impact for the first time. This marks the first quartersince the inception of the Fund that The Kegs consolidated SSSG resultsare not negatively impacted by a declining US dollar. In fact, theUSD/CAD exchange rate was slightly positive compared to Q1 of 2006.In the past, Kegs consolidated results were negatively impacted comparedto the companys peers as the US dollar declined approximately 25% overa 5-year period.

New stores performing well. Management also alluded to the impressiveperformance of recently opened stores, which had a positive contributionto the overall results. We view continued strong performance by newrestaurants as an important factor in improving the visibility and

attractiveness of Kegs outlets to potential franchisees and a strong driverin Kegs restaurant development plans. At its current level of 95restaurants, we see Keg as having an opportunity to grow within Canada

by leveraging its impressive brand appeal.

Estimates. We are increasing our 2007E SSSG assumption to 5.7%, toreflect the better than expected growth in Q1. As a result, our AFFO/unitestimates for 2007E and 2008E increase slightly (by $0.01) to $1.27 and$1.32 respectively. Our distribution estimates remain unchanged.

Maintaining $14.00 target. On the back of impressive Q1/07 results, wereiterate our positive view of Kegs units based on our quality rankingof trademark royalty trusts, resulting in our 7.5% target yield for the units(See Exhibits 1 & 2 for more details). We are maintaining our Outperform,

Average Risk rating on KEG units.

Priced as of prior trading days marketclose, EST (unless otherwise stated).

For Required Disclosures, please seepage 7.


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RBC Capital Markets The Keg Royalties Income Fund

Same Store Sales Growth - Better Than Expected Q1 Despite Difficult Comparables

The Keg reported stronger than expected Q1 SSSG of 7.6% (See Exhibit 1) and substantially higher than our forecast of 5.0%over the same period in the prior year. This strong result is particularly noteworthy given the difficult 2006 comparable of 8.1%Although full financials were not provided, based on this growth rate we expect that FFO/unit in Q1/07 will come in at $0.33,in-line with our estimate.

Canadian strength drives sales growth. In discussions, management mentioned that Q1 sales growth was driven mainly byCanadian operations, with 8.1% SSSG in the quarter. Seeing as this result is on the back of a difficult 9.4% SSSG in Canada inQ1/06, we are particularly pleased with this indication of the Kegs strong brand appeal as a leading steakhouse in Canada.

No F/X translation impact for the first time. This marks the first quarter since the inception of the Fund that The Kegsconsolidated SSSG results are not negatively impacted by a declining US dollar. In fact, the USD/CAD exchange rate wasslightly positive compared to Q1 of 2006. In the past, Kegs consolidated results were negatively impacted compared to thecompanys peers as the US dollar declined approximately 25% over a 5-year period.

New stores performing well. Management also alluded to the impressive performance of recently opened stores, which had apositive contribution to the overall results. We view continued strong performance by new restaurants as an important factor inimproving the visibility and attractiveness of Kegs outlets to potential franchisees and a strong driver in Kegs restaurantdevelopment plans. At its current level of 95 restaurants, we see Keg as having an opportunity to grow within Canada byleveraging its impressive brand appeal.

Exhibit 1: Same Store Sales Growth

-2.4%

7.6%6.9%

3.1%

1.1%

4.7%

6.3%6.5%

4.3%

7.9%

4.0%

5.7%5.0%5.0%5.0%

-4%

-2%

0%

2%

4%

6%

8%

10%

1998

1999

2000

2001

2002

2003

2004

2005

2006

Q1/07

Q2/07E

Q3/07E

Q4/07E

2007E

2008E

Source: Company reports; RBC Capital Markets estimates

Maintaining OutperformOur $14.00/unit target price (unchanged) is derived by assigning KEG a target yield of 7.5% to our 2011E distribution(discounted back and added to the present value of interim distributions received). Based on the estimated all-in return of14.0%, we are maintaining our Outperform, Average risk recommendation on KEG units. The target yield used is one of thelowest among the trademark royalty trust group, reflective of the companys high score on quality, which we explain below.

Valuation methodology. We value restaurant trusts based on a target-yield approach due to the flow-through nature of theTrademark Royalty Trust (TRT). The target yield is based on a spread to our benchmark Canada 10-year bond. Finally, thespread is chosen based on the composite score for quality, which is shown in Exhibit 2. A lower spread is assigned to the TRTwith a higher composite score. The target yield we derive on this basis is shown in Exhibit 3.

The new federal tax that will apply to trusts in 2011 has created a twist on the methodology to our valuation. Instead of applyingthe target yield described above to next years distribution, we apply it to our estimated distribution in 2011 after the tax istaken out. We then take the present value of that target price and add the present value of (non-taxed) distributions in the interim

period to derive our one-year target price for each TRT, which we provide in Exhibit 3. Our rating is then based on the totalestimated return to our target price (including distributions).

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KEG receives one of the highest scores on quality and is therefore assigned the second lowest target yield. As shown inExhibit 2, KEG receives high marks across most of the criteria that we use in determining quality. KEGs composite score of3.8 is the second highest in the group, resulting in our assigning KEG a low target yield of 7.5% (as shown in Exhibit 3). Anexplanation of KEGs score for each criterion is as follows:

SSSG trend: KEG receives high marks for its SSSG trend, reflective of its performance in the most recent years, andmoderated only by the negative impact the declining US dollar exchange rate had on it sales. SSSG is our most importantcriteria (with a 35% weighting). The current Q1/07 SSSG of 7.6% reaffirms the rationale behind KEGs high score in thiscriterion.

Float/Liquidity: At a market cap of $162MM, KEG ranks slightly above the group average of $157MM (Exhibit 4).

Restaurant development: KEG vended in 9 net new restaurants over the past two years, and is around the industryaverage at this pace. We consider a growing restaurant base to be indicative of high franchisee interest in the conceptand/or profitability of restaurant operations.

Number of restaurants: KEG receives low marks in this criterion as its 95 restaurants in the royalty pool place it secondlowest in the group and well below the average of close to 300 for the other TRTs (Exhibit 5). We consider this a negativedue to higher concentration risk.

Level of competition: KEG receives the highest possible marks reflecting its leading Canadian steakhouse position in theindustry. This grants the company increased flexibility in terms of pricing power and product development.

Geographic diversification: KEG receives the highest marks as a result of its well-diversified restaurant base, withexposure to Western and Eastern Canada, as well as the US.

Brand appeal: Top mark for KEG on brand appeal as the company is well focused on a single concept operation andcontinues to grow brand awareness and image among its increasing customer base.

Debt: KEG receives high marks reflecting its low use of debt.

OpCo viability: KEGs relatively low number of restaurants (higher concentration risk) is offset by its profitableoperations and a geographically well diversified restaurant base, resulting in average marks for OpCo viability.

Extent of franchising: Keg receives average marks on franchising, as the company uses a half and half approach. Wegenerally view highly franchised operations as a positive due to being able to shift some of the costs onto the franchisees.

Exhibit 2: Measuring TRT Quality*

SSSG Float Restaurant # of Level of Geographic Brand Opco Extent of Composite

Trend Liquidity Development Rest. Competition Diversification Appeal Debt Viability Franchising Score Rank

Weighting = 35% 12% 10% 10% 8% 7% 5% 5% 5% 3% 100%

AW 3.5 4 4 5 1 4 3 4 3 5 3.6 3

BPF 5 5 5 3 2 4 3 4 5 5 4.3 1

EAT 1 1 1 2 2 2 1 5 2 5 1.6 7

KEG 4 4 3 2 5 5 5 4 3 3 3.8 2

PDM 2 2 3 3 3 3 1 1 3 5 2.4 6

PZA 3 5 4 4 2 1 4 3 4 5 3.4 4

SCU 3.5 2 2 3 1 4 2 3 3 5 2.9 5

SRV 1.5 1 2 1 3 1 1 4 2 1 1.6 8

* Score: 1 = Poor 5= ExcellentSource: RBC Capital Markets Research

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Exhibit 3: Target Price Derivation and Relative Ranking

Quality 10-Year Target Distributions Target Market Estimated

Score 1 Canada Spread Yield 2008 2009 2010 2011 Price Price Return Rating Risk

AW 3.6 4.0% 3.5% 7.5% 1.34 1.41 1.46 1.02 14.50 13.40 18.0% OP Avg

BPF 4.3 4.0% 3.0% 7.0% 1.43 1.48 1.53 1.07 16.00 15.00 15.7% OP Avg

EAT 1.6 4.0% 8.5% 12.5% 1.13 1.13 1.13 0.74 6.50 7.61 0.2% U AAKEG 3.8 4.0% 3.5% 7.5% 1.26 1.35 1.42 1.00 14.00 13.34 14.0% OP Avg

PDM 2.4 4.0% 7.0% 11.0% 1.58 1.64 1.69 1.13 11.00 10.06 24.8% OP AA

PZA 3.4 4.0% 4.5% 8.5% 0.92 0.98 1.02 0.74 9.00 8.91 11.0% OP Avg

QSR n.a. 4.0% 7.5% 11.5% 1.33 1.32 1.33 1.04 9.50 11.61 -6.8% U AA

SCU 2.9 4.0% 5.5% 9.5% 1.13 1.17 1.21 0.85 9.50 9.95 6.4% SP Avg

SRV 1.6 4.0% 8.5% 12.5% 1.31 1.33 1.36 0.93 8.00 9.26 0.2% U AA

Average: 9.7%

Source: RBC Capital Markets estimates

Exhibit 4: Restaurant Trust Comparables

Distributions Y/Y Dist. Growth Yield (%)

2004 2005 curr. 2006 2007E 2008E 2004 2005 2006 2007E 2008E curr. 2006 2007E 2008E

Restaurant Trusts

A&W Revenue Royalties Income Fund 4 1.08 1.08 1.20 1.16 1.32 1.34 0.0% 0.0% 7.5% 13.9% 2.1% 9.0 8.6 9.8 10.0

Boston Pizza Royalties Income Fund 1.11 1.19 1.33 1.28 1.36 1.43 8.6% 8.0% 6.9% 6.4% 5.3% 8.9 8.5 9.1 9.5

The Keg Royalties Income Fund 1.08 1.09 1.18 1.12 1.21 1.26 0.0% 1.1% 2.9% 7.5% 4.4% 8.8 8.4 9.0 9.4

PDM Royalties Income Fund 0.62 1.39 1.44 1.44 1.56 1.58 n/a n/a 3.7% 8.3% 1.3% 14.3 14.3 15.5 15.7

Prime Restaurants Royalty Income Fund 1.13 1.13 1.13 1.13 1.13 1.13 0.0% 0.0% 0.0% 0.0% 0.0% 14.8 14.8 14.8 14.8

Priszm Canadian Income Fund3

1.22 1.26 1.28 1.32 1.28 1.28 n/a 3.7% 5.0% -3.2% 0.0% 11.0 11.4 11.0 11.0

Pizza Pizza Royalty Income Fund n/a n/a 0.88 0.84 0.89 0.92 n/a n/a n/a 5.5% 3.4% 9.8 9.4 10.0 10.3

Second Cup Royalty Income Fund n/a 1.00 1.09 1.03 1.08 1.13 n/a n/a 3.0% 5.1% 4.6% 11.0 10.4 10.9 11.4

SIR Royalty Income Fund n/a 1.20 1.26 1.24 1.28 1.31 n/a n/a 2.9% 3.2% 2.4% 13.6 13.3 13.8 14.1

Average 11.2 11.0 11.5 11.8

S/O Float Mkt Cap Float 3-yr DI RBCCM RESEARCH

Symbol Price (MM units) ($MM) ($MM) Grth (%) Target ($) Rec1

Risk2

Restaurant Trusts

A&W Revenue Royalties Income Fund AW.un 13.40 13.4 8.3 180.1 111.8 2.3 14.50 OP Avg

Boston Pizza Royalties Income Fund BPF.un 15.00 16.4 12.8 245.6 191.3 7.8 16.00 OP Avg

The Keg Royalties Income Fund KEG.un 13.34 12.1 9.7 162.0 129.4 1.3 14.00 OP Avg

PDM Royalties Income Fund PDM.un 10.06 8.4 7.3 84.8 73.4 n/a 11.00 OP AA

Prime Restaurants Royalty Income Fund EAT.un 7.61 9.3 6.1 70.8 46.5 0.0 6.50 U AA

Priszm Canadian Income Fund QSR.un 11.61 25.8 15.6 299.8 180.5 4.4 9.50 U AA

Pizza Pizza Royalty Income Fund PZA.un 8.91 23.5 18.0 209.0 160.0 n/a 9.00 OP Avg

Second Cup Royalty Income Fund SCU.un 9.95 9.7 9.7 96.6 96.6 n/a 9.50 SP Avg

SIR Royalty Income Fund SRV.un 9.26 6.8 5.4 63.1 49.6 n/a 8.00 U AA

Average 156.8 115.4 3.2

1 Investment ratings: TP (Top Pick); O (Outperform); SP (Sector Perform); U (Underperform); n.r. (not rated)

2 Risk ratings: Avg (Average); AA (Above Average); S (Speculative)

3 Priszm's 2006 Distribution includes a $0.06/unit special dividend

4 A&W 2007 Distribution includes a $0.08/unit special dividend


Company ProfileThe Keg Royalty Income Fund was launched in May of 2002 with the purpose of providing unit holders with royalty incomefrom top line revenues of The Keg restaurants. Each restaurant is designed to provide diners with a casual atmosphere andquality food at a reasonable price. The Keg has grown to be Canadas leading steakhouse in the casual dining restaurant sector

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and currently has 95 restaurants operating in Canada and the United States. Operations are controlled by Keg Restaurants Ltd.in Canada and by subsidiaries of KRL in the U.S.

Exhibit 5: Restaurant Key Metrics Summary

AW BPF EAT KEG PDM PZA8

QSR SCU SRV9

Trust Type Royalty Royalty Royalty Royalty Royalty Royalty Operating Royalty Royalty

Royalty drivers:

Royalty rate 3% 4% 3.25% 4%4.9%10

6% n.a. 6.5% 6%Sales inclusion 100% 80% 100% 100% 100% 100% n.a. 100% 100%

Vend-in discount 7.5% 7.5% 7.5% 7.5% 7.5%2

7.5% n.a. 7.5% 7.5%

Royalty pool restaurant units (2007) 660 266 156 95 261 531 4867

351 38

Royalty pool sales (2006E) ($000's) 598,551 484,684 326,900 372,541 284,484 353,138 n.d. 189,287 149,481

Franchised locations 98% 99% 94% 55% 97% 97% n.a. 93%5

0%

5-year system sales growth 7.0% 18.3% 5.5% 8.8% 9.4% 5.1% 1.0% 0.0% 2.3%

Avg. revenue per outlet (2006) ($000's) 915 2,145 2,096 4,094 1,116 706 1,045 538 4,152

Average cheque/person ($) 6.00 15.94 17.65 28.00 13.15 n.a. 10.30 n.a. 20.004

Same Restaurant Sales Growth

4 year average (2003-2006) 4.6% 6.8% -1.2% 2.1% 1.6% 3.8% 1.3% 3.9% 0.9%

2003 1.8% 4.1% -3.8% -2.4% -0.6% -0.7% 2.2% -0.7% -1.4%2004 3.9% 6.8% -1.6% 1.1% 3.6% 5.9% 0.5% 5.8% -3.1%

2005 5.2% 8.0% -0.8% 3.1% 2.1% 5.8% -0.2% 4.6% 2.5%

2006 7.4% 8.4% 1.5% 6.9% 1.4% 4.5% 2.7% 6.2% 5.9%

2007E 4.0% 6.0% 0.0% 5.7% 2.2% 3.5% 2.5% 5.0% 3.5%

2008E 3.0% 5.0% 0.0% 4.0% 2.1% 3.0% 2.5% 4.0% 2.5%

Geographic distribution of restaurants

Western Canada 60% 71% 13% 45% 1% 2% 28% 29% 0%

Central Canada 32% 26% 83% 35% 61% 96% 62% 68% 100%

Atlantic Canada 8% 4% 4% 2% 37% 2% 10% 3% 0%

United States 0% 0% 0% 18% 0% 0% 0% 0% 0%

Minority ownership 37.9% 20.0% 34.3% 20.1% 13.4% 23.5% 39.8% 15.5% 21.4%

Cash shortfall ($MM) - - 0.980 - n.d. n.d. - n.d. -

Subordination: Yes None Yes Yes None Yes Yes Yes Yes

% 37.9% n.a. 34.3% 20.1% n.a. 23.5% 20.0% 15.5% 21.4%

Base rate n.a. n.a. n.a. n.a. n.a. $0.80 $1.20 n.a. $1.20

Earliest subordination ending Perpetual n.a. Perpetual Perpetual n.a. 30-Jun-07 31-Dec-08 Perpetual 28-Aug-07

Arrears Perpetual n.a. Perpetual Perpetual n.a. 12 months 12 months Perpetual 12 months

1 Royalty pool excludes alcohol and tobacco sales 6 Royalty pool sales for the year ended 2005

2 Subject to adjustment of the Class B Exchange Multiplier 7 Total number of restaurants operated as of January 2006

3 For the period from 2001 to Q2/06 8 For the 2005 fiscal year ended October 2, 2005

4 Average cheque for Jack Astor's, which accounts for 23 of 38 restaurants in the 9 For year ended August 30

5

Represents the percentage of all cafes in the system that are franchised10

Pizza Delight and Mikes = 4%; Scores and Baton Rouge = 6%


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Exhibit 6: Financial Summary

THE KEG ROYALTIES INCOME FUND 2005 Q1/06 Q2/06 Q3/06 Q4/06 2006 Q1/07E Q2/07E Q3/07E Q4/07E 2007E 2008E

($000 unless otherwise indicated)

KEY ASSUMPTIONS

Total Outlets (During Year - Royalty Poo 86 91 91 91 91 91 95 95 95 95 95 98

Revenue Per Royalty Pool Outlet 3,787 1,032 970 1,007 1,084 4,094 1,107 1,032 1,073 1,156 4,370 4,570

Same Store Sales Growth 3.1% 8.1% 3.7% 7.3% 9.6% 6.9% 7.6% 5.0% 5.0% 5.0% 5.7% 4.0%

Total System Sales - Royalty Pool Outlet 325,717 93,957 88,300 91,600 98,684 372,541 105,200 98,067 101,978 109,862 415,107 447,844Funds flow

Royalty income 13,138 3,761 3,564 3,734 4,038 15,097 4,208 3,923 4,079 4,394 16,604 17,914

Interest income 4,281 1,056 1,067 1,081 1,083 4,287 1,070 1,070 1,070 1,070 4,281 4,281

Total revenue 17,419 4,817 4,631 4,815 5,121 19,384 5,278 4,993 5,149 5,465 20,885 22,194

General and administrative 441 138 120 102 105 465 141 122 104 107 474 484

Interest 687 220 220 220 220 880 200 200 200 200 798 770

Other 6,965 1,823 1,726 1,880 1,876 7,305 1,824 1,846 1,853 1,877 7,399 8,137

Funds flow from operations 9,326 2,636 2,565 2,613 2,920 10,734 3,114 2,825 2,992 3,281 12,213 12,804

Per Unit 1.13 0.30 0.28 0.29 0.32 1.20 0.33 0.29 0.31 0.34 1.27 1.32

Capital Expenditures - Purchases of N (4,761) (8,927) - - - (8,927) (7,749) - - - (7,749) (5,658)

Capital Expenditures - Other - - - - - - - - - - - -

Total Capex (4,761) (8,927) - - - (8,927) (7,749) - - - (7,749) (5,658)

Net Equity Proceeds 4,761 8,927 - - - 8,927 7,749 - - - 7,749 5,658

Net Debt Issue - - - - - - - - - - - -NWC and Other (323) (262) (20) (51) (323) (656) (446) 41 (97) (300) (802) (702)

Distributable income 15,968 4,197 4,271 4,442 4,473 17,383 3,422 3,642 3,679 3,788 14,530 15,958

Distributable income post non-controllin 9,003 2,374 2,545 2,562 2,597 10,078 2,735 2,911 2,940 3,027 11,613 12,226

Distributable income per Fund Unit 1.09 0.27 0.28 0.28 0.29 1.12 0.29 0.30 0.30 0.31 1.21 1.26

9,003 2,374 2,545 2,562 2,597 10,078 2,668 2,867 2,895 2,981 11,411 12,102

Units Outstanding (MM)

Public Units 8,404 9,054 9,054 9,054 9,054 9,054 9,704 9,704 9,704 9,704 9,704 9,704

% of Total 80.0% 78.6% 78.6% 78.6% 78.6% 78.6% 79.9% 79.9% 79.9% 79.9% 79.9% 76.6%

Total Minority Interest Units (Effective) 2,103 2,470 2,470 2,470 2,470 2,470 2,437 2,437 2,437 2,437 2,437 2,961

% of Total 20.0% 21.4% 21.4% 21.4% 21.4% 21.4% 20.1% 20.1% 20.1% 20.1% 20.1% 23.4%

Total Units (end of period) 10,506 11,524 11,524 11,524 11,524 11,524 12,140 12,140 12,140 12,140 12,140 12,665


Exhibit 7: Price Target Justifications and Impediments

Company(Symbol) Valuation Target Price Impediments

A&W RevenueRoyaltiesIncome Fund(AW.UN)

We are assigning a target yield of 7.5% to our 2011Edistribution (discounted back and added to the present valueof interim distributions). This is well below the averagetarget yield of just under 10% - reflecting the A&W's highmarks in our quality assessment criteria. We rate AW unitsOutperform, Average risk.

Potential impediments include further changes inthe proposed tax treatment for trust structures,lower disposable income due to slower economicgrowth, health concerns, decreased tourism, branddisassociation with baby boomers, trends awayfrom the QSR segment and external shocks.

Boston PizzaRoyalties

Income Fund(BPF.UN)

Our target price is derived through applying our 7.0% target-yield to our estimated distribution in 2011 - after the tax is

taken out. We then calculate the present value of that targetprice and of (non-taxed) distributions in the interim period toderive our one-year target price for BPF. We rate BPF unitsOutperform, Average risk.

Investment risks include further changes in theproposed tax treatment for trust structures, lower

disposable income associated with slower economicgrowth, decreased tourism, health concerns,potential execution risk associated with theexpansion strategy and variation in bar to foodsales.

The KegRoyaltiesIncome Fund(KEG.UN)

Our target price is derived through applying our 7.5% target-yield to our estimated distribution in 2011 - after the tax istaken out. We then calculate the present value of that targetprice and of (non-taxed) distributions in the interim period toderive our one-year target price for KEG. We rate KEG unitsOutperform, Average Risk

Impediments include further changes in theproposed tax treatment for trust structures, slowereconomic growth, decreased tourism, reducedcustomer traffic, loss of unique competitiveposition, exchange rate risk and reduced sales dueto outbreaks, such as BSE.

PDM RoyaltiesIncome Fund

We assign PDM an above average target yield of 11%(reflective of PDMs relative ranking among the othertrademark royalty trusts) to our 2011E distribution

Risks include further changes in the proposed taxtreatment for trust structures, slower economicgrowth, inability to generate higher SSSG at

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(PDM.UN) (discounted back and added to the present value of interimdistributions), and we derive a one-year target price whichimplies the highest estimated all-in return in our coverageuniverse. We rank PDM units Outperform, Above Average risk.

recently acquired brands, continuedunderperformance and Pizza Delight and Mikes, anddifficulties related to managing a portfolio ofbrands.

PrimeRestaurantsRoyalty IncomeFund (EAT.UN)

We derive our target price by applying a 12.50% target yieldto our 2011 estimated after-tax distribution. We thencalculate the present value of that target price and of (non-taxed) distributions in the interim period to derive our one-year target price for EAT. We rate Prime units Underperform,Above Average Risk.

Potential risks include further changes in theproposed tax treatment for trust structures, slowereconomic growth; decreased tourism, reducedcustomer traffic; continued under performance byEast Side Mario's; and reduced sales due tooutbreaks such as H7 bird flu and BSE.

Priszm CanadianIncome Fund(QSR.UN)

Our target price is derived by applying our 11.5% target yieldto our estimated 2011E after-tax distribution, discountedback and added to the present value of interim distributions.We rate QSR units Underperform, Above Average risk.

Impediments include further changes in theproposed tax treatment for trust structures, lowerdisposable income, decreased tourism, a trendaway from the QSR segment by health consciousconsumers, loss of consumer connection with KFCbrands and reduced sales due to H7 bird flu.

Pizza PizzaRoyalty IncomeFund (PZA.UN)

PZA ranks in the top half among the other TRTs for quality -based on its sizeable royalty pool, higher float and strongbrand appeal. As a result we assign a target yield (of 8.5%) toour 2011E distribution (discounted back and added to thepresent value of interim distributions received). We rate PZAunits Outperform, Average risk.

Potential risks include further changes in theproposed tax treatment for trust structures, slowereconomic growth, resulting in lower disposableincome, decreased tourism, Ontario-basedeconomic shocks, and a shift in consumer attitudesaway from the QSR food segment.

Second CupRoyalty Income

Fund (SCU.UN)

We are assigning a target yield of 9.50% to our 2011Edistribution (discounted back and added to the present value

of interim distributions received). We rate SCU units SectorPerform, Average risk.

Impediments include higher coffee prices, lowerdisposable income associated with slower economic

growth, decreased tourism leading to lower sales,increased competition, failure to develop newproducts to complement coffee sales.

SIR RoyaltyIncome Fund(SRV.UN)

SRV ranks lowest among the other TRTs by quality and we areassigning a target yield of 12.5% to our 2011E distribution(discounted back and added to the present value of interimdistributions received. We rate SRV units Underperform,Above Average risk.

Potential investment risks include further changesin the proposed tax treatment for trust structures;slower economic growth; failure to execute onstated expansion strategy; reduced tourism; andOntario specific economic shocks.

Required DisclosuresThis product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets choosesto provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,clients should refer to http://www7.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?EntityID=1 or send a requestto RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, OntarioM5J 2W7.

Distribution of Ratings, FirmwideFor purposes of disclosing ratings distributions, regulatory rules require member firms to assign all rated stocks to one of three

rating categoriesBuy, Hold/Neutral, or Sellregardless of a firm's own rating categories. Although RBC Capital Markets' stockratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell,respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above).

Analyst CertificationAll of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all ofthe subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

Dissemination of ResearchRBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients, havingregard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary websites

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Important DisclosuresThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors, includingtotal revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have beengenerated by investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Additional DisclosuresRBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital MarketCorporation, Royal Bank of Canada Europe Limited and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBCCapital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, itsaffiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets

judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this repor

constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been preparedwithout regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not besuitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. Thisreport is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteedand a loss of original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, whichincludes profits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own lawregulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securitiesdiscussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act a

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wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC CapitalMarkets Corporation.To Canadian Residents:

This publication has been approved by RBC Dominion Securities Inc. Any Canadian recipient of this report that is not a Designated Institution in Ontario, anAccredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishesfurther information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC DominionSecurities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.

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