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Recommendation Changes

The Keg Royalties Income Fund - Price Target Update

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The Keg is positioned towards the higher end of the casual dining restaurant segment, focusing on customers looking for high quality steak and prime rib at a reasonable price. Vancouver-based KRL is the leading operator and franchisor of steakhouse restaurants in Canada and has a substantial presence in select regional markets in the United States. KRL continues to operate The Keg restaurant system and expand that system through the addition of both corporate and franchised Keg steakhouses with revenues split approximately equally as of Mar-31-2017and 15% of revenues from the US. As of Mar-31-2017, the Royalty Pool includes 100 Keg restaurants, 43 of which are owned and operated by KRL and its subsidiaries, (33 in Canada and 10 in the United Sates), and 57 Keg restaurants which are owned and operated by Keg franchisees (all of which are in Canada). As of Mar-31-2017, one franchise restaurant in Canada is not included in the Royalty Pool, as it opened subsequent to Oct-2-2016.

The Keg brand has been in existence for over thirty-eight years. The Keg is connected to Hy's of Canada thru a common owner and executive estimated to own 23%. They employ 9,500 with annual system sales forecast to exceed $650M in 2017. Corporate market expansion in the US is focused on three target markets, specifically: Phoenix, Arizona; Denver, Colorado; and Dallas, Texas.

The Keg Rights LP owns rights to certain trademarks and other related intellectual property used by franchised and corporately owned restaurants by the Keg Restaurants Ltd. (KRL). The Keg Royalties Income Fund, through the Partnership, earns royalty income equal to 4% of gross sales of Keg restaurants in the Royalty Pool. The amount is calculated as the royalty income, less the Partnership's operating expenses, less earnings attributable to KRL. KRL pays a royalty equal to 4% of the sales of all Keg restaurants in the royalty pool to the Keg Rights LP who in turn pays interest on a $57M, 7.5% loan from the income fund. The interest on the loan and the fund's approximate 75% interest in the Keg Rights LP provide the cash flow to pay distributions. The funds only function is to flow thru the income received. The fund retains the income trust structure, with distributions being primarily taxed as dividends. The ability of KRL to pay the royalty, then make-whole payments on closed restaurants, and interest on the loan from the income fund depends on the sales and profitability at KRL.

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