Maple Leaf Memo
Editors’ Note: The recent selloff precipitated by a 9 percent decline in China’s A share market provided still more anecdotal evidence of that country’s increasing importance to global financial markets. Yiannis Mostrous, editor of The Silk Road Investor, is as focused an observer of Asia, and the global economy at large, as we know.
Yiannis is also co-author, along with Ivan Martchev and Elliott Gue, of The Silk Road to Riches: How You Can Profit by Investing in Asia’s Newfound Prosperity, which addresses the long-term story of China’s and Asia’s rise to global economic and financial prominence.
That region will soon be the world’s growth engine and will therefore draw on and impact resource economies–just like Canada’s. Prime Minister Stephen Harper and Finance Minister Jim Flaherty have intensified efforts to boost trade with China, but even without direct involvement, Canada will be affected because of Asia’s impact on the supply/demand profile for energy resources.
Below is an excerpt from the introduction to The Silk Road to Riches, a brief summation of the book’s global themes. Enjoy.
Preparing For Change
A vast network of ancient trade routes, the Silk Road connected Asia with the West. From the Chinese metropolis of Xian to the shores of the Indian Ocean and the Mediterranean Sea, goods and ideas traveled on this road, enhancing the lives of millions of people.
In May of 2005, during the annual meeting of the Asian Development Bank, finance ministers from thirteen Asian nations moved a step closer to creating an Asian monetary fund and establishing a Silk Road for a new era. Although building this road is a long process, the fact is Asian countries (including Japan) are pushing for more regional financial integration.
The reasons for this common desire are twofold. Asian governments, first, were not satisfied with the International Monetary Fund’s response during the Asian financial crisis of 1997 and, second, the region’s emergence as an important component of global growth is gaining momentum.
[The Silk Road to Riches] has at its core an economic change premise: Economic leadership changes over time, and the world is now entering a period of such change. As this period advances, Asia will emerge as the leader in global economic growth, while the West will enter a more subdued growth cycle.
A big part of the investment community dismisses this argument as nonsense. Very few contemplate imminent change at a time when America’s economic and military powers seem boundless. Yet, historically, these are the times when change begins, when expectations are low. As myriad arguments are floated as to why the status quo will persist, those who fall for simplicity will be caught off guard.
Many skeptics will demand more concrete data in support of our conclusions and the underlying assumption upon which such are based. We do not contest the rationality of this point of view, but the reality of structural change is that its evolution begins before hard data becomes available. Far-sighted investors must be ready to explore opportunities before indisputable proof emerges. Once it does, everyone will–or will already have–jumped, making it a more difficult, less profitable game. The old axiom that whatever everyone knows is not necessarily worth knowing is another underpinning of this book.
The main challenge, as with any macro-related investment decision, is to assess the impact of Asia’s rise on the global economy and the region’s role in the new world. Making the right call regarding India’s and China’s future will be critical for successful investing. China’s size and rapid development has taken the world by surprise, making it very difficult for people to approach the problem with clear minds.
Big corporations have made Asia the center of their respective production operations. Although lower costs were initially the reason, the use of technology and the introduction of other Western business practices have been instrumental in increasing the productivity of the average employee. True productivity growth started from a lower level and has combined with a low cost base to form an integral part for the multinational corporation’s production line. And as long as cutthroat competition remains the name of the game, there is nothing anyone can do to stop the trend.
As the productivity gap between the West and the East has tightened, the wealth gap, too, has begun to disappear, albeit at a much slower pace. In the meantime expect an array of political moves in America and Europe designed to protect their workers. The process might be slowed, but the outcome is inevitable: The integration of China and India into the capitalistic system and their resulting claim for a bigger piece of the economic pie.
And here is the big question: Does Asia need the West more than the West needs Asia or vice versa? The answer is that both need each other.
The economic dynamism Asia now projects will eventually lead to a structural rise in domestic demand–this will allow Asia to become more independent. Not long after the British left the Colonies, the New World not only outgrew its reliance on the UK, the Old Country became America’s dependants. Asian development will trace the same arc. And as with the young United States, certain parts of Asia will grow not only economically, but politically and militarily as well.
On January 28, 2002, Barron’s dedicated its cover story to hedge fund manager and legendary short-seller James Chanos because of his famous call on Enron, issued when the now-defunct energy trading giant was still riding high. In that interview Chanos identified Tyco as the next problem. He was proven right. After the story ran, Barron’s received letters from angry Tyco stockholders demonizing Chanos in particular and short sellers in general as enemies of America’s economy.
On a different level, widely read financial newsletters that had been recommending Tyco to their subscribers were reprinting the company’s investor relations’ press releases in an effort to persuade individual investors that there was no reason to worry. Such is the passion with which investors defend their actions.
Although such actions do, in retrospect, look silly, at the time people believed that the sad arguments put forward by the company to defend its actions were not only true but also justified holding Tyco shares.
The foregoing illustrates that investors are notoriously slow in realizing and accepting change. Throughout history this shortcoming has cost people a lot of money, and will continue to do so. Making an effort to understand and (occasionally) anticipate social, economic, and political changes is one of the most important qualities of a successful long-term investor. Not everyone will draw the same conclusions after examining a particular set of data, but different interpretation is a fact of life in the investment world.
[The Silk Road to Riches] is best characterized as a guide for the long-term investor. If the ideas and arguments have merit, those who heed them will realize great financial gains. As the story unfolds, fear and hype, booms and busts, and creation and destruction of wealth will mark what will be an explosive transformation altering the global economy–and our lives–forever.
To learn more about The Silk Road To Riches, click here.
The preceding is excerpted from The Silk Road To Riches: How You Can Profit By Investing In Asia’s Newfound Prosperity, published by Financial Times/ Prentice Hall. The Silk Road to Riches is available at Amazon.com and local bookstores.
Speaking Gigs
There’s more to Atlanta than peaches. Join me and Personal Finance Editor Neil George and Associate Editor Elliott Gue at the WealthExpo, March 16-18, at the Cobb Galleria Center in Atlanta. To register and learn more, go to www.thewealthexpo.com. Don’t forget to tell them I sent you.
Take it to the mountains–that’s what we say. Join me, Neil and Elliott at the 17th Annual Atlanta Investment Conference, April 19-21, at Chota Falls outside Atlanta. Go to www.aicatchota.com or call 678-778-8136 to register. Call and ask about an early-bird deal. Don’t forget to tell them I sent you.
The RoundupTrusts continue to report, and we’ll continue to offer the highlights.
Oil & Gas Trusts
Canetic Resources (CNE.UN, NYSE: CNE) generated funds from operations (FFO) of CD750.1 million (CD3.64 per basic unit) for 2006 compared to CD360.5 million (CD4.04 per basic unit) in 2005, an increase driven by acquisitions. Fourth quarter FFO totaled CD170.1 million (76 cents Canadian per unit), an increase of 60 percent from CD106.5 million (CD1.16 per unit) realized in the same period last year. Net earnings increased 239 percent to CD223.1 million in 2006 compared to CD65.8 million in 2005.
On a per unit basis net earnings increased 46 percent to CD1.08 per basic unit compared from 74 cents Canadian in 2005. Canetic distributed CD2.76 per unit (23 cents Canadian per unit per month) in 2006 compared with CD2.34 per unit (19.5 cents Canadian per unit per month) in 2005. Canetic boosted its annual production average 84 percent to approximately 74,409 barrels of oil equivalent (BOE) per day for 2006.
Production in the fourth quarter totaled 80,276 BOE per day compared to 74,475 BOE per day in the third quarter of 2006. Canetic replaced 237 percent of 2006 production on a proved plus probable basis at a finding, development and acquisition (FD&A) cost of CD23.30 per BOE including future development capital. The trust spent less than 50 percent of FFO to replace 76 percent of 2006 production via its internal development program, at a cost of CD19.21 per BOE.
Proved plus probable reserves increased 16 percent to 275.6 million BOE from 238.4 million BOE. Proved reserves increased 12 percent to 192.2 million BOE. Canetic’s Reserve Life Index (RLI) increased 1.0 year to 9.7 years on a proved plus probable basis and 0.5 years to 6.8 years on a total proved basis. Sell Canetic Resources.
Crescent Point Energy Trust (CPG.UN, CPGCF) reported a 79 percent drop in fourth quarter net income to CD6.91 million from CD33.45 million during the same period in 2005 as falling natural gas prices offset company-record average daily production. Earnings for the quarter ended December 31 fell to 10 cents Canadian per unit from 87 cents Canadian. Revenue hit CD100.96 million, up from CD75.9 million as production reached 21,369 BOE per day.
Crescent Point completed 12 acquisitions that paved the way for the production gains in 2006. For the full year, net income rose to CD68.9 million from CD38.5 million on revenue of CD427.5 million, up from CD251.1 million. Crescent Point’s 2006 FD&A, including true development costs, came in at CD16.36 per proved BOE of reserves. The five-year rolling average for FD&A is CD12.40 per BOE.
Crescent Point replaced 147 percent of 2006 production, not including reserves added through acquisitions. Including acquisitions, the trust increased its year-end reserve base by 94 percent on a proved basis. Year-end 2006 reserves are 64 million BOE proved and 90.3 million BOE proved plus probable, up from 32.9 million BOE proved and 47.9 million BOE proved plus probable at the end of 2005. Crescent Point’s proved plus probable RLI ticked up to 11.9 years from 11.1 years. Likely facing a distribution cut, Crescent Point Energy Trust is a sell.
Fairborne Energy Trust (FEL.UN, FELNF) cut its monthly distribution to 9 cents Canadian from 13 cents Canadian per unit, effective for the March payment due in April. The natural gas trust has also agreed to acquire Fairquest Energy Ltd in an all-share deal worth about CD151 million. Fairborne is offering 0.39 trust units for each outstanding common share of Fairquest and will assume CD45 million of Fairquest’s net debt.
Based on Fairborne’s Friday closing unit price of CD9.61, the offer is worth about CD3.75 per common share of Fairquest, roughly a 19 percent premium over Fairquest’s Friday closing price. Fairborne said the acquisition metrics work out to about CD26.93 per BOE of proved reserves, CD14.71 per BOE of proved plus probable reserves and CD59,321 per BOE per day. The combined entity would have a market capitalization of about CD677 million. Sell Fairborne Energy Trust.
Focus Energy Trust’s (FET.UN, FETUF) midsummer acquisition of Profico Energy Management drove annual and fourth quarter average daily production gains, and the trust managed to keep FFO basically flat despite a 25 percent decrease in average natural gas prices. Production averaged 15,899 BOE per day in 2006, 88 percent natural gas. For 2006, natural gas price protections boosted revenue by approximately CD38.6 million and increased the realized price for natural gas by CD1.31 per thousand cubic feet (MCF).
Focus has price-protected about 60 percent of 2007 gas production at CD8.26 per MCF. As of Dec. 31, 2006, Focus had proved plus probable reserves of 83.7 million BOE, an increase of 108 percent from the 40.3 million BOE at the end of 2005. Focus reported 2006 proved plus probable FD&A costs of CD28.77 per BOE, including future development capital, and an RLI of 9.9 years. Hold Focus Energy Trust.
Paramount Energy Trust’s (PMT.UN, PMGYF) boosted production overall for 2006, but hedging only somewhat offset weak natural gas prices. Average daily production increased 5 percent to 153.4 million cubic feet (MMCF) per day 2006, but the trust recorded a 9 percent drop in cash flow to CD236.7 million (CD2.82 per unit) from CD260.2 million (CD3.47 per unit) for 2005.
Paramount realized an average gas price of CD7.52 per MCF 2006, down 6 percent from CD7.97. The trust’s average price before financial hedging and physical forward sales decreased 24 percent to CD6.61 per MCF in 2006 from CD8.71 in 2005, in line with the decrease in spot prices for the year. Paramount realized CD51 million of additional revenue and cash flow in 2006 from hedging activities. The trust’s total net debt to annualized fourth quarter cash flow measured 1.7 times as of Dec. 31, 2006.
Fourth quarter cash flow, down to CD58.2 million (69 cents Canadian per unit) from CD78.2 million (96 cents Canadian per unit), was crimped as cold weather forced downtime at several facilities. Paramount Energy Trust–a 30 percent distribution cut behind it–is a buy up to USD12.
Provident Energy Trust’s (PVE.UN, NYSE: PVX) asset mix offset the impact of falling commodity prices as it turned in company-record cash flow from operations of CD433 million (CD2.20 per unit), up 39 percent from 2005. Revenue generated for the year totaled CD2.2 billion, an increase of 61 percent from CD1.4 billion in 2005. Distributions declared totaled CD283 million (CD1.44 per unit), compared to CD231 million (CD1.44 per unit) for the same period in 2005.
The payout ratio of cash flow from operations for 2006 was 66 percent compared to 74 percent for 2005. Provident’s fourth quarter cash flow from operations was CD123 million (58 cents Canadian per unit), up 27 percent from CD96 million (57 cents Canadian per unit) in the fourth quarter of 2005. Full-year net earnings came in at CD141 million, up from CD97 million in 2005. For the fourth quarter of 2006, Provident recorded a net loss of CD26 million, compared to net earnings of CD55 million in the fourth quarter of 2005.
The decline in fourth quarter net earnings is due primarily to a CD56 million change in unrealized loss on financial derivative instruments. Full-year midstream earnings of CD220 million reflected the successful integration of the 2005 acquisition of NGL. Upstream production averaged 31,700 BOE per day in 2006. Proved plus probable oil and gas reserves increased 14 percent to 153 million BOE, and Provident’s RLI increased for the fourth consecutive year, reaching 12.4 years. Provident replaced 185 percent of total production, increasing total proved reserves to 118 million BOE, through internal development and acquisition activity. FD&A costs, including revisions and future development capital, were CD22.04 per BOE of proved plus probable reserves, or USD13.26 over a three-year average. Well-diversified Provident Energy Trust is a buy up to USD12.
Thunder Energy Trust (THY.UN, THYFF) reported a fourth quarter 2006 loss, cut production guidance for 2007 and put itself up for sale as losses widened on falling output during the three months ended Dec. 31, 2006. Thunder cut its distribution by 25 percent in February on lower oil and gas prices and the impact of the Canadian government’s decision to tax trusts at the entity level beginning in 2011.
Thunder lost CD130.2 million, or CD2.61 per unit, in the fourth quarter, significantly worse than its loss of FFO, the money used for the monthly payout to investors, fell 53 percent from a year ago to CD18.5 million, or 35 cents Canadian a unit. Thunder said in a statement that due to “current market circumstances,” it would begin looking at “strategic alternatives available to maximize shareholder value” and has hired investment bankers to look for potential merger targets or a buyer or to examine restructuring options. A downward revision in the trust’s reserves resulted in a write-down of CD102 million on its property and plant assets, compared with a write-down of CD56.2 million a year earlier.
Year-end reserve revisions resulted in an additional write-down of CD58.6 million in goodwill related to the formation of the trust in July 2005. Thunder cut its 2007 production guidance to 8,600 to 9,000 BOE per day, down from 9,452 BOE per day averaged in 2006. Sell Thunder Energy Trust.
Electric Power
Algonquin Power Income Fund (APF.UN, AGQNF) reported a 9.6 percent jump in operating profits for last year to CD31 million on revenues up nearly 5 percent to almost CD46 million. Costs declined slightly to CD16.7 million compared to the previous year. Total power sold increased 11.5 percent to 678,505 megawatt hours (MWh) with Algonquin’s main region, Quebec, seeing a 14.3 percent rise to 305,656 MWh. New York and Ontario saw 32.1 percent and 21.1 percent rises in power sold, respectively.
For 2006, revenue grew 12.3 percent to CD201.4 million from CD179.3 million in 2005. Fourth quarter revenue was up to CD53.7 million from CD50.9 million in the fourth quarter of 2005. Net earnings in 2006 were CD28 million (39 cents Canadian per unit), up from CD21.8 million (31 cents Canadian per unit) in 2005.
Cash available for distribution in 2006 increased to CD67.5 million (93 cents Canadian per unit) compared to CD64.9 million (93 cents Canadian per unit) in 2005. Cash distributions in 2006 totaled 92 cents Canadian per unit, unchanged from 2005. Algonquin Power Income Fund is a buy up to USD9.
Primary Energy Recycling (PRI.UN, PYGYF) generated 2006 revenue of USD87.1 million, incurred USD81.1 million in operating expenses and reported operating income of USD6 million for the year. Higher commodity volumes and prices at its Harbor Coal unit hurt overall performance. Primary Energy generated distributable cash of USD33.8 million declared total distributions of USD36.2 million (USD1.13 per unit), resulting in an effective payout ratio of 107.1 percent for 2006. Buy Primary Energy Recycling up to USD9.50.
Gas/Propane
CCS Income Trust (CCR.UN, CCRUF) boosted 2006 net income by 57 percent through acquisitions and by bringing new facilities on line. Annual income rose to CD124 million from CD79.16 million in 2005, although fourth quarter income dropped 12 percent to CD25.66 million because of reduced oil and natural gas drilling activity. Strong overall performances from the company’s four divisions offset some of the impact of the slowdown in the oil patch.
The trust’s operational exposure to the production side of the business insulates it somewhat, but reduced drilling activity would affect year-over-year growth in 2007. CCS will maintain its capital expenditures in the range of CD195 million to CD205 million over 2007, and the trust also announced it’s expanded into the US with a USD49.8 million acquisition of two service companies in Louisiana. CCS Income Trust is a buy up to USD33.
Spectra Energy Income Fund’s (SP.UN, SPFFF) reported results for Spectra Energy Facilities LP, of which the fund currently has a 53.8 percent indirect ownership. Revenue for the fourth quarter was CD33 million, up 49.5 percent from CD22.1 million for the same period last year, and annual operating revenue increased CD19.9 million from the previous year to CD101.8 million, both increases due mainly to the Westcoast Gas Services acquisition, higher average fees and a positive equalization adjustment. During the fourth quarter, the fund increased monthly cash distributions to 7 cents Canadian per unit and declared total distributions of CD5.1 million from distributable cash of CD5.9 million, for a payout ratio of 86 percent; the annual payout ratio for 2006 was 82 percent.
Average daily throughput in the fourth quarter was 594 MMCF per day compared to 420 MMCF per day for the same period last year. Earnings before interest, taxes, depreciation and amortization (EBITDA) for the fourth quarter was CD14.3 million, an increase of approximately 41.7 percent from the fourth quarter last year. EBITDA for 2006 was CD47.9 million, up 33.9 percent from 2005. Net income for the fourth quarter of 2006 was CD4.2 million, up CD3 million from the same period a year earlier. Net income for 2006 was CD18 million, up CD15 million from 2005. Buy Spectra Energy Income Fund up to USD11.
Superior Plus Income Fund (SPF.UN, SPIJF) reported net profit for the fourth quarter rose to CD38.1 million (45 cents Canadian per unit), up from CD21.2 million (25 cents Canadian per unit) a year earlier. Revenues rose to CD703 million from CD697 million. The increase in net earnings is principally due to reduced amortization after Superior Plus took accelerated charges in the 2005 fourth quarter because of the decision by its Erco unit to close its Thunder Bay, Ontario, sodium chlorate mill last spring.
Superior Plus undertook a strategic review last spring after record warm weather hurt Superior Propane’s business during last year’s winter heating season. As a result, the fund sold its JW Aluminum unit, a maker of specialty, flat-rolled aluminum products in the US, for USD310 million; shut down its mill in Bruderheim, Alberta, a few months after closing the Thunder Bay mill in April; and completed its 55,000 ton Erco mill in Chile and began production in September to exclusively supply a Chilean pulp and paper company. Superior Plus Income Fund is a hold.
Business Trusts
Contrans Income Fund (CSS.UN, CSIUF) generated an increase of more than 18 percent in total revenue for 2006, from CD385.5 million in 2005 to CD455.2 million. Acquisitions generated additional revenues of CD49.4 million for the year and CD17.3 million in the fourth quarter of 2006 and boosted earning by CD3.6 million for the year and CD1.5 million during the three months ended Dec. 31, 2006. Cash flow from continuing operations amounted to CD49.6 million in 2006 compared to CD39.6 million in 2005. Contrans Income Fund is a hold.
FutureMed Healthcare Income Fund (FMD.UN, FMDHF) reported a 23 percent boost in fourth quarter sales, an increase reflected across all geographic markets and most product categories. Earnings for the period were up 29 percent as total sales rose to CD28.7 million from CD23.3 million a year ago. For the year ended Dec. 31, 2006, sales were up 9.2 percent to CD105.1 million from CD96.3 million in 2005. FutureMed generated distributable cash of CD4.2 million (31 cents Canadian per unit) for the fourth quarter and CD13.9 million (CD1.03 per unit) for 2006. Hold FutureMed Healthcare Income Fund.
Mullen Group Income Fund (MTL.UN, MNTZF) almost doubled its net annual income and revenue on the strength of its booming oilfield trucking operations. Revenue for 2006 topped CD1 billion, up from CD591.7 for 2005, and net annual income jumped 83 percent to CD128.1 million (CD1.86 per unit) from CD70 million. Net income growth was driven mainly by acquisitions completed during 2005 and 2006, along with modest price and volume increases in the preexisting businesses in the trucking/logistics segment.
Even with reduced drilling activity, Mullen reported that its oilfield segments brought in CD604.3 million in total revenues in 2006, compared to CD400.4 million from trucking. Net income for the three months ended Dec. 31, 2006, was down to CD14 million (17 cents Canadian per unit) from CD24 million (52 cents Canadian per unit) during the same period a year earlier because of a number of noncash items. Mullen Group Income Fund is a buy up to USD20.
Newalta Income Fund’s (NAL.UN, NALUF) expansion into Ontario, Quebec and Atlantic Canada helped boost year-end earnings by 61 percent in 2006. Newalta earned CD75.6 million (CD2.11 per unit) for the year, up from CD46.9 million (CD1.66 per unit) in 2005. The diversification Newalta achieved via seven acquisitions in 2006 offset slower operations in Western Canada.
The acquisitions increased Newalta’s market share to 15 percent in the CD1.25 billion eastern Canadian industrial waste market, complementing its control of half the CD750 million Western Canada market share. Newalta now controls approximately 25 percent of the national waste management market. Newalta’s new Eastern division accounted for 32 percent of total assets in 2006, 21 percent of total revenue and 12 percent of net margin. The Western division includes oilfield, drill site and industrial business units.
The oilfield and drill site units brought in about 51 percent of Newalta revenues but suffered CD1.5 milion net margin decline in the fourth quarter because of a drop in commodity prices and corresponding drop in oil patch activity. Newalta’s oilfield division represents about 15 percent of the trust’s total revenue stream. The industrial unit, 16 percent of assets, generated 22 percent of total revenue. Newalta Income Fund is a buy up to USD30.
Priszm Income Fund (QSR.UN, PSZMF) reported annual sales of CD503.4 million, a 3.9 percent increase from 2005, and fourth quarter sales of CD156.4 million, up 4.1 percent. Same-store sales were up 8.1 percent for the year and 9.7 percent in the fourth quarter in Quebec, but sales at Ontario outlets open a year or more increased by just 0.1 percent in 2006. That improved to 0.9 percent in the fourth quarter, but Priszm executives are rolling out new promotions and products, including the introduction of trans-fat-free canola cooking oil, in an effort to solidify results in an important province.
Priszm, which earned CD15.6 million (75.5 cents Canadian per unit) on its more than half a billion in sales, is officially shortening its name to Priszm Income Fund from Priszm Canadian Income Fund. The restaurant trust plans to open more than 50 new locations annually during the next five years. Buy Priszm Income Fund up to USD11.
Sleep Country Canada Income Fund (Z.UN, SLPCF) reported fourth quarter profits dropped as higher costs offset a 42 percent jump in sales. Sleep Country earned CD5.5 million (39 cents Canadian per unit), down from CD6.6 million (47 cents Canadian per unit) a year ago. Sales rose to nearly CD87.1 million from CD61.2 million as the company expanded through acquisitions in Quebec and the US, but expenses were up to CD13.3 million from CD8.2 million and interest costs were also higher. For the full year, net profits rose to CD26.4 million from CD22.4 million, while sales jumped 44.9 percent to CD324.1 million. Sleep Country Canada Income Fund is a buy up to USD22.
Sun Gro Horticulture Income Fund (GRO.UN, SGHRF) reported an increase in gross margin for the fourth quarter to 46 percent from 45 percent in 2005, as well as a 9 percent increase in revenue to CD46.5 million. Fourth quarter operating income of CD2.5 million was up from CD1.6 million in 2005, mainly because of improved pricing and production efficiencies. For the 12 months ended Dec. 31, 2006, revenue of CD197.3 million was down 0.75 percent from the CD198.8 million reported in fiscal 2005 because of a 6 percent decline in annual sales of Sun Gro’s higher-priced mixes.
Gross profit margin for the 12 months increased to 48 percent from 46 percent in 2005. Annual operating income rose to CD16.5 million from CD9.6 million in 2005, reflecting the year’s improved gross margin and a 6 percent decrease in distribution expenses. Net earnings increased to CD15.9 million (72 cents Canadian per unit), from a loss of CD3.5 million (16 cents Canadian per unit) in 2005. Hold Sun Gro Horticulture Income Fund.
Wajax Income Fund (WJX.UN, WJXFF) reported net earnings for the fourth quarter of CD18.1 million (CD1.09 per unit), up from CD15.8 million (95 cents Canadian per unit) in the year-earlier period. Mobile equipment segment earnings were up 6 percent to CD9.8 million, industrial components increased 4 percent to CD4.4 million, and power systems improved by 51 percent to CD8.4 million. Distributable cash amounted to CD1.12 per unit for the quarter, a 19 percent increase from a year ago. Cash distributions declared in the quarter were CD2.06 per unit, which included a December special distribution of CD1.12 per unit.
Wajax has already secured more than CD60 million of orders from a number of customers for mining loading equipment for delivery in 2007 and has received GE Energy bio and natural gas engine orders for 2007 in excess of CD30 million. Wajax Income Fund is a hold.
Real Estate Investment Trusts
Chartwell Seniors Housing (CSH.UN, CWSRF) reported total revenue growth of 40.5 percent to CD100.8 million for the fourth quarter and a 56.1 percent boost for 2006 to CD350.6 million. Property revenues were up 44.4 percent in the fourth quarter of 2006 primarily because of the CD51.4 million in revenue from the acquisition of 65 properties since Jan. 1, 2005, and a 5.5 percent increase in same property revenues. For the year ended Dec. 31, 2006, property revenues rose 57.9 percent, including a CD155.1 million contribution from acquisitions, a 5.7 percent increase in same property revenues, and improved average rents and occupancies. The weighted average occupancy for 2006 was 93.4 percent, up from 91.9 percent last year. Hold Chartwell Seniors Housing.
InnVest REIT (INN.UN, IVRVF) narrowed its fourth quarter loss to CD745,000 from CD2.2 million a year ago. Operating revenue was CD99.4 million for the three months ended December 31, up from CD80.6 million the year before, while room revenue increased to CD81.1 million from CD68.1 million. The increase in room revenue primarily reflects a CD9.6 million revenue boost from seven hotels acquired in 2006. Profits for 2006 rose to CD38.6 million (74.9 cents Canadian per unit) from CD17 million (39.7 cents Canadian per unit) in 2005. Full-year room revenues increased to CD333.5 million from CD282.1 million. InnVest REIT is a hold.
IPC US REIT (IUR.UN, IPCUF) reported fourth quarter net income rose to USD24.2 million (48 cents per unit), quadruple year-earlier numbers, but said distributable income is expected to decline in 2007. Operating revenue for the quarter increased to USD45 million, up 17.8 percent from USD38.2 million in the fourth quarter of 2005. Annual net income increased to USD55.8 million in 2006, up from USD4.3 million in 2005 on the sale of three large assets.
Operating revenue for 2006 was USD169.7 million, up 18.6 percent from USD143 million in 2005. Distributable income increased to USD41.3 million from USD40.8 million in 2005 but was down 2 cents to 96.3 cents US for the year. IPC US announced in January that it’s looking to be acquired or merged with another real estate investment trust (REIT). Distributable income was reduced by the sales of the three assets, the proceeds of which have yet to be reinvested, and will be reduced by about 4 cents US per unit in 2007 because of the internalization of management activities within the REIT. Hold IPC US REIT.
Royal Host REIT (RYL.UN, ROYHF) reported a 155 percent rise in continuing hospitality operations as its effort to refocus on core operations seemed to bear fruit. The REIT sold its time-share business in December, and in January, it announced the sale of its US hotel management business. Net income from hotel operations rose to CD4.7 million in 2006, driven largely by the launch of a luxury condominium in British Columbia.
Overall occupancy fell by 2.5 percent in the fourth quarter, traditionally a slow season for travel and hotel stays. Annual occupancy rates were relatively flat, slipping by 0.2 percent. However, ADR–a measure of the average room price for all guest rooms–rose by 5.4 percent during the same quarter to CD94.80. Year-end ADR rose 4.98 percent to CD97.52. The REIT doubled its cash available for distribution during 2006 to CD1.05 per unit.
Full-year 2006 net income of CD14.3 million (56 cents Canadian per unit) was up from CD2.3 million (7 cents Canadian per unit) in 2006. Fourth quarter revenue was CD37.5 million, and Royal Host recorded a net loss of CD244,000 (1 cent Canadian per unit), including a CD470,000 loss from discontinued operations, compared to a net loss of CD330,000 (1 cent Canadian per unit) on revenue of CD33.8 million in the same period a year ago. Royal Host REIT is a hold.