Unlocking Value
Another strong Canadian trust is following the Trinidad Drilling (TSX: TDG, OTC: TDGCF) model. On March 27, TransForce Income Fund (TSX: TIF-U, OTC: TIFUF) announced it would convert to a corporation this year to save cash for acquisitions.
As with Trinidad—which is up 30 percent from its Jan. 10 conversion announcement—market reaction to TransForce’s move has been favorable. Closing the book on 2011 taxation has unlocked value in the market place.
The success of Trinidad and now TransForce makes it likely we’ll see more early conversions in coming months. Nonetheless, most are still unlikely to move until much closer to 2011 in order to take maximum advantage of trust status.
The really good news: It’s now crystal clear that conversion is far from the investor doomsday many have predicted, whether it takes place in 2008 or 2011. Good businesses will yield strong investor returns regardless of how they’re organized. The key is to find them, buy them and hold on as long as they’re getting stronger and more valuable.
The two strongest trust sectors in early 2008 are real estate and energy. In stark contrast to double-digit price declines in the US, Canadian housing prices are on track to rise 3.5 percent this year, according to Brookfield Real Estate Services Fund’s (TSX: BRE-U, OTC: BREUF) nationwide network of property brokers. That’s another reason to prefer Canadian REITs, which continue to yield twice as much as their US counterparts.
As for energy, oil and gas producer trusts have languished since mid-2006 because of weak natural gas prices, 2011 tax worries and US economic concerns. In the first quarter, however, the two dozen tracked in the How They Rate Table returned an average of more than 20 percent. Two of the biggest winners were Advantage Energy Income Fund (NYSE: AAV, TSX: AVN-U) and Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF), both big losers last year.
Energy’s strength has surprised many because slowing growth in the US alone is no longer enough to take down global commodity prices. We may still see a big drop this year for oil and gas. But that will only happen if developing Asia drops off a cliff, and that hasn’t happened yet. Moreover, when the US economy does stabilize, prices are likely to rise even more.
Trust merger activity is another emerging bright spot. Coal miner Royal Utilities Trust (TSX: RU-U, OTC: RYUTF) and energy infrastructure operator Spectra Energy Income Fund (TSX: SP-U, OTC: SPFFF) have both agreed to takeovers by major shareholders at premiums of roughly 15 to 20 percent to pre-deal prices. And with many Portfolio picks selling at or below book value, they’re bona fide candidates for future deals.
Of course, not every sector of the Canadian economy or the trust universe is thriving. Many face steep challenges this year, particularly from the weak US economy’s impact on Canadian businesses. Five trusts cut distributions this month partly for that reason, and half a dozen others were pushed to the brink. The country’s manufacturing sector in particular has suffered from the strong Canadian dollar, and the energy services business is still chronically weak.
With the exception of TransForce, none of the Canadian Edge Portfolio trusts showed any real fourth quarter weakness because of the economy. Most turned in decent numbers for the fourth quarter, and even those that lagged painted a bright outlook for 2008.
Unfortunately, that hasn’t stopped many strong trusts from getting hit hard on fears they may suddenly develop a weakness. In fact, several of last year’s biggest winners are under water this year by as much as 15 to 20 percent.
The good news is we won’t have to wait long for the bears to get a big time reality check with first quarter earnings results. And after this year’s declines, the bar is set very low for trusts such as Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF). That sets the stage for major upside surprises.
Even if our favorites’ numbers shine as I expect, I’m not counting on a rapid recovery. But measuring up will show distributions are secure in the toughest environments. And as long as that’s the case, share price recovery will only be a matter of time. That’s all the reason anyone should need to stick with them in these volatile times.
Two additional notes: The NAFTA challenge to the Canadian government’s Tax Fairness Plan continues to progress. Interested investors should visit http://www.naftatrustclaims.com. Also, for those still having trouble sorting their taxes, links to trust Web sites are provided in the Income Trust Tax Guide, with all the backup you need to file distributions as qualified dividends.
Portfolio Action
There are only two changes to the Canadian Edge Portfolio this month. I’m moving TransForce Income Fund to the Conservative Portfolio, reflecting its now-clarified status on 2011 trust taxation and very secure, though reduced, distribution. I’m also moving Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF) to the Aggressive Portfolio because of uncertainty from the raft of antitrust lawsuits against it.
High Yields of the Month
Both High Yield of the Month picks are Conservative Portfolio holdings: this month’s swap-in and conversion play TransForce Income Fund and Income Participating Security (IPS) Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF). As an IPS combining a debt security with equity, Atlantic has no 2011 taxation risk. Note there’s a possibility management will redeem the debt portion at a premium for cash in November 2009, which should be a positive.
How They Rate
One trust drops off the How They Rate list this month: Wellco Energy Services Trust, which merged with Peak Energy Trust (TSX: PES-U, OTC: PKGFF). Each Wellco share was swapped for 0.9 of Peak.
Note that Trinidad Drilling has now converted to a corporation on a share-for-share basis. Next month, Spectra Energy Income Fund (TSX: SP-U, OTC: SPFFF) will be absorbed by its parent for CAD11.25 per share in cash and will drop off the list as well. There are no new additions this month to coverage.
Here are advice changes. See the How They Rate or Portfolio tables for changes in buy targets. Price and yield information is updated every 15 minutes on both tables.
Oil and gas trusts are coming off their best quarter in more than two years as natural gas prices are at last recovering and 2011 tax worries are fading. Odds favor their good fortune extending for the rest of the year and beyond, but it’s always critical to focus on the most sustainable. I rate all 24 oil and gas producer trusts tracked in the Canadian Edge How They Rate Table, pulling out the best from the rest.
Canadian Currents
NAFTA Chapter 11 gives investors the right to take investment disputes with NAFTA member states to arbitral tribunals rather than to domestic courts of law. It was designed to give investors faster, cheaper paths to quick resolutions, but that’s not always the case. A longtime subscriber has chosen another route, which you can also follow.
Tips on Trusts
This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section.
Dividend Watch List—There were five distribution cuts last month: Chartwell Seniors Housing REIT, Fording Canadian Coal (NYSE: FDG, TSX: FDG-U), Sun Gro Horticulture, TransForce and Westshore Terminals (TSX: WTE-U, OTC: WTSHF). Only Fording, however, still rates a sell because it’s become a momentum stock.
Resources Equal Resilience—Canada’s economy expanded more greatly than expected in January, with 16 of 21 sectors—including oil and gas—posting gains for the month.
Bay Street Beat—How the Canadian analyst community views trusts, and how to use that information.
T-Minus 11 Days—The Income Trust Tax Guide has links to all of the trusts’ Web sites providing information on how their dividends should be treated for US tax purposes. Note virtually all should be treated as qualified dividends. The information on the trusts’ Web sites is excellent backup for filing them that way, even if your broker is mistakenly listing them as ordinary income.
More Information
The following is a regular repeat from prior issues.
Use our live quote feed on the How They Rate Table for US dollar prices of trusts intraday. For other information, go directly to a trust’s website by clicking on its name in the table. Clicking on the Toronto symbol (suffix “.UN”) will take you to the web site of our Canadian partner Toronto-based MPL Communications (133 Richmond St. West, Toronto M5H 3M8) www.adviceforinvestors.com, which has price charts and access to press trust releases. For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on income and royalty trusts. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto Globe & Mail features the “Globe Investor” section with all the latest news on trusts. Dominion Bond Rating Service is the pre-eminent credit rater for trusts. The Bank of Canada Web site features a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.
Roger Conrad
Editor, Canadian Edge
As with Trinidad—which is up 30 percent from its Jan. 10 conversion announcement—market reaction to TransForce’s move has been favorable. Closing the book on 2011 taxation has unlocked value in the market place.
The success of Trinidad and now TransForce makes it likely we’ll see more early conversions in coming months. Nonetheless, most are still unlikely to move until much closer to 2011 in order to take maximum advantage of trust status.
The really good news: It’s now crystal clear that conversion is far from the investor doomsday many have predicted, whether it takes place in 2008 or 2011. Good businesses will yield strong investor returns regardless of how they’re organized. The key is to find them, buy them and hold on as long as they’re getting stronger and more valuable.
The two strongest trust sectors in early 2008 are real estate and energy. In stark contrast to double-digit price declines in the US, Canadian housing prices are on track to rise 3.5 percent this year, according to Brookfield Real Estate Services Fund’s (TSX: BRE-U, OTC: BREUF) nationwide network of property brokers. That’s another reason to prefer Canadian REITs, which continue to yield twice as much as their US counterparts.
As for energy, oil and gas producer trusts have languished since mid-2006 because of weak natural gas prices, 2011 tax worries and US economic concerns. In the first quarter, however, the two dozen tracked in the How They Rate Table returned an average of more than 20 percent. Two of the biggest winners were Advantage Energy Income Fund (NYSE: AAV, TSX: AVN-U) and Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF), both big losers last year.
Energy’s strength has surprised many because slowing growth in the US alone is no longer enough to take down global commodity prices. We may still see a big drop this year for oil and gas. But that will only happen if developing Asia drops off a cliff, and that hasn’t happened yet. Moreover, when the US economy does stabilize, prices are likely to rise even more.
Trust merger activity is another emerging bright spot. Coal miner Royal Utilities Trust (TSX: RU-U, OTC: RYUTF) and energy infrastructure operator Spectra Energy Income Fund (TSX: SP-U, OTC: SPFFF) have both agreed to takeovers by major shareholders at premiums of roughly 15 to 20 percent to pre-deal prices. And with many Portfolio picks selling at or below book value, they’re bona fide candidates for future deals.
Of course, not every sector of the Canadian economy or the trust universe is thriving. Many face steep challenges this year, particularly from the weak US economy’s impact on Canadian businesses. Five trusts cut distributions this month partly for that reason, and half a dozen others were pushed to the brink. The country’s manufacturing sector in particular has suffered from the strong Canadian dollar, and the energy services business is still chronically weak.
With the exception of TransForce, none of the Canadian Edge Portfolio trusts showed any real fourth quarter weakness because of the economy. Most turned in decent numbers for the fourth quarter, and even those that lagged painted a bright outlook for 2008.
Unfortunately, that hasn’t stopped many strong trusts from getting hit hard on fears they may suddenly develop a weakness. In fact, several of last year’s biggest winners are under water this year by as much as 15 to 20 percent.
The good news is we won’t have to wait long for the bears to get a big time reality check with first quarter earnings results. And after this year’s declines, the bar is set very low for trusts such as Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF). That sets the stage for major upside surprises.
Even if our favorites’ numbers shine as I expect, I’m not counting on a rapid recovery. But measuring up will show distributions are secure in the toughest environments. And as long as that’s the case, share price recovery will only be a matter of time. That’s all the reason anyone should need to stick with them in these volatile times.
Two additional notes: The NAFTA challenge to the Canadian government’s Tax Fairness Plan continues to progress. Interested investors should visit http://www.naftatrustclaims.com. Also, for those still having trouble sorting their taxes, links to trust Web sites are provided in the Income Trust Tax Guide, with all the backup you need to file distributions as qualified dividends.
Portfolio Action
There are only two changes to the Canadian Edge Portfolio this month. I’m moving TransForce Income Fund to the Conservative Portfolio, reflecting its now-clarified status on 2011 trust taxation and very secure, though reduced, distribution. I’m also moving Arctic Glacier Income Fund (TSX: AG-U, OTC: AGUNF) to the Aggressive Portfolio because of uncertainty from the raft of antitrust lawsuits against it.
High Yields of the Month
Both High Yield of the Month picks are Conservative Portfolio holdings: this month’s swap-in and conversion play TransForce Income Fund and Income Participating Security (IPS) Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF). As an IPS combining a debt security with equity, Atlantic has no 2011 taxation risk. Note there’s a possibility management will redeem the debt portion at a premium for cash in November 2009, which should be a positive.
How They Rate
One trust drops off the How They Rate list this month: Wellco Energy Services Trust, which merged with Peak Energy Trust (TSX: PES-U, OTC: PKGFF). Each Wellco share was swapped for 0.9 of Peak.
Note that Trinidad Drilling has now converted to a corporation on a share-for-share basis. Next month, Spectra Energy Income Fund (TSX: SP-U, OTC: SPFFF) will be absorbed by its parent for CAD11.25 per share in cash and will drop off the list as well. There are no new additions this month to coverage.
Here are advice changes. See the How They Rate or Portfolio tables for changes in buy targets. Price and yield information is updated every 15 minutes on both tables.
- Acadian Timber Income Fund (TSX: ADN-U, OTC: ATBUF)—Sell to hold. The trust seems to be weathering the US slowdown in good form.
- Bonterra Energy Fund (TSX: BNE-U, OTC: BNEUF)—Hold to buy @28. This small, oil-weighted trust with long reserve life is in good shape for a strong 2008.
- Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF)—Sell to hold. The dividend is a lot safer after last month’s cut, and the REIT looks on track for solid growth in the seniors housing business.
- Essential Energy Services Trust (TSX: ESN-U, OTC: EEYUF)—Hold to sell. Business is even weaker than expected in the energy patch, and dividend risk has grown again. Why take it when you can own Trinidad instead?
- Harvest Energy Trust (NYSE: HTE, TSX: HTE-U)—Buy@24 to sell. Sometimes the numbers paint a picture you’re not fully expecting. In this case, the refining business is a lot more of a drag than I forecasted, and there are too many better oil and gas trusts without that risk.
- Primary Energy Recycling (TSX: PRI-U, OTC: PYGYF)—Sell to hold. The company at last has a deal on the Harbor Coal project that should dramatically reduce financial risk.
- Sun Gro Horticulture (TSX: GRO-U, OTC: SGHRF)—Sell to hold. The dividend cut and drop in shares limit downside risk from here, despite continued exposure to US economic weakness.
- TransForce Income Fund (TSX: TIF-U, OTC: TIFUF)—Hold to buy@9. The trust has resolved its post-2011 fate and dramatically reduced exposure to US economic weakness while keeping its long-run growth plans intact.
Oil and gas trusts are coming off their best quarter in more than two years as natural gas prices are at last recovering and 2011 tax worries are fading. Odds favor their good fortune extending for the rest of the year and beyond, but it’s always critical to focus on the most sustainable. I rate all 24 oil and gas producer trusts tracked in the Canadian Edge How They Rate Table, pulling out the best from the rest.
Canadian Currents
NAFTA Chapter 11 gives investors the right to take investment disputes with NAFTA member states to arbitral tribunals rather than to domestic courts of law. It was designed to give investors faster, cheaper paths to quick resolutions, but that’s not always the case. A longtime subscriber has chosen another route, which you can also follow.
Tips on Trusts
This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section.
Dividend Watch List—There were five distribution cuts last month: Chartwell Seniors Housing REIT, Fording Canadian Coal (NYSE: FDG, TSX: FDG-U), Sun Gro Horticulture, TransForce and Westshore Terminals (TSX: WTE-U, OTC: WTSHF). Only Fording, however, still rates a sell because it’s become a momentum stock.
Resources Equal Resilience—Canada’s economy expanded more greatly than expected in January, with 16 of 21 sectors—including oil and gas—posting gains for the month.
Bay Street Beat—How the Canadian analyst community views trusts, and how to use that information.
T-Minus 11 Days—The Income Trust Tax Guide has links to all of the trusts’ Web sites providing information on how their dividends should be treated for US tax purposes. Note virtually all should be treated as qualified dividends. The information on the trusts’ Web sites is excellent backup for filing them that way, even if your broker is mistakenly listing them as ordinary income.
More Information
The following is a regular repeat from prior issues.
Use our live quote feed on the How They Rate Table for US dollar prices of trusts intraday. For other information, go directly to a trust’s website by clicking on its name in the table. Clicking on the Toronto symbol (suffix “.UN”) will take you to the web site of our Canadian partner Toronto-based MPL Communications (133 Richmond St. West, Toronto M5H 3M8) www.adviceforinvestors.com, which has price charts and access to press trust releases. For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on income and royalty trusts. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto Globe & Mail features the “Globe Investor” section with all the latest news on trusts. Dominion Bond Rating Service is the pre-eminent credit rater for trusts. The Bank of Canada Web site features a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.
Roger Conrad
Editor, Canadian Edge
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