Maple Leaf Memo
Dig a Little Deeper
One noteworthy trend to emerge during the recently concluded earning reporting season was the prevalence of trusts booking one-time adjustments to earnings to reflect passage of the Tax Fairness Plan, the minority government’s proposal to place a 31.5 percent levy on distributions to unitholders.
AltaGas Income Trust, for example, reported net income of CD13.1 million (CD0.23 per unit), down from CD29.9 million (CD0.54 per unit) during the second quarter of 2006. But AltaGas took a non-cash charge because Canada’s 2007 federal budget implementation legislation received third reading and royal assent and therefore effectively became law. The implications of the Tax Fairness Plan, which was part of the Bill C-52, had to be reflected in companies’ financial statements immediately.
AltaGas’ non-cash charge totaled CD14.5 million. Net of that and other adjustments, AltaGas’ second quarter 2007 net income was CD27.6 million (CD0.48 per unit). The trust also announced a distribution increase and a special distribution on top of that. Unitholders of record as of Aug. 27 and thereafter will get monthly payments at an annualized rate of CD2.10, up about 3 percent. Unitholders will also be getting a special distribution of one AltaGas Utility Group common share for every 100 trust units they own as of Aug. 27.
We’ll be exploring the mechanics of one-time adjustments and why trusts had to take them in the September issue of Canadian Edge, which will be published this Friday. We’ll also be taking a look at Canadian REITs.
A Dig of Another Kind
It’s almost a lead-pipe certainty that the current credit squeeze will choke off merger and acquisition (M&A) activity. It’s going to cost more to get financing for deals, so the trickle will naturally slow as would-be buyers get weeded out.
It’s as sure a fact that those trusts unfit for a structure that required such a level of capital discipline would have died due to market forces–with or without the conservative government’s statist hyperactivity of last Halloween.
Market forces–an accumulation of cash in the hands of private equity coupled with historically low interest rates over an extended period–dictated the rash of takeovers that spread throughout the income trust sector in mid-2007. Market forces identified businesses agile and cash-generating enough to survive the multiple tugs on the budget; it’s one thing to pay a high distribution, quite another to do it and at the same time retain sufficient resources to grow the business and keep the balance sheet respectable.
What management chooses to do with the cash its business generates is the subject of much ink. Some decisions are good, some aren’t.
At the same time, there’s always a market for heavy cash-generating businesses, and credit hasn’t evaporated entirely; lenders are certainly more discriminating, but rates are still at historically low levels. They could be headed lower in the near future, if the louder cries from the capitalists are heard and Federal Reserve Chairman Ben Bernanke takes one more step from the policy-bias language to cut the fed funds rate.
What Stephen Harper and Jim Flaherty did–counter to what their ostensible political philosophy would have you believe–is engineer a government intrusion on the efficient working of private financial markets.
Charioting in to the trumped up cries of “tax leakage” and “corporations must pay their fair share,” the Prime Minister and his Finance Minister eviscerated the trust sector.
Let’s step off for a moment; consider the merits of the arguments the minority government made.
Income trusts pay a lower rate of entity-level tax. True. Income trusts face lower costs of capital than do traditional corporations. True, from a certain perspective. Trusts have to appeal to retail investors, a broader market. They have to pay more cash flow out on a month-to-month basis. It’s cheaper, but they have to work harder to get the numbers to work.
You allow businesses to operate a certain way; you allow investors to take part in the fruits of that effort. You’re still getting an up-front cut of what the business generates; and you defer another cut to the future a bit, and let investors increase their self sustainability into retirement.
Income and royalty trusts represented one more choice for investors, combining elements of income investing with elements of growth investing, involving more risk, but more cash along the way. But even that risk was not so much dependent on what the market says about the company, which can be reasonable over time (see General Electric or Microsoft) or nuts in a heartbeat (see Pets.com).
And it seems strange to remove incentives to pay out large dividends during a time when the population needs more income from investment.
The Roundup
Electric Power Macquarie Power & Infrastructure Income Fund (MPT.UN, MCQPF) unit Leisureworld Senior Care LP, in which Macquarie holds a 45 percent interest, has agreed to acquire a portfolio of seven long-term care (LTC) homes for approximately CD67 million plus transaction and refurbishment costs. The portfolio includes 1,127 beds and is currently managed by Diversicare Canada Management Services. The acquisition is conditional upon regulatory approval from the Ontario Ministry of Health and Long-Term Care (MOHLTC). Counsel’s LTC homes are located in communities where there’s stable demand for long-term care.
The portfolio achieved average annual occupancy of 90.48 percent for the year ended Dec. 31, 2006. More than 60 percent of fiscal 2006 revenue was funded by the MOHLTC. Leisureworld is set up well to grow its Ontario LTC portfolio; according to the Ontario Ministry of Finance, the 75-plus age group is expected to be among the fastest-growing age groups over the next 20 years, increasing from 6 percent of the population in 2005 to 10 percent of the population in 2031. Macquarie Power & Infrastructure Income Fund is a buy up to 12.
Gas/Propane
AltaGas Income Trust (ALA.UN, ATGFF) announced Aug. 29 that it’s deferring the development of the Noel natural gas pipeline construction project and Pouce Coupe sour gas facility expansion project. The projects announced on April 10, 2007, involving Devon Canada were subject to certain economic conditions precedent and are being deferred for economic reasons. AltaGas Income Trust is a buy up to 26.
CCS Income Trust (CCR.UN, CCRUF) reported August 24 that Institutional Shareholder Services Canada Corp (ISS) has recommended that CCS unitholders vote in favor of the proposed acquisition of CCS by an investor group led by David Werklund, the founder, president and CEO of CCS. The Werklund group’s all-cash offer is for CD46 per unit. The transaction has been approved unanimously by the board of directors of CCS (with interested and non-independent directors abstaining) following receipt of the unanimous recommendation of an independent committee of directors of CCS Inc.
A meeting of CCS unitholders has been scheduled for Wednesday, September 5, 2007 in Calgary to consider the proposed transaction. The transaction, if approved by the CCS unitholders, will be completed in the fourth quarter of 2007. For more information regarding the voting of units and/or exchangeable shares, US-based CCS unitholders should contact Innisfree M&A Incorporated, the US proxy solicitation agent, at 1-888-750-5834 (banks and brokers should call Innisfree collect at 212-750-5833). Hold CCS Income Trust.
Business Trusts
BFI Canada Income Fund’s (BFC.UN, BFICF) operating subsidiary IESI Corp has received all necessary permits for the expansion of its Seneca Meadows Landfill in Waterloo, NY. The permits allow an additional 31 million tons of disposal capacity and extend the site life of the non-hazardous solid waste management facility to approximately 2023, based on current annual volumes. The Seneca Meadows site handles the disposal of more than two million tons of waste per year, and is also one of the largest waste tire recyclers in New York State, providing beneficial reuse of more than two million tires per year.
And Alberta Environment has granted the fund an operating permit to continue operations at its Calgary landfill. The conditions of this approval don’t require any material operating changes from past procedures.
IESI has also acquired Winters Bros Waste Systems, an integrated non-hazardous solid waste services provider based in Westbury, NY. Winters Bros provides collection, transfer and recycling services to commercial and industrial businesses, residences, municipalities, and construction sites, primarily in Long Island. It operates eight transfer stations and multiple collection operations.
The fund increased its US revolving credit facility by $320 million, of which $281 million will be used to fund the acquisition including all related transaction costs, and $39 million will be available for future growth. The fund’s leverage ratio will be approximately 2.8 times. BFI Canada Income Fund is a buy up to 28.
Chemtrade Logistics Income Fund’s (CHE.UN, CGIFF) wholly-owned subsidiary BCT Chemtrade Corp has entered into a long-term agreement with Bayer MaterialScience AG for the storage of caustic soda at BCT Chemtrade’s Rotterdam Terminal, which will be expanded to handle increased throughput. Charges include a fixed fee for the terminal services provided and additional fees if the throughput exceeds the contracted amount. Chemtrade has agreed to expand its existing terminal facility at a cost of approximately EUR3.5 million, increasing total storage capacity to 100,000 tons.
In addition, Chemtrade has agreed to build an additional jetty for the loading and unloading of seagoing vessels and barges, improving its ability to optimize the use of its facilities. The jetty expansion is expected to cost approximately EUR2.9 million and will be financed by the Port of Rotterdam. Construction is expected to begin in the fall of 2007 and be completed by June 2008. Chemtrade Logistics Income Fund is a buy up to 10.
CML Healthcare Income Fund (CLC.UN, CMHIF) is after Medisys Health Group Income Fund (MHG.UN, MHGKF), but the family-controlled health care and imaging services provider doesn’t seem likely to allow the access for due diligence purposes CML would want before making an offer. The Gelman family owns a controlling interest in Medisys; it’s made a CD7 per unit going-private offer, but most analysts who’ve taken up the question say that number (which puts the total value of the business at CD37.6 million) doesn’t fully value Medisys’ unique imaging assets. Hold CML Healthcare Income Fund.
Real Estate Trusts
Chartwell Seniors Housing (CSH.UN, CWSRF) may be getting closer to a takeover. A special committee of the trust’s board “has made certain information available under confidentiality agreements to certain parties,” suggesting the strategic review process has become more active after slowing during the second quarter. Although the ultimate offer may be south of previous estimates of as high as CD20 per unit due to the recent turmoil afflicting credit markets, analysts still say CD17 per unit is a decent ballpark figure. Chartwell Seniors Housing is a buy up to 15.
IPC US REIT (IUR.UN, IPCUF) has agreed with Dallas-based Behringer Harvard on the acquisition of IPC’s portfolio of 35 US properties. The agreement calls for Behringer Harvard to purchase all of IPC’s subsidiaries at a price of about CD1.4 billion, or CD9.75 per unit. The deal is expected to close by early November 2007, contingent upon regulatory approvals, third-party consents and the approval of the IPC unitholders. Hold IPC US REIT.
One noteworthy trend to emerge during the recently concluded earning reporting season was the prevalence of trusts booking one-time adjustments to earnings to reflect passage of the Tax Fairness Plan, the minority government’s proposal to place a 31.5 percent levy on distributions to unitholders.
AltaGas Income Trust, for example, reported net income of CD13.1 million (CD0.23 per unit), down from CD29.9 million (CD0.54 per unit) during the second quarter of 2006. But AltaGas took a non-cash charge because Canada’s 2007 federal budget implementation legislation received third reading and royal assent and therefore effectively became law. The implications of the Tax Fairness Plan, which was part of the Bill C-52, had to be reflected in companies’ financial statements immediately.
AltaGas’ non-cash charge totaled CD14.5 million. Net of that and other adjustments, AltaGas’ second quarter 2007 net income was CD27.6 million (CD0.48 per unit). The trust also announced a distribution increase and a special distribution on top of that. Unitholders of record as of Aug. 27 and thereafter will get monthly payments at an annualized rate of CD2.10, up about 3 percent. Unitholders will also be getting a special distribution of one AltaGas Utility Group common share for every 100 trust units they own as of Aug. 27.
We’ll be exploring the mechanics of one-time adjustments and why trusts had to take them in the September issue of Canadian Edge, which will be published this Friday. We’ll also be taking a look at Canadian REITs.
A Dig of Another Kind
It’s almost a lead-pipe certainty that the current credit squeeze will choke off merger and acquisition (M&A) activity. It’s going to cost more to get financing for deals, so the trickle will naturally slow as would-be buyers get weeded out.
It’s as sure a fact that those trusts unfit for a structure that required such a level of capital discipline would have died due to market forces–with or without the conservative government’s statist hyperactivity of last Halloween.
Market forces–an accumulation of cash in the hands of private equity coupled with historically low interest rates over an extended period–dictated the rash of takeovers that spread throughout the income trust sector in mid-2007. Market forces identified businesses agile and cash-generating enough to survive the multiple tugs on the budget; it’s one thing to pay a high distribution, quite another to do it and at the same time retain sufficient resources to grow the business and keep the balance sheet respectable.
What management chooses to do with the cash its business generates is the subject of much ink. Some decisions are good, some aren’t.
At the same time, there’s always a market for heavy cash-generating businesses, and credit hasn’t evaporated entirely; lenders are certainly more discriminating, but rates are still at historically low levels. They could be headed lower in the near future, if the louder cries from the capitalists are heard and Federal Reserve Chairman Ben Bernanke takes one more step from the policy-bias language to cut the fed funds rate.
What Stephen Harper and Jim Flaherty did–counter to what their ostensible political philosophy would have you believe–is engineer a government intrusion on the efficient working of private financial markets.
Charioting in to the trumped up cries of “tax leakage” and “corporations must pay their fair share,” the Prime Minister and his Finance Minister eviscerated the trust sector.
Let’s step off for a moment; consider the merits of the arguments the minority government made.
Income trusts pay a lower rate of entity-level tax. True. Income trusts face lower costs of capital than do traditional corporations. True, from a certain perspective. Trusts have to appeal to retail investors, a broader market. They have to pay more cash flow out on a month-to-month basis. It’s cheaper, but they have to work harder to get the numbers to work.
You allow businesses to operate a certain way; you allow investors to take part in the fruits of that effort. You’re still getting an up-front cut of what the business generates; and you defer another cut to the future a bit, and let investors increase their self sustainability into retirement.
Income and royalty trusts represented one more choice for investors, combining elements of income investing with elements of growth investing, involving more risk, but more cash along the way. But even that risk was not so much dependent on what the market says about the company, which can be reasonable over time (see General Electric or Microsoft) or nuts in a heartbeat (see Pets.com).
And it seems strange to remove incentives to pay out large dividends during a time when the population needs more income from investment.
The Roundup
Electric Power Macquarie Power & Infrastructure Income Fund (MPT.UN, MCQPF) unit Leisureworld Senior Care LP, in which Macquarie holds a 45 percent interest, has agreed to acquire a portfolio of seven long-term care (LTC) homes for approximately CD67 million plus transaction and refurbishment costs. The portfolio includes 1,127 beds and is currently managed by Diversicare Canada Management Services. The acquisition is conditional upon regulatory approval from the Ontario Ministry of Health and Long-Term Care (MOHLTC). Counsel’s LTC homes are located in communities where there’s stable demand for long-term care.
The portfolio achieved average annual occupancy of 90.48 percent for the year ended Dec. 31, 2006. More than 60 percent of fiscal 2006 revenue was funded by the MOHLTC. Leisureworld is set up well to grow its Ontario LTC portfolio; according to the Ontario Ministry of Finance, the 75-plus age group is expected to be among the fastest-growing age groups over the next 20 years, increasing from 6 percent of the population in 2005 to 10 percent of the population in 2031. Macquarie Power & Infrastructure Income Fund is a buy up to 12.
Gas/Propane
AltaGas Income Trust (ALA.UN, ATGFF) announced Aug. 29 that it’s deferring the development of the Noel natural gas pipeline construction project and Pouce Coupe sour gas facility expansion project. The projects announced on April 10, 2007, involving Devon Canada were subject to certain economic conditions precedent and are being deferred for economic reasons. AltaGas Income Trust is a buy up to 26.
CCS Income Trust (CCR.UN, CCRUF) reported August 24 that Institutional Shareholder Services Canada Corp (ISS) has recommended that CCS unitholders vote in favor of the proposed acquisition of CCS by an investor group led by David Werklund, the founder, president and CEO of CCS. The Werklund group’s all-cash offer is for CD46 per unit. The transaction has been approved unanimously by the board of directors of CCS (with interested and non-independent directors abstaining) following receipt of the unanimous recommendation of an independent committee of directors of CCS Inc.
A meeting of CCS unitholders has been scheduled for Wednesday, September 5, 2007 in Calgary to consider the proposed transaction. The transaction, if approved by the CCS unitholders, will be completed in the fourth quarter of 2007. For more information regarding the voting of units and/or exchangeable shares, US-based CCS unitholders should contact Innisfree M&A Incorporated, the US proxy solicitation agent, at 1-888-750-5834 (banks and brokers should call Innisfree collect at 212-750-5833). Hold CCS Income Trust.
Business Trusts
BFI Canada Income Fund’s (BFC.UN, BFICF) operating subsidiary IESI Corp has received all necessary permits for the expansion of its Seneca Meadows Landfill in Waterloo, NY. The permits allow an additional 31 million tons of disposal capacity and extend the site life of the non-hazardous solid waste management facility to approximately 2023, based on current annual volumes. The Seneca Meadows site handles the disposal of more than two million tons of waste per year, and is also one of the largest waste tire recyclers in New York State, providing beneficial reuse of more than two million tires per year.
And Alberta Environment has granted the fund an operating permit to continue operations at its Calgary landfill. The conditions of this approval don’t require any material operating changes from past procedures.
IESI has also acquired Winters Bros Waste Systems, an integrated non-hazardous solid waste services provider based in Westbury, NY. Winters Bros provides collection, transfer and recycling services to commercial and industrial businesses, residences, municipalities, and construction sites, primarily in Long Island. It operates eight transfer stations and multiple collection operations.
The fund increased its US revolving credit facility by $320 million, of which $281 million will be used to fund the acquisition including all related transaction costs, and $39 million will be available for future growth. The fund’s leverage ratio will be approximately 2.8 times. BFI Canada Income Fund is a buy up to 28.
Chemtrade Logistics Income Fund’s (CHE.UN, CGIFF) wholly-owned subsidiary BCT Chemtrade Corp has entered into a long-term agreement with Bayer MaterialScience AG for the storage of caustic soda at BCT Chemtrade’s Rotterdam Terminal, which will be expanded to handle increased throughput. Charges include a fixed fee for the terminal services provided and additional fees if the throughput exceeds the contracted amount. Chemtrade has agreed to expand its existing terminal facility at a cost of approximately EUR3.5 million, increasing total storage capacity to 100,000 tons.
In addition, Chemtrade has agreed to build an additional jetty for the loading and unloading of seagoing vessels and barges, improving its ability to optimize the use of its facilities. The jetty expansion is expected to cost approximately EUR2.9 million and will be financed by the Port of Rotterdam. Construction is expected to begin in the fall of 2007 and be completed by June 2008. Chemtrade Logistics Income Fund is a buy up to 10.
CML Healthcare Income Fund (CLC.UN, CMHIF) is after Medisys Health Group Income Fund (MHG.UN, MHGKF), but the family-controlled health care and imaging services provider doesn’t seem likely to allow the access for due diligence purposes CML would want before making an offer. The Gelman family owns a controlling interest in Medisys; it’s made a CD7 per unit going-private offer, but most analysts who’ve taken up the question say that number (which puts the total value of the business at CD37.6 million) doesn’t fully value Medisys’ unique imaging assets. Hold CML Healthcare Income Fund.
Real Estate Trusts
Chartwell Seniors Housing (CSH.UN, CWSRF) may be getting closer to a takeover. A special committee of the trust’s board “has made certain information available under confidentiality agreements to certain parties,” suggesting the strategic review process has become more active after slowing during the second quarter. Although the ultimate offer may be south of previous estimates of as high as CD20 per unit due to the recent turmoil afflicting credit markets, analysts still say CD17 per unit is a decent ballpark figure. Chartwell Seniors Housing is a buy up to 15.
IPC US REIT (IUR.UN, IPCUF) has agreed with Dallas-based Behringer Harvard on the acquisition of IPC’s portfolio of 35 US properties. The agreement calls for Behringer Harvard to purchase all of IPC’s subsidiaries at a price of about CD1.4 billion, or CD9.75 per unit. The deal is expected to close by early November 2007, contingent upon regulatory approvals, third-party consents and the approval of the IPC unitholders. Hold IPC US REIT.