Trust surprise

Here’s a surprise. Of the approximately 80 income trusts that remained in the dying days of 2010, half of them plan to maintain or increase their distributions in 2011.

That runs counter to the general expectation that most of the remaining trusts would cut their payments as of Jan. 1, whether or not they converted to corporations. And it comes as welcome news to investors as interest rates continue to hold at near-record lows.

The information comes from a detailed analysis of the trust sector prepared by Francois Casas, Professor Emeritus (Economics), University of Toronto. As far as I can determine, it was the most complete and up-to-date snapshot of state of the trust sector in advance of the imposition of the government’s new tax on Jan. 1.

Prof. Casas kindly provided me with his research and gave permission to share it with readers. I filled in some of the “unknowns” myself and the end result offers some valuable insights into where trusts are going and what we can expect in 2011. Here are some of the key points.

A few trusts and limited partnerships will retain their current status. Of the 77 trusts and LPs covered in the study, 11 have announced they will not convert to corporations at this time or are still examining their options. Here are the key ones: Inter Pipeline (TSX: IPL.UN), Capital Power Income Fund (TSX: CPA.UN), Brookfield Renewable Power Fund (TSX: BRC.UN), A&W Revenue Royalties Income Fund (TSX: AW.UN), Boston Pizza Royalties Income Fund (TSX: BPF.UN), Boyd Group Income Fund (TSX: BYD.UN), The Data Group Income Fund (TSX: DGI.UN), The Keg Royalties Income Fund (TSX: KEG.UN), Pizza Pizza Royalties Income Fund (TSX: PZA.UN), Richards Packaging Income Fund (TSX: RPI.UN), and SIR Royalty Income Fund (TSX: SRV.UN).

Thirty-three trusts will cut distributions. Half of the trusts/LPs that have announced their intentions for 2011 said they would reduce their payments after Jan. 1. Most of the cuts are in the 25 per cent to 35 per cent range but a few are much deeper. Investors in Canadian Oil Sands Trust (TSX: COS.UN) will see their payments slashed by 60 per cent in the New Year from $0.50 per quarter to $0.20. Another trust which has announced a big cut is Canfor Pulp Income Fund (TSX: CFX.UN), which is dropping its payout by 53 per cent from $3 annually to $1.40. Also on this list is natural gas producer Peyto Energy Trust (TSX: PEY.UN), which is reducing its payment by 50 per cent to $0.72 annually.

Five trusts are increasing their payouts. Any trust or LP that can boost its payment despite the new tax is obviously doing very well. There are five that are in this position. Boyd Group Income Fund, which operates 133 auto collision repair centres in Canada and the U.S., recently announced it will increase its distribution by 4.3 per cent to $0.03 a month effective in January. At a recent price of $7.70, the projected yield in 2011 is 4.7 per cent.

Baytex Energy Trust (TSX: BTE.UN, NYSE: BTE) announced an 11 per cent distribution increase on Dec. 11. Inter Pipeline, is raising its payment by 6.7 per cent.

Unitholders of A&W Revenue Royalties Income Fund will also reap higher rewards starting in January. The trust announced it will raise its payment by 10 per cent, to $0.117 monthly ($1.404 a year).

The little-known Chesswood Income Fund (TSX: CHW.UN) announced a 12.5 per cent distribution increase in October, to $0.045 monthly ($0.54 a year). Chesswood, which operates in the financial services sector, recently traded at $5.93 for a projected yield of 9.1 per cent in 2011.

Twenty-eight trusts will maintain their distributions. A number of other prominent trusts have recently announced that they also intend to retain their existing payment level in 2011. They include Freehold Royalty Trust (TSX: FRU.UN), Bird Construction Income Fund (TSX: BDT.UN), Enerplus Resources Fund (TSX: ERF.UN), K-Bro Linen Income Fund (TSX: KBL.UN), Pengrowth Energy Trust (TSX: PGF.UN, NYSE: PGH), and Just Energy Income Fund (TSX: JE.UN).

That’s the scorecard as we close the curtain on the trust sector (well, most of it anyway). Again, thanks to Prof. Casas for compiling this information and sharing it with us.

Photo © John Wohlfeil

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