As business trust conversions become increasingly common, income-hungry investors have to be wondering which trusts are happy to carry on just the way they are.
Units in several trusts, including BFI Canada Income Fund, have tumbled on news that the companies are shifting to a common share structure, and cutting back on the all-important cash they hand out to owners. Trusts are taking this step as they prepare for life under a more onerous tax regime in 2011.
There have been 14 trust transformations proposed since the federal government pulled the carpet from under the sector in 2006, according to Scotia Capital analysts Navdeep Malik and Turan Quetawala. In all but three cases, the metamorphosis came with a cut to the trust's cash distributions.
The two Scotia Capital analysts also noted in a report published Thursday that the price of units promptly dropped on news of all but two of these 14 conversions.
Investors who want to see the cash continue to flow from their trusts, and the unit price continue to bob along, need to understand what will motivate companies to maintain a trust structure through 2011. The Scotia Capital analysts are glad to explain the dynamics of the sector, and make a fearless prediction on which business trust makes the most likely conversion candidate.
"Business trusts with significant potential capital requirements (i.e., acquisition opportunities or growth capex) remain prime contenders for early conversions," wrote the analysts. They see trucking play Mullen Group as among the leading candidates to make the move. Rival TransForce has already switched gears, converting to a common share strcuture this spring.
"On the other hand, business trusts that are relatively less capital intensive are less likely to convert early as they would rather benefit from the full tax holiday," said Mr. Malik and Mr. Quettawala.
The two rhymed off Livingston International Income Fund, Davis + Henderson Income Fund, Vicwest Income Fund, Home Equity Income Trust, AutoCanada Income Fund, Cineplex Galaxy Income Fund, Rogers Sugar Income Fund, and the restaurant royalty trusts as companies that are likely to maintain the status quo.
This group of trusts "have low capital requirements and are, therefore, well suited to a high payout structure. Therefore, we expect them to maintain a high payout ratio even after they convert to a corporate structure around 2011."
