Income trust risk

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jackstraw
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Post by jackstraw »

lystgl wrote: That doesn't preclude the trust from cap ex spending.... I don't believe that [that income trusts are Ponzi's] should necessarily be the case.
So many people dismiss those of us trying to raise red flags with the argument "What you are saying doesn't apply to ALL trusts therefore it must be wrong."

For all my warnings, I DO own income trusts and have for 20 years. I am confident that ALL the nay-sayers will readily admit there are some trusts that are properly valued and are keeping their assets sustainable. We do not mean ALL trusts have the problems we talk about.

We want others to know that they have to do the same fundamental analysis and valuation calculations for trusts as they do for corporations. Because they refuse to do that, they can't know WHICH are over priced.

You didn't comment on the point I made that people don't know what the term 'distributable income' really means.
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Post by lystgl »

jackstraw, you're right. I, for one, don't know what distributable cash is because different trusts have different ideas of what distributable cash is. Some trusts report per unit distributions that are higher than their per unit earnings. Even I know that this can't be maintained indefinitely. I also think you're right in that every investor should do his/her own due diligence when investing in these and anything else. The OSC , Mutual Fund Dealers Assoc, various provincial entities, exchanges and gov't agencies, oversight is less than stellar. Everyone passes GO, everyone collects $200 and NO ONE goes to jail. The only one not collecting is the investor. It's a jungle out there and I welcome any and all advice.
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yielder
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Post by yielder »

lystgl wrote:that this can't be maintained indefinitely.
Yes it can. Earnings include non-cash items such as depreciation and amortization. Trusts add this back to earnings and then subtract capital expenditure which is a real cash item. There are sometimes some other items such as financing charges and tax adjustments but depreciation is the big one.

YLO example.

If I owned individual trusts, I would do this kind of analysis with each earnings release. Since very few trusts disclose this kind of info, you have to write to them to request the info. It took me two months to get YLO to respond. Anybody who buys individual trusts rather than one of the many baskets that exist is asking to be sand-bagged à la SPF.UN.
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yielder
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Post by yielder »

jackstraw wrote:I strongly DON'T want the commission to decree a definition of "distributable cash" because there has never, ever been the necessary discussion of what is in fact meant by the term.
Then make disclosure of a reconciliation of distributable cash to net earnings mandatory while consensus is reached.
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Post by jackstraw »

You are still missing my point. One can always add and subtract numbers to arrive at any conclusion. My point was that before regulating what that calculation is (to arrive at some number) we have to decide what the 'understanding' of the resulting number is... What does the number represent?...What is its meaning?

I am no apologist for accounting GAAP, and would be more than willing to rethink the % used to calculate depreciation and amortizations, if it can be shown that the current rate of expensing prior year's purchases is too high.

Still the accountants' Net Income is the measure of what is the maximum sustainable distribution if you define "sustainable" to mean the amount that can be distributed without shrinking the company. If you won't shrink the company then you can only pay out the growth, or income, or profit.

What do the income trusters think "distributabe cash" is? What is the concept that it measure?
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yielder
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Post by yielder »

jackstraw wrote:You are still missing my point.
No, I'm not. You say that you can always add and subtract numbers. No you can't unless the trust discloses them. Many don't. Once you have the numbers and come up with distributable cash, you have to assess whether it's "good" or not. And that's an increasingly big question mark because of the CAPEX number. I mentioned elsewhere that we've seen SPF play games . Even if they hadn't, would we have been in a position to determine that CAPEX is adequate? Certainly not in the short run and maybe not even in the long run if the trust does the acquisition shuffle. Right now there's no discussion around CAPEX because the number is buried.

As for the suitability of using accounting depreciation for a trust, I don't have clear opinion at this point. If the trust is a mature entity, then maintenance CAPEX rather than accounting depreciation might be a better inclusion in the distributable cash calculation. Replacing the asset can be accomplished through an acquistion financed by OPM rather than retained earnings. However, if a trust does acquisitions that are meant to be accretive, as many do, rather than replace assets, I'm not so sure about maitenance CAPEX.

Until there is mandatory disclosure of cash distribution derivation, none of this discussion is likely to take place except maybe by Al Rosen. You only have to search here on his name to see what people think of him.
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Post by gyrfalcon »

jackstraw wrote:So many people dismiss those of us trying to raise red flags with the argument "What you are saying doesn't apply to ALL trusts therefore it must be wrong."

For all my warnings, I DO own income trusts and have for 20 years. I am confident that ALL the nay-sayers will readily admit there are some trusts that are properly valued and are keeping their assets sustainable. We do not mean ALL trusts have the problems we talk about.

We want others to know that they have to do the same fundamental analysis and valuation calculations for trusts as they do for corporations. Because they refuse to do that, they can't know WHICH are over priced.
It was a revelation to me that you own trusts. It would appear, in that case, that you are not all that more cautious than myself. I only directly own one RT, which is ARC, and 2 REITs. I have a larger position in SDT.UN which gives me a managed, limited position in dozens of Trusts. The downside of a single blowup is small (and in a number of cases has been avoided by Sentry mgt).

I think that where I differ from some is in the belief that there are still many DYI investors out there who perceive no risk with Trusts. I think that concept is getting a bit dated i.e. do these people READ the paper, or not ?? It's not as if we couldn't list off a dirty dozen rather easily, all of which have had some press coverage.

I view Trusts as no better / no worse than Stocks. I can truly say that 90-95% of the Stocks on the TSX will NEVER get even a "look-see" from myself. For Trusts it's also about 90%. So where is the difference ??

I'd like to close with text from the 2005 ARC annual report. I think we need to keep things in perspective:

Inside Cover: "ARC's ... compound annual total returns since inception have averaged 28 per cent."

p.24 "At inception of the Trust on July 16, 1996, the NAV was determined to be $11.42 per unit based on a 10 per cent discount rate; since that time, including the January 15, 2006 distribution, the Trust has distributed $16.23 per unit. Despite having distributed more cash than the initial NAV, the NAV as at December 31, 2005 was $16.62 per unit using GLJ prices and $21.92 per unit using constant prices and costs. NAV increased $5.19 per unit during 2005 after distributing $1.99 per unit to unitholders."
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Post by yielder »

gyrfalcon wrote:I think that where I differ from some is in the belief that there are still many DYI investors out there who perceive no risk with Trusts. I think that concept is getting a bit dated i.e. do these people READ the paper, or not ?? It's not as if we couldn't list off a dirty dozen rather easily, all of which have had some press coverage.
I wouldn't say and have never said that DYI investors perceive no risk with Trusts. What I would say is that many most have no idea how to analyze trusts & have no idea where to look for risk, are buying them because of yield, and are paying too much for them. WADR to those here who got burned, SPF.UN is a good example.

Trusts have had an exceptionally good run which has lulled many into a warm, fuzzy state. Many don't remember the 1998 collapse or, if they do, say yabbut look at the recovery afterward. True but that event was single event driven, yields were higher, and rates weren't showing signs of a sustained inflation driven increase.
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Post by gyrfalcon »

yielder wrote:... What I would say is that many most have no idea how to analyze trusts & have no idea where to look for risk, are buying them because of yield, and are paying too much for them. ...
It occurs to me that I'd be interested whether you see differences in the potential for yourself, and others, to analyze Royalty Trusts vs REITs vs Business Trusts. I won't be debating this with you; I'm just genuinely interested in your views. gyr.
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Post by Springbok »

yielder wrote: What I would say is that many most have no idea how to analyze trusts & have no idea where to look for risk, are buying them because of yield, and are paying too much for them.
Out of interest, how do you come to this conclusion? Is there data available to back this up?

Why would this be more true for trusts than for dividend paying or in fact any other stocks?

I suspect (but would not SAY) that DIY investors on average do quite a bit of research before buying. After all, they don't have some so called professional suggesting what they should buy. And if they are not capable of in-depth analysis, they may very well spread their risks and buy diversified or index funds, whether these be trusts or other investments.

I have followed the discussions on $Trusts for some time, and there are many there that seem to spend most of the waking hours analysing trusts, based on what information is available Some of them are VERY capable and share their findings to those with lesser skills.
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Post by uhoh »

yielder wrote:Many don't remember the 1998 collapse or, if they do, say yabbut look at the recovery afterward. True but that event was single event driven, yields were higher, and rates weren't showing signs of a sustained inflation driven increase.
what was the reason for that collapse? and how long did it take for trusts to come back?
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Post by Arby »

uhoh wrote:
yielder wrote:Many don't remember the 1998 collapse or, if they do, say yabbut look at the recovery afterward. True but that event was single event driven, yields were higher, and rates weren't showing signs of a sustained inflation driven increase.
what was the reason for that collapse? and how long did it take for trusts to come back?
1998 trust collapse??? Eyeballing a chart from CIBC, the TSX Trust Index peaked at about 100 during 1997-98, and dropped to a low of about 80 by Aug 1998, which is a 20% drop for the trust index. During the same time period, the CIBC chart shows the TSX Composite went from a peak of about 115 to a low of about 85, for a 26% drop. So trusts fell much less than stocks during 1998.

As to the cause of that drop in the trust index in 1998, I suspect it was partly due to the drop in the overall stock market. But it was also partly due to the fact that, back in the mid 1990's, a number of trusts were sold on an installment receipt basis. Investor's paid only half the cost up front, and the other half was to be paid at a later date. It turned out the second installment payment was due during the market downturn of 1998, so many trust investors simply dumped their units rather than pay the second installment receipt. That type of situation is very unlikely to happen today, as trusts are typically no longer sold on an installment receipt basis.
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Post by scomac »

ISTM that you're ignoring the Asian currency crisis and the ensuing meltdown in commodity prices, particularily oil.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
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Post by Springbok »

scomac wrote:ISTM that you're ignoring the Asian currency crisis and the ensuing meltdown in commodity prices, particularily oil.
These events also affected the overall TSX market which it self is very oil&gas oriented.

I think the point is that trusts were not affected any differently than the overall market and have perhaps rebounded more strongly.

If commodities are hit again due to lower Asian demand, it will not make much difference if you are in trusts or in conventional equity - we will see a pullback either way.

If interest rates increase, I would think that div paying stocks would be affected to a larger extent than high distribution trusts - A 1% change in bond rates is not too significant to somone holding a trust fund that is paying out 11 or 12% but could be to someone owning a stock paying out under 4%. The trust unit values will probably drop a bit but then trust distributions will be even more attractive.

BTW, Don Coxe in Basic Points recommends commodities in the April edition:

http://makeashorterlink.com/?V5072680D

and then there is Norman Levine's viewpoint: " Why go to trusts at 6% when bonds are going to 5% with less risk he says" - Why 6%, why not OGF.Un at 12%??
Last edited by Springbok on 28 Apr 2006 22:59, edited 2 times in total.
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yielder
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Post by yielder »

Springbok wrote:If commodities are hit again due to lower Asian demand, it will not make much difference if you are in trusts or in conventional equity - we will see a pullback either way.
Oil & gas trusts will cut their distributions which will magnify the price drop. As for business trusts, the shakeout is already beginning. REIT's, depending on the condition of their leaseholders, are probably not going to experience cuts unless we see a recession that drives up vacancy rates because of bankruptcies. The pullback will be greater for those stocks - trusts or conventional equities - that cut their dividends. Leverage is a two edged sword. There's higher leverage among trusts than among conventional div paying equities and the payout ratios are higher. Their will be more cuts among trusts and a greater pullback. There's also likely to be a flight from small caps which most trusts are to the relative safety of large caps.
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Post by gyrfalcon »

gyrfalcon wrote:
yielder wrote:... What I would say is that many most have no idea how to analyze trusts & have no idea where to look for risk, are buying them because of yield, and are paying too much for them. ...
It occurs to me that I'd be interested whether you see differences in the potential for yourself, and others, to analyze Royalty Trusts vs REITs vs Business Trusts. I won't be debating this with you; I'm just genuinely interested in your views. gyr.
And I'm still interested. :wink:
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Post by sydney2 »

I guess I am in the riskiest zone I own the following:
28/29/20/27/17/8.

Hard to believe that Penn West is listed #20. I have held some of these trusts for years and if I had listened ed to everyone, would have dumped them long ago, but have held on and will hold on longer.

There are some business trusts that don't interest me, have one reit - Riocan in RSP drip 652 shares.

We hold Penn West in the unregistered account and also in RSP accounts. The unregistered account purchase was at $29.40 for 2500 shares and pays $850.00 per month. There have always been naysayers from the day I started to buy these things. I mirrored my basket along with DD, with what Sentry Select was buying and some of the other successful funds.
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Post by Springbok »

yielder wrote: The pullback will be greater for those stocks - trusts or conventional equities - that cut their dividends. Leverage is a two edged sword. There's higher leverage among trusts than among conventional div paying equities and the payout ratios are higher. Their will be more cuts among trusts and a greater pullback. There's also likely to be a flight from small caps which most trusts are to the relative safety of large caps.
Could be. But others say differently:

An interesting article in FP:

Payouts safer than dividends, study finds


Boyd Erman and Carrie Tait, Financial Post
Published: Friday, April 28, 2006

The recent headlines generated by business income trusts cutting payouts have led some investors to a simplified view of the world of payouts: Trusts' distributions bad, common-share dividends good. Right?

Wrong, according to Scotia Capital's trust analysts. They compared the payout history of business trusts against common equities since January, 2002, using the members of the Scotia Capital business trust index and all stocks in the S&P/TSX composite index.

The analysts found that "a greater percentage of trusts have maintained or increased distributions, and a lower percentage have reduced or suspended distributions, relative to common equities."

Of 150 trusts in the Scotia Capital index, 81% have increased or maintained distributions since January, 2002, while 73% of dividend-paying common equities have boosted their payouts. Those increases tend to be about the same size, the analysts found.

But which security type has bigger declines in payouts when they're going down? The answer is common equities. They cut dividends by an average annual rate of 12%, versus about 10% for income trusts.

"We are somewhat surprised by these results given that common equities are thought of as higher growth-oriented investments relative to income trusts. However, we believe this illustrates that certain trusts indeed have the potential for substantial organic or acquisitive growth," the analysts concluded. Boyd Erman
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Post by kcowan »

sydney2 wrote:I guess I am in the riskiest zone I own the following:
28/29/20/27/17/8.

Hard to believe that Penn West is listed #20. I have held some of these trusts for years and if I had listened ed to everyone, would have dumped them long ago, but have held on and will hold on longer.

There are some business trusts that don't interest me, have one reit - Riocan in RSP drip 652 shares.

We hold Penn West in the unregistered account and also in RSP accounts. The unregistered account purchase was at $29.40 for 2500 shares and pays $850.00 per month. There have always been naysayers from the day I started to buy these things. I mirrored my basket along with DD, with what Sentry Select was buying and some of the other successful funds.
I don't think you are at high risk. The thing is that most people are unaware/do not understand the factors that lead to the rankings, including brokers. They just look at yield.

So time is on your side.
For the fun of it...Keith
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Post by yielder »

gyrfalcon wrote:
And I'm still interested. :wink:
Apologies. I missed your question. I'm not sure exactly what you're asking here. Could you re-phrase, please?
Springbok wrote:Out of interest, how do you come to this conclusion? Is there data available to back this up?
Anecdotal. The time involved to analyse a stock for the first time is very lengthy and ongoing maintenance analysis, while quite a bit lower, is still time consuming. ROBtv and CNBC as well as newsletters such as Investors Digest exist because the demand is there. While some probably use them for ideas and nothing more, it's a very easy, small step to take to substitute their research for yours. I still get a couple of newsletters and read TDW's reports daily. I do so because the process of learning how to analyse a stock is never ending. However, the line between educating oneself and paying attention to the forecasts and the recommendation sometimes get confused. I've done that over the years. The discussions that take place in public forums suggest no disciplined, well-founded analytic approach. It's possible that these people are not representative but I think they are based on the time element that I just mentioned.
Why would this be more true for trusts than for dividend paying or in fact any other stocks?
Nope. A stock is a stock is a stock except that trusts require even more digging because they are small cap.
I suspect (but would not SAY) that DIY investors on average do quite a bit of research before buying.
What makes you suspect that? Surely not $Trusts? I agree with you that there are some not many who spend most of their waking hours researching. However, the ratio of those who do that to those who don't, ie, those who read only is high. FWIW, I do not consider research to be reading someone else's blurb whether public or pay-for-view or listening to a talking head.
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Post by Springbok »

yielder wrote: What makes you suspect that? Surely not $Trusts? I agree with you that there are some not many who spend most of their waking hours researching. However, the ratio of those who do that to those who don't, ie, those who read only is high.
I would agree that very few individual investors do much detailed research. Most of us are not trained to do this, so we generally rely on what others do and on basic data that is now easier to access than it was before the days of the internet.

But, I would think that DIY investors, out of neccessity, would be more likely to do some research, because they do have to make their own decisions.

Individual investors who deal through a brokerage are more likely to do very little research and rely on the brokers recommendations.

Just my gut feeling - No data to back this up!
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yielder
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Post by yielder »

Springbok wrote:Could be. But others say differently:
WADR, the study, or at least what has been used by the FP, goes beyond financial porn. It's a load of cherry-picking shit: it's four-year time frame that covers a booming economy, lowish interest rates, rising commodity prices and begins near a market bottom. In this environment, I would expect energy trusts to increase their payouts, business trusts to increase their payouts through the accretive acquistion exercise, and REITs to increase their payouts because of high occupancy rates.

But then again, I'm not surprised at the report's time frame given that Scotia underwrites trust issues, gets fees from its ETF and mutual fund products. I would be highly surprised to hear any sell side analyst say otherwise. And even the buy side analysts won't say otherwise unless they want to encourage redemptions from their products.
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Post by yielder »

Springbok wrote:data that is now easier to access than it was before the days of the internet.
The net is a two-edged sword. It provides timely access to free(ish), high(ish) quality investment data, tools, and training while at the same time providing access to mostly low quality, good-sounding sweet-talking group think. Human nature being what it is, the second information set will prevail. It will cycle through boom and bust: dot.cons, dogs of the dow. I'd expect a shakeout of the current "dividends are good mantra" as well, as people buy the yield, get a nasty short-term surprise, and cycle into the next winner. Wanna bet it's growth stocks? Anybody on ROBtv or CNBC talking yet about growth stocks being good value relative to value stocks? :lol:
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Post by worthy »

cherry-picking
So trust distributions perform better in a time of low interest rates with rising commodity prices than common stock dividends?
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Post by Arby »

Note that the Scotia study was based on Business Trusts. That is the trust sector that has seen the most blowups and distribution cuts in recent months, so it is even more surprising that Business Trust distributions performed better than stock distributions.

Also, most Business Trusts would not derive any benefit from the rise in commodity prices. If they had included oil & gas trusts and REITs in the study, it would probably have looked even better for trusts.
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