Bought Inter Pipeline Fund And Boston Pizza Royalty Income Fund


I’ve recently picked up a couple of non-financial income trusts: Inter Pipeline and Boston Pizza Royalty Income Fund.

Inter Pipeline Fund

You can read about Inter Pipeline in my How To Pick Pipeline Trusts post, where I highlighted their key assets as well as their strong and growing free cash flow. Interestingly, The Vancouver Sun has an article on Not enough pipeline for surging oil production, regular says.

The National Energy Board said the pipeline industry may face a capacity crunch as oil output this year rises to 2.9 million barrels a day, nine per cent more than in 2006. Almost all new Canadian oil comes from the oilsands region of northern Alberta, where more than $100 billion worth of projects to exploit reserves are planned or underway.

Boston Pizza Royalty Income Fund

Onto Boston Pizza Royalty Income Fund, this is my very first restaurant investment. The fund owns the Boston Pizza trademarks and licenses them to a private corporation, Boston Pizza International (BPI), for a 99-year term. In return, BPI compensates the fund with 4% of franchise revenues from 266 Boston Pizza restaurants across Canada. The beauty of this “top-line” funneling is that the fund enjoys a stable and consistent cash flow with no dependency on the restaurants’ profitability. Their cash flow statements are an eye-opener — no capital expenditures! BPI and their franchisees incur all the maintenance and expansion costs, while the fund gleans 4% off their total sales.

There are few contenders in the restaurant royalty space, which includes A&W Revenues Royalties, Pizza Pizza and The Keg Royalties Income Fund. However, Boston Pizza Royalty stands out of the pack with their higher liquidity (about 4x the others), generous yield (9.5%) and best-in-class same-store-sales-growth (6.5% over 10 years).

Same-store-sales-growth (SSSG) is crucial because that’s the main driver behind the fund’s distribution increases. The fund went public in 2002 with an initial monthly distribution of $0.0833, but has since risen it 12 times to $0.1130 for an annualized 6.36%, which is in line with the 6.5% SSSG.

Between the 9.5% yield and 6.36% growth, my expected internal rate of return is 15+%. The trust is trading at around $14.50 while distributing $0.113 per unit per month. This is a much better value than when it was trading at over $20 before Halloween. Back then, it was distributing only $0.109 per unit per month.

The distribution is about 84% taxable, so it’s more tax-efficient to hold the fund inside RRSP. Short of that, the second best option is to hold it under the spouse with the lower tax-bracket.

Reference:

Feeds and Links
Comment Feed
From This Author
Del.icio.us
Digg
Technorati
Categories
Investing
Stocks
Fixed Income



 

Write a Comment

Take a moment to comment and tell us what you think. Some basic HTML is allowed for formatting.

Reader Comments

Comment Number:
1
Written by:
moneygardener (AKA investor99)
Posted on:
August 2, 2007 at 4:47 pm

“with no dependency on the restaurants’ profitability.”

I guess the stable cash flow has no dependence on their profitability, unless of course they went bankrupt, however the growth of the dist. and share price would obviously be highly dependant on that profitability.

Comment Number:
2
Written by:
moneygardener (AKA investor99)
Posted on:
August 2, 2007 at 4:49 pm

Sounds like it’s essentially a play on the Boston Pizza Brand. I think the restaraunt has a very good niche.

Good Baked Shrimp Penné too!

Comment Number:
3
Written by:
Financial Jungle Guy
Posted on:
August 2, 2007 at 5:27 pm

To clarify, the fund owns the brand, but not the restaurants. Profitability is a function of sales and costs. Within normal operating parameters, the fund’s cash flow doesn’t depend on the restaurants’ profitability. For example, the fund receives identical royalties from 2 BP restaurants with identical sales even if they have different profitability.

Last year, BPI opened 41 new restaurants and closed down 1. Obviously, if the number of restaurants is shrinking, that may reduce the fund’s cash flow.

Comment Number:
4
Written by:
Financial Jungle Guy
Posted on:
August 2, 2007 at 6:52 pm

Here’s a Boston Pizza post from the CB forum by “Justise”:

I started buying Boston Pizza [BPF.UN] recently when I did deeper into the fundamentals.

SSSG [same store sale growth] averages 6.4% for the past 10 years with 2006 SSSG of 8.4%. On top of SSSG, there are also new restaurents addition. On aggregate therefore, the total sale growth is to the tune of around 18%.

Purely on SSSG rate, Boston Pizza as a business are better than the likes of expanding businesses like Wal-Mart, Tim Horton, McDonalds, Shoppers Drug Mart, Sleep Country etc. Yet the P/E is the lowest of all named and the yield is the highest and aggregate sales growth are in double digits. There is in theory, no capex required as all but 3 are franchise stores, and so are all new restaurents commitments on hand.

Boston Pizza is therefore a value stock, a growth stock and a high yield stock.

Comment Number:
5
Written by:
moneygardener (AKA investor99)
Posted on:
August 2, 2007 at 7:43 pm

I don’t agree with any comparision of P/Es or other metrics with these other food retailers. The structure is not the same, it’s apples to oranges. You are protected from downside with the 4% of revenue, but you are also buffered from upside, because earnings due to cost cutting and margin expansion are what can drive these businesses, not just sales growth as with BPF.UN.

Comment Number:
6
Written by:
Financial Jungle Guy
Posted on:
August 2, 2007 at 8:07 pm

Another way to look at risk/reward is that with 9.5% yield + 6% SSSG on the table, why chance it with margin expansion?

Moreover, SSSG can be forever, but margin expansion is only temporary plus there is a pratical ceiling. Over the long-term, a company can only cut costs so much.

Comment Number:
7
Written by:
moneygardener (AKA investor99)
Posted on:
August 2, 2007 at 8:13 pm

I agree with you, but the same horsepower is not there that you might get with a Shoppers or Hortons.

Comment Number:
8
Written by:
Harry
Posted on:
August 3, 2007 at 3:12 am

IPL.UN has a payout ratio of 80%. IN fact its net income is less than payout. Its capex is 1/3rd of depreciation historically for every year except 2006 which means it has been underspending on investments. Also its Book value change has been -10% over 5 years which means it is not adding to its business equity. Besides GlobeInvestor gives it only 2 stars. Overall my analysis does not indicate anything to be excited about.

Comment Number:
9
Written by:
Financial Jungle Guy
Posted on:
August 3, 2007 at 4:43 am

Harry, you’re evaluating a pipeline trust as if it’s a common stock.

Inter Pipeline can freely depreciate its assets to derive at the most tax advantageous position. By over depreciating, its income and book naturally fall short “on paper”.

BTW, 80% payout is conservative for pipeline trusts.

Have you read my post on “How to pick pipeline trusts”?

Comment Number:
10
Written by:
Harry
Posted on:
August 3, 2007 at 10:08 pm

Ok I went back and read your post on how to pick pipeline trusts and can see where the Capex gets confusing. Also being a novice in Income Trusts I did not know that 80% payout ratio is OK. I hold ARC energy, Pengrowth, Prime west and Canadian Oil Sands. All of them from before Flah&Y(*Y dropped the bomb. What do you think of them.

Comment Number:
11
Written by:
Financial Jungle Guy
Posted on:
August 4, 2007 at 3:15 am

The only one that I follow is COS.un. Even then, I don’t own any oil and gas trusts. Income trusts by nature are too dependent on the prevailing interest rate. I don’t need to add oil and gas prices to equation.

IMO, a pipeline play, like Inter Pipeline, is a safer way to participate in the O&G sector.