Client Presentation Income Trusts: Past, Present and Future

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Agenda. Market OverviewProposed Tax Fairness PlanOil

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Client Presentation Income Trusts: Past, Present and Future

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2. Agenda Market Overview Proposed Tax Fairness Plan Oil & Gas Trusts Business Trusts REITs Conclusions

3. Approximately 260 income trusts value of $200 billion Strong growth fuelled by: Investor looking for stable investment following tech bubble Aging demographic requiring yield Part of S&P/TSX Income Trust Index 2006 weaker than last year: Introduction of taxes in 2011 Softening of commodity prices Lower funds flow

5. What is an Income Trust? However, these are not fixed income vehicles: No fixed coupon dates No known maturity date No guarantee of principal Treat Them Like Equities Same exposure to downside risk as equities We view them as “high-yielding” equities Voting rights are essentially the same

6. Proposed Tax Fairness Plan Plan Objectives Shift the tax burden from individuals to corporations Stop tax leakage at federal and provincial level Remove income trusts’ tax advantage Stop income trust conversions Levelling the playing field Corporate tax for existing income trust beginning in 2011 Trusts created after October 2006 will be subject to tax starting in 2007 Capture taxes from tax-exempt investors and from foreign investors

7. Proposed Tax Fairness Plan Direct Benefits for Individuals Income splitting for all pension plans effective in 2007 Increase in Age Credit of $1,000 effective for 2006 Value of approximately $150/year Reduction in general corporate income tax rate by 0.5% to 31.5% starting in 2011

8. Tax Rates by Type of Investor

9. Impact on Distributable Cash Flow Lower distributable cash flow Net after-tax distributions for taxable investors are unchanged Lower dividend rate equalized for new trust tax Distributions are likely to be cut in 2011

10. Proposed Tax Fairness Plan Potential Obstacles Vote in House of Commons Conservatives have 40% of seats. However, the NDP and the Bloc are rumoured to be supportive Government succumbs to lobbying Coalition of Canadian Energy Trusts Lobbying to exempt oil & gas trusts from proposed tax plan Canadian Association of Income Trusts were successful in past Foreign ownership limits rule Pension fund holding limits Most analyst believe the proposal will be successful

11. Present Value of Tax Holiday RBC CM expects pullback of 20% to 25% Consider trusts has corporations with a 4-year tax holiday The Bloq has been rumoured to be pushing for a 10-year tax holiday. On a present value basis, this would imply a pullback of approximately 13%

12. Impact on Valuations Negative for trust valuations Funds flow will diminish Difficult to raise capital Foreign investors Uncertainty Positive for trust valuations Lack of substitute product Trusts who currently pay corporate taxes Tax shields Tax loss carry forwards Undepreciated capital cost allowance

13. Which Trusts Will Be Impacted Most Negatively High payout ratios In general, anything in excess of 90% can be considered too high High debt levels Reduces financial flexibility and added expense of interest cost Growth dependent on acquisitions Reduced access to capital markets Lower valuation may hinder ability to make acquisitions, a competitive environment when trying to acquire quality assets

14. Income Trusts Convert To Corporate Structures Not likely prior to 2011 Still more tax efficient in a trust Cost of converting can be avoided or delayed Why convert to a corporation? To complete strategic acquisitions not clear if small tuck-in acquisitions will be allowed The Proposed Tax Fairness Plan may limit transactions which will allow companies to circumvent the policy objectives Oil & gas trusts may have tax incentive to convert to corporation Lower provincial tax rate could reduce corporate tax to 28.5%

15. REITs – Most Are Expected to be Exempt Most REITs not impacted Rent collecting entities are not expected to be affected Some types of REITs may be affected Operational type REITs could be at risk Hotel, long-term care and retirement REITs Foreign-focused REITs could also be at risk If impacted, there there may be restructuring initiatives that would allow them to be exempt NAVs should serve as a good, long-term value “back-stop”

16. Income Trust Index

17. Oil Prices A return to $50 oil cannot be ruled out in the near term

18. Oil Prices – Futures Strip Falling

19. US Crude Inventories Robust

20. Natural Gas

21. Natural Gas Inventories – Storage Crunch Natural gas inventories are closing in on an all time record

22. Impact of Oil and Natural Gas Prices

23. Impact of Oil and Natural Gas Prices

24. Net Asset Value and why it matters NAV analysis - apples to apples comparison makes more sense than applying a simple earnings or cash flow multiple to arrive at a target price NAV Basic Calculation: Assets: Present value of each year of future production (using a commodity forecast) + value of reserves Less: Debt + Hedging Costs = Net Asset Value Ability to grow NAV is crucial

25. Net Asset Value Trusts Trade at a premium Mature properties Less opportunity to grow NAV

26. Cash Flow Valuations Trusts Trade at a premium Senior and Junior E&Ps pay taxes Senior E&Ps have longer life assets

27. Valuation per flowing barrel Trusts Trade at a premium Senior and Junior E&Ps pay taxes Senior E&Ps have longer life assets

28. Impact of Tax Fairness Plan

29. Stability of Distributions

30. Oil & Gas Trusts Modest underweight exposure to the energy sector Wait for a pull back before investing in large cap income trusts Look at E&P companies for commodity exposure Encana (ECA), Husky (HSE) and Petro Canada (PCA) - trading at lower P/NAV premium and oil sands assets do not appear to be fully valued   Portfolios that are overweight royalty trusts should consider reducing exposures. So far only natural gas weighted trusts have reduced distributions, however, the possibility of lower natural gas and oil prices could result in more distribution cuts and lower unit prices.

31. Oil & Gas Trusts Royalty trusts continue to be more expensive Large US investor base still evaluating proposal Unit prices likely to decline Distribution levels are not sustainable under the proposed tax system Fully loaded payout ratios expected to be 108% for 2007 Means trusts need to issue debt or capital to fund distributions and capex Some royalty trusts may eventually trade at a discount to the corporate peer group

32. Business Trust Overview Opportunity or Mirage – no near term catalyst Lack of new funds Index inclusion is finished

33. Business Trust Overview Lower valuations will make it hard for some business trusts to complete acquisitions or grow cash flows. Retain cash to fund growth projects Could also issue high-yield debt Are some of these lower valued income trusts worth buying? Some small cap business trusts are starting to trade at attractive multiples…but investors should be careful Trust P/AFFO Yield Somerset 3.1x 27.0% TerraVest 5.0x 22.0% Cargojet 5.9x 13.8% Resolve 6.1x 14.3%

36. REITS Summit acquisition will free up $2.1 billion 8% of REITs market cap Other potential take-over candidates Alexis Nihon – already announced takeout CREIT (high quality and no large ownership block) IPC REIT (motivated inside sellers) Relatively cheap REITs Morguard REIT Other Industrial exposure Dundee REIT

37. Trusts with a higher risk of cutting distributions Geared for income-oriented investors Payout Ratio Mitigation Factors Challenging Business Environment Not a valuation call Not exhaustive list No Oil & Gas Trusts stick to proven trusts

38. Avoid trusts that Suspended Distributions Improving – Continue to Monitor High Payout Ratio with Growth Strategy High Payout Ratio Challenging Business Environment Seasonal – Cyclical

39. Conclusions Continue to hold income trusts As part of diversified equity portfolio Provide investors with yield Stick to high quality trusts Larger market cap Lower payout ratio and leverage Uncertainty will cause volatility Unit prices expected to continue to decline Too many bargain hunters in market Look for buying opportunities to establish positions Reduce unwanted positions on strong days

40. Required Disclosures Explanation of RBC Capital Markets Rating System An analyst's "sector" is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector. Ratings: Top Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector over 12 months; provides best risk-reward ratio; approximately 10% of analyst's recommendations. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Qualifiers (any of the following criteria may be present): Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; no significant cash flow/financing concerns over coming 12-24 months; fairly liquid. Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; may not be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float. Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted.

41. Distribution of Ratings, Firmwide For purposes of disclosing ratings distributions, regulatory rules require member firms to assign all rated stocks to one of three rating categories: Buy, Hold/Neutral, or Sell regardless of a firm's own rating categories. Although RBC Capital Markets' stock ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above).In the event that this is a compendium report (covers six or more subject companies), RBC Dominion Securities may choose to provide specific disclosures for the subject companies by reference. To access current disclosures, clients should send a request to RBC Dominion Securities, Attention: Manager, Portfolio Advisory Group, P.O. Box 7500, 77 King Street West, Toronto, Ontario M5W 1P9. Dissemination of Research RBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients. RBC Capital Markets' equity research is posted to our proprietary websites to ensure eligible clients receive coverage initiations and changes in rating, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via third party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets research. Important Disclosures The author(s) of this report are employed by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto, Canada. As this is a compendium report (covers six or more subject companies), to access current disclosures, clients should send a request to RBC Dominion Securities, Attention: Manager, Portfolio Advisory Group, P.O. Box 7500, 77 King Street West, Toronto, Ontario M5W 1P9.

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