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A report card on income trusts

Examining the year-end results of six income trusts, a leading authority on the subject hands out a total of five passing grades.

Imagine you’re a coach whose team is fighting for a playoff spot. You have to stand at the podium and explain how your guys blew a two-goal lead in the third period and lost in a shootout.

That’s how it is these days with the reporting of year-end results — it’s an anxious exercise for companies and investors alike.

Many companies have a lot of explaining to do. Many investors have hard decisions to make.

The coach may blame some bad calls and the company may blame the economy, but they’re still going to be held to account.

Today, we dissect the year-end results of six income trusts. On the whole, when you consider the dreadful fate predicted for income trusts after the 2006 “Halloween” tax, the report card isn’t bad.

To stretch out the hockey analogy, three of these trusts are securely in the playoffs, two are hanging on gamely and the last is in “wait-‘til-next-year” mode (and no it isn’t Maple Leaf Sports and Entertainment).

Our guide to these results is one of the leading observers of income trusts in Canada, Income Trust Guidepublished by the Money Reporter. We’ll go straight to the podium and get started.

A record year

An opening comment: these are all income trusts that this advisory follows regularly. They are on a list of trusts that it believes have the strength to reward investors over the long term.

We begin with one that is doing all it can to earn its keep on the list. AltaGas Income Trust (TSX-ALA.UN) ought to have felt the effects of lower oil and natural gas prices in 2008. Instead it turned in a record year.

True, its fourth quarter was flat compared to the year before. But for the year as a whole, it earned $2.38 per unit as against $1.90 per unit in 2007. That’s a healthy 25 per cent increase.

But surely things will slow down now. Not necessarily, says the advisory. “As infrastructure becomes the destination for greatly increased investment in the next few years, AltaGas finds itself well positioned.” It remains a buy.

It is worth noting that the trust’s units have not yet matched its results and trade well below their 52-week high.

Not just hunkering down

Consumers’ Waterheater Income Fund (TSX-CWI.UN) saw its revenues rise 7 per cent in 2008. This pushed earnings up 6.9 per cent. EBIDTA (Earnings before interest, taxes, depreciation, and amortization) grew by 3.4 per cent. And the customer attrition rate fell by one per cent.

Better still, says the advisory, the company “is not just hunkering down” and hoping the bad times blow over. Through its purchase of Stratacon Inc. it has gotten into the sub-metering business.

This “smart” metering service allows apartment dwellers to pay for only what they use and not an average of what the whole building pays. The service recently earned the company a fat contract in Toronto.

This company has a steady stream of revenues that give it a ”recession-proof” profile and it remains a buy. Like AltaGas, however, it has not seen the price of its units rise with its revenues.

The units of Enbridge Income Fund (TSX-ENF.UN) have held up much better. This pipeline company also has the guaranteed revenue that should keep it healthy in a sick economy.

Its earnings rose to $0.63 per share in 2008 from $0.61 the year before. “That increase is bigger than it looks,” says the Income Trust Guide, as 2007 revenues got the considerable benefit of a one-time tax rate reduction. Enbridge has no trouble keeping its buy rating.

Two other trusts are buys despite some jagged numbers.

Mixed results

As the housing market slackens, apartment dwelling is liable to be on the rise. That would make Canadian Apartment Properties REIT (TSX-CAR.UN) a solid buy. And so it is, despite some mixed results.

In the fourth quarter of 2008, the trust posted a loss of $0.40 per unit versus a profit the year before. It also posted a loss for the year as a whole — but it was less than the loss the year before.

On the other hand, distributable income rose to $1.26 per unit in 2008, more than enough to cover the distribution. The trust’s occupancy rate also increased, to a robust 95.8 per cent, and its average monthly rents rose. The units have been up and down so far this year.

Enerplus Resources Fund (TSX-ERF.UN) had excellent results in 2008 — and precious little to show for it on the charts.

The holder of a large portfolio of oil and natural gas properties, Enerplus saw its cash flow shoot up 45 per cent and its payout ratio fall. Net income per unit more than doubled, from $2.66 to $5.44. Yet the price of the units has plunged. That’s the effect of lower oil and gas prices, not the company’s failings.

A meaningful measure

Out of the playoffs for now is EPCOR Power L.P. (TSX-EP.UN). This trust, which owns a string of power plants, might be expected to do well in times like these. Instead it lost $67 million in 2008. The company’s rationale was that “the net loss is not a meaningful measure of the Partnership’s operating performance.”

But the market thinks it is, as the units are down. And the Income Trust Guideisn’t buying it either. This trust may gather steam in the future, but it stays on hold for now.

Of course the ace-in-the-hole with income trusts is the cash distribution you get. That makes the year-end results even more meaningful — trusts that kept the revenues rolling in can keep the distributions rolling out.

That’s one difference between hockey and income trusts — as long as the management team plays well, you keep getting your money back.