A handful of business trusts are showing the rest how IR should be done
‘Doing IR for income trusts must be the worst job!’ exclaims a Canadian analyst. Business trusts, she says, are a ‘very unsophisticated market,’ and she adds: ‘They just don’t know how to handle us. Many were taken public out of greed, and a lot of them outsource IR to firms that are really just promoters. Honestly, the little ones are just going under or being bought by vulture investors.’
She concedes, however, that large business trusts like BFI Canada and Yellow Pages – and the other 14 business trusts added to the S&P/TSX Composite Index this year – have good IR teams.
But as we wrote in Tax free – and losing trust in the June issue of IR magazine, the trust structure has been adopted by a raft of smaller companies that lack the stable and predictable cash flow necessary to meet the promises of regular income made to unit holders.
‘When we first became a trust, it was a concept meant for a relatively mature, stable business with a dominant position and a recognized name, and we met all those criteria. But of late it’s been a very popular vehicle for all sorts of new issues,’ says Gord Nelson, CFO of movie theater chain Cineplex Galaxy, which took home three trophies at the IR Magazine Canada Awards 2006.
John Vincic, executive VP of BarnesMcInerney’s IR division, confirms that the whole sector is under siege: ‘Out of all the trusts that have cut their distributions, we’ve yet to see a single one make a comeback and restore their distributions to historical levels. Until we see a regular pattern of trusts able to do this, they’re going to continue to be punished severely.’
A lot of business trusts ‘are on a learning curve as to what information people need as opposed to what they’re required to give out,’ with the former outstripping the latter, says Dirk Lever of RBC Capital Markets, Canada’s leading trust analyst. He advises trust IROs to ‘imagine you’re reading your public documents, and ask yourself if you would be able to build a model using that information. If I’m unable to build a model, I’ll just pass right over you and pick someone else to do research on.’
In fact, most of Canada’s 263 trusts ‘are finally getting it,’ Lever says. The main thing for trusts to focus on is cash flow, not earnings. ‘IR people from a corporate background have to make that jump to understand where cash flow is coming from and what the bank covenants are. Some of the disclosure from trusts is better now, but some is just brutal.’
Getting noticed
Business trusts, which have rapidly grown to represent a significant chunk of Canada’s capital markets in the last half-decade, started to get noticed in IR magazine’s Investor Perception Studies in 2004, when Yellow Pages won best IPO for its mid-2003 listing. ‘Better than anything else I’ve seen the last year,’ said one respondent to the survey. The contrast between this and other companies not so suited to the trust model was already emerging: ‘The perfect type of business for an income trust. It dominates its industry,’ said another voter.
Also in 2004, BFI Canada won best investment community meetings by a small-cap company, an achievement it repeated in 2005. This year Aeroplan Income Fund took home the award for best IPO, while Cineplex cleaned up in the under $1 bn market cap range.
Anne MacMicken, BFI Canada’s manager of investor and employee relations, says doing IR for an income trust is no different than common equity IR. ‘We have different performance metrics, true. But the common thing is good and open communications based on the needs of the investment community and on the personalities of management.’
The recent negative focus on business trusts has been exaggerated, MacMicken believes. ‘My biggest challenge is getting people to realize that there are some of us in the business trust sector that are ideal for this structure, with consistent cash flows, a stable industry and predictable capital expenditure,’ she says.
MacMicken has seen an increase in the proportion of institutional investors since BFI was added to the index. In fact, the wave of new investors preceded the expansion of the index by several months. ‘As soon as they knew we were going to be included in the index, we started meeting with them and getting them educated. It definitely affected us – we saw trading volumes increase, for example. But this year, with the official addition to the index, we haven’t had to do any extra IR work.’
The new institutional following that comes with inclusion in the index is raising the standard of IR across the asset class, says Rik Parkhill, president of TSX Markets. ‘The demand on IR at income trusts has always been significant because they had large, fragmented retail investor bases,’ he says. ‘But the inclusion of trusts in the index really raised the comfort level for institutions, and in response, we’re seeing more corporate IR professionals at trusts.’
Retail following
For its part, Cineplex, which is too small to be added to the index, started out with a fairly retail-heavy 50-50 mix and isn’t seeing any change. ‘After all, we have instant recognition from retail investors – people know what Cineplex is,’ Nelson says. Pat Marshall, VP of communications and IR, adds: ‘For anyone following the Warren Buffett theory of investing – buy what you know – it’s easy to know movies and the movie theater business.’
Another contrast with BFI, which has only generalist trust analysts covering it and not a single waste management analyst, is that Cineplex has started to attract specialized media analysts. Nelson says the change has happened over the last 18 months. ‘With a few years of history under their belt, the brokers now tend to have media analysts who understand business trusts but also cover traditional corporations.’
By the same token, Nelson is skeptical about the Canadian Association of Income Funds’ efforts toward standardizing financial disclosure for business trusts, particularly the non-Gaap measure of distributable income. ‘There are a lot of nuances in different businesses, so it would be difficult,’ he says.
It’s companies like Cineplex – and BFI Canada – that provide hope for Canadian investors now that the sheen on business trusts has been tarnished. And not just hope – Cineplex caters to its retail following, as well as Bay Street professionals and media, with an AGM that is ‘the most fun to attend of any out there,’ according to Marshall. The latest meeting, held in May, was at the Paramount Toronto, one of Canada’s
most successful theaters. Accompanying the PowerPoint and executive speeches were – naturally – popcorn, soft drinks and candy.