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Are the good times good enough
to get through the bad times? Almost every business experiences
seasonal sales. That's certainly true at Sun
Gro Horticulture Income Fund,which sells peat
moss to gardeners. "We sold Sun Gro when
sales during their peak period came in under
expectations, though sales were well above what
they needed to hit distributions," Mr. Bradley
says.
A few months later, Sun Gro units tanked when
the company announced that weak winter sales
had forced it to tap a line of credit to make
the promised distributions.
How does the trust's value
compare with Canadian and U.S. public companies
in the same sector? If the rest of the oil patch nosedives, energy
trusts are also going to lose ground. Mr. Cheng
says: "In a trust IPO, you wouldn't want
to pay a lot more for the company than a strategic
buyer would pay in a takeover."
Is the company dependent
on the patronage of just a few customers? If one customer represents
more than 20 per cent of revenue, a red flag
goes up. Trusts such as Halterm Income Fund,
which ran the Halifax port, and airport warehouse
owned IAT Air Cargo Trust ran into trouble when
key clients either moved on or stopped paying
their bills.
It's also important to ask whether the trust
is in a sector that promises dependable cash
from revenue. Restaurants and truckers are among
the newly hatched trusts in cyclical sectors.
Ms. Lundquist says: "I wouldn't buy a trucking
company. It's one of those business lines that
just shouldn't be in a trust."
Is the company large enough
to withstand unexpected downturns? Many of the trusts created out of
conversions by public companies are extremely
small, including Big Rock Brewery Income Fund,
with a $44-million market capitalization, and
auto repair chain Boyd Group Income Fund, a $27-million
concern.
The track record for small trusts contains some
car wrecks. Request Seismic Surveys Ltd. was
a small oil services play that became a trust,
and didn't have the resources to withstand an
oil patch downturn. Ms. Lundquist says: "Buying
Request was the worst investing decision I've
ever made."
What protection from competition
does the trust enjoy? The best trusts are monopolies, protected
by barriers such as capital costs, regulation
or less tangible walls such as a strong brand
name. Such protection is part of the attraction
at pipeline and power plant trusts.
Does the business generate enough money to fund
capital spending and distributions? Mr. Belaiche
notes: "There is no company in the world
that doesn't need to put money back into the
business."
Are you getting portfolio
diversity? If you
already own four REITs, what's the value of buying
another? The pros look for a mix of businesses
and energy trusts in their holdings. They also
want any trust to represent a geographically
diverse company, to lessen the risk of cash flow
being hurt by problems in one region -- think
of Legacy's pain after SARS emptied Toronto hotels.
Finally, don't be disappointed if you buy trust
units, and the price doesn't do much. Remember,
trusts are meant to throw off income. A unit
that makes regular, predictable distributions,
but doesn't budge off its $10 IPO price is doing
what it was meant to do.
Income-seeking investors want trusts in stable
businesses, with a track record for always handing
out the cash. An investor with this goal would
probably steer clear of trusts in cyclical, trendy
or competitive businesses.
"Once you've picked a diversified group
of trusts, let 'em ride. The price may go up
or down somewhat, but the flow of income will
continue unabated if you've picked well," Ms.
Lundquist says.
Yield Signs
High yields aren't always desirable when selecting an income trust investment.
These securities, like all others, frequently offer a classic risk-reward
tradeoff.
RANKED BY YIELD
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