Boston Pizza Income Fund(Symbol-BPF.UN)

[Small Investor Activist]

A few years ago before it went public I had Boston Pizza, it was a lot tastier than the unfresh disgusting slices at PizzaPizza. I hadn't been back until recently in Cambridge and was so disappointed in the portion size, cost and bland taste that I almost complained to the manager. What a rip off, a little individual pan pizza for the price, $10.50, of a medium anywhere else. The waitress lied to me when I asked her if it was a nice size portion. She got no tip. The crust wasn't too bad but not as good as I remember, the cheese was gooey, fell off with every bite and they just threw on some fresh unheated tomatoes and green peppers. The last few times I walked into a Boston Pizza to wait for someone and do some diligence they weren't busy at all. They have bars in their restaurants but the smoking ban has hurt that segment. The only thing they seem to have going for them is new and clean restaurants. I hope they're not running their real estate department like KrispyKreme. This company could be juicing same store sales with price increases that will turn off customers.

For fun I have emailed this thread to BP IR and the analysts covering the trust:

Walter Spracklin
RBC Capital Markets

Chris Bolton
BMO Nesbitt Burns

Robert Silgardo
Dundee Securities Corp.

Chris Rankin
Canaccord Capital Corporation

Petro Panarites
CIBC World Markets

Lets see if the stock falls this week I'll give them another chance if they offer me a voucher for a free pizza.

[dakota]

I'll give them another chance if they offer me a voucher for a free pizza.

I guess it couldn't have been all that bad huh?

[Jo Anne]

I've only eaten at a Boston Pizza once. The kids took us there for Mother's day or something.

We waited forever for our meal, and they screwed up one of the orders. (I think we got the plate meant for a person at the table across from us.)

I don't really like fast food pretending it's something fancy. If I'm going to eat out at a restaurant, I'd prefer real food. Pasta and pizza are just fillers, as far as I'm concerned.

[unicef01]

when you have howie mandell (sp) as your lead ad person, you can't possibly be doing too well...lol

chain food will be chain food, average at best but consistent..

[randomwalker]

Ok I had one bad experience wit Boston Pizza BPF.UN but it could have been much worse if I'd washed it down with that swill that Lakeport Brewery TFR.UN is serving up.

That being said there's no accounting for taste and I'd have to do some real ersearch.

That being said and believing markets to be more or less efficent I don't really care about individual trusts and simply buy the sector via Barclay BTH.UN

[JungleGuy]

Would like to revive this old Boston Pizza thread.

The shares haven't done well, but same store sales growth (SSSG) and distribution growth have been steady at 6+%. It's yielding 9.4%.

The worst growth was in 1999 when SSSG was 4%. Would it be reasonably conservative to expect 13+% return?

JG

[dakota]

randomwalker wrote

Ok I had one bad experience wit Boston Pizza BPF.UN but it could have been much worse if I'd washed it down with that swill that Lakeport Brewery TFR.UN is serving up.

No accounting for taste, it's my wife's favorite brew. Bought some Sleeman Honey brew for an expected visitor that didn't show and she drank it and thought it was OK but preferred her Lakeport. Labatt liked it well enough to buy the company

[brad911]

Dakota,

You'll notice that the price of Lakeport has "somehow" miraculously gone up in price recently from their standard "buck a beer" reputation. The only reason Labatt (Imbev) bought the brewery was to eventually destroy the discount beer competition against their premium brands. For the traditional target market, the share that lakeport secured was substantial enough to irritate the brass of the Canadian market. Eventually you'll see the price just below price-point of the flagship products.

[dakota]

brad911 wrote

You'll notice that the price of Lakeport has "somehow" miraculously gone up in price recently from their standard "buck a beer" reputation. The only reason Labatt (Imbev) bought the brewery was to eventually destroy the discount beer competition against their premium brands.

Doesn't matter to me, I buy my beer from a local craft brewery at half the price of the commercia brands and my wife will do the same if it goes too high

[pitz]

The yield on this trust is now running fairly close to 12%. And the track record of growth has been fairly consistent at 5-6%/year.

Seriously, where's the downside? I see a lot of sour grapes upthread, but at current prices, this is looking like a 15%+/year total return stock, without the sort of risk presented by the likes of Shoppers Drug Mart, or other companies substantially reliant on earnings growth.

Any thoughts? The only 'bad' experience (piece of sharp glass cutting my lip on a broken mug my drink was served) I had was rectified quite professionally.

[Nortel'd]

Forget their pizza and beer.

Boston Pizza won our little family over with their $2.20 “Private Blend Coffee” and $11.75 “Crispy Chicken Pecan Salad” served with complimentary garlic toast.

Every time we go, the place is full of contented and people. I also get the impression our local Boston Pizza serves a lot more customers than the local Shoppers Drug Mart. Mind you, at Boston’s dinner for three came to $55.00 including the tip, while a recent trip to Shoppers cost our daughter $250 for makeup and hair spray.

Have had BPF.UN on my watch list for over a year and have a limit all or nothing order for 1000 units @ $11.20. Came close early May. As I can only get access to my office computer during my lunch break and after 2:00 pm; I missed a chance of getting some for $11.25.

[pitz]

Have had BPF.UN on my watch list for over a year and have a limit all or nothing order for 1000 units @ $11.20. Came close early May. As I can only get access to my office computer during my lunch break and after 2:00 pm; I missed a chance of getting some for $11.25.

What's your rationale behind $11.20?

[Nortel'd]

Sorry Pitz, I don’t have a good reason other than, in the past I have been impatient and have got caught buying stocks that immediately drop in value.

On April 03 BPF.UN ended the day at $11.35 and then started to climb for a few days and then started to drop again. I took this to be my signal, and hoping it would drop even lower than $11.35, I have been chasing a limit order for $11.20 since April 25.

[Nortel'd]

Damn! I spoke too soon, I am not sure if this matters, but I forgot to mention (and more important) my signal included the fact TD Waterhouse’s Market Research “INK Insider Report” indicated a tad of insider buying happened just prior to April 03. I figure the actions of the insiders caused the blip and now I am waiting for the pay dirt.

[adrian2]

Seriously, where's the downside?

The last time I looked at it, they were distributing significantly more than 100% of cash.

[pitz]

Seriously, where's the downside?

The last time I looked at it, they were distributing significantly more than 100% of cash.

First Quarter 2008 financials

I think you have a case there where they're taking charges against earnings for the 2011 income trust tax (as announced by Minister Flaherty -- but doesn't actually take effect until 2011), *and* there is a mismatch between the payment of distributions (monthly) to unitholders, and the production of books.

Q4/2007 was weak though in terms of franchise sales, and recovery didn't occur till Q1, 2008 (when they opened a bunch of new restaurants..).

If you dig deeper into the report, it seems that BPI (the management company) itself is being capital-stripped by its owners by way of the payment of very large dividends. Since they are major holders of the fund units, they have been selling fund units in order to fund the bulk of the dividend, thus suppressing the price of the fund units. In your view, is there something fundamentally wrong with this sort of arrangement? Sounds like a good way to depress the value of the units though...

[adrian2]

As I've written upthread, it's been a while since I've looked at their financials; TD Waterhouse shows the current payout ratio at 122%.

From your link, by quarter

Code: Select all

        $ earnings   $ dist
Q1 2008    0.316      0.230
Q4 2007    0.343      0.458
Q3 2007    0.354      0.339
Q2 2007    0.117      0.335

A little too much variability for my taste.

BTW, you have a point re: future income taxes taken as a charge now. But the amount is less than 3% in recent quarters, it was a much bigger factor in the reduced earnings of Q2 2007.

Also, keep in mind they had a recent rights issue at $12, IIRC.

[pitz]

Code: Select all

        $ earnings   $ dist
Q1 2008    0.316      0.230
Q4 2007    0.343      0.458
Q3 2007    0.354      0.339
Q2 2007    0.117      0.335

Distributions were flat or rising in each and every quarter since inception.

If you add Q1/2008, and Q4/2007 together -- distributions = earnings (earnings for Q1/Q4, etc. include charges for future income tax, on the basis that trusts will be taxed in 2011). And Q2, 2007 obviously includes a significant one-time charge relating to Q4, 2006 and Q1, 2007 on account of the tax changes announced by Minister Flaherty.

Don't know what TDWH's payout ratio data says -- but if they're booking 30% charges for the 2011 trust tax, then naturally the payout ratio would be somewhere in the 130% range. Also, the payout ratio should be slightly higher than actual earnings as well due to the amortization of the 99-year royalty contract.

I don't have a slant or an agenda to push on this trust, one way or the other, but ISTM, most of the variability that is presented on that quarterly data has more to do with the accounting presentation of results, rather than the actual underlying performance of the business, and the Q2/2007 results are affected by a significant one-time charge.

[adrian2]

One more look at their financials link posted above:

From page 6, earnings before taxes for the quarter were $4,326,530, compared to a year ago $3,729,960 (nice increase). But the general and administrative expenses increased to $323,840 from $256,917 -- if you look at it as a kind of MER, it's close to 7.5% (from 6.9%). Sorry, I'm too much of a cheapskate to look further. Kind of like Frank Stronach's Magna -- I'll take a pass for a stock whenever I see that kind of pay cheques for the top guys.

[pitz]

From page 6, earnings before taxes for the quarter were $4,326,530, compared to a year ago $3,729,960 (nice increase). But the general and administrative expenses increased to $323,840 from $256,917 -- if you look at it as a kind of MER, it's close to 7.5% (from 6.9%). Sorry, I'm too much of a cheapskate to look further. Kind of like Frank Stronach's Magna -- I'll take a pass for a stock whenever I see that kind of pay cheques for the top guys.

A 7.5% MER is high?? Just what does $320k get you these days, if you read the MD&A, they were involved in litigation (ie: lawyers aren't free!) relating to the trademarks with "Boston Market", and they came to a settlement. And I don't know if you actually could assemble trustees, maintain a website, and mail out shareholders materiels and dividends for much less than $320k/year. Doesn't seem unreasonable to me. And there'd be some legal/accounting work involved in the whole trust conversion question that would logically have to be billed to the G&A account.

RY spent $13 billion on SG&A last year, on gross profits of $28 billion. By your logic, that's a 46% MER!

[adrian2]

We're talking about a top-line royalty trust, not running a business. They are supposed to be close to a flow-through, without too many expenses; so yes, $320k annually seems high to me.

You know what: I've said it before, there are enough stocks in the universe for all of us; you like it, you buy it. I don't have strong enough opinions to short it, nor am I interested enough to study it in detail. It's not my cup of tea; by all means, you can make a ton of money investing in it, it won't bother me an iota, on the contrary, I'll be glad for you.

As for the numbers you've quoted on RY, I don't think they are comparable; but again I'm not going to debate it.

You have strong opinions, go for it.

[pitz]

Well adrian2, looks like others agree with you that the restaurant royalty trusts might very well be under pressure.

Statistics Canada reported Friday that seasonally adjusted sales for restaurants and drinking establishments declined by 2.2 per cent in March, to $3.9-billion. Statscan analyst Marc Racette attributed the dip to snowy weather, which had Canadians cocooning, and rising gasoline prices, which led consumers to cut their spending in other areas.

[Small Investor Activist]

It is a tough time for pizza makers, who are strapped by rising cheese and flour costs and consumers who have been pinched by a sluggish economy. AP

BostonPizza is expensive, you can dine elsewhere and have better quality food for less. It's not tasty like it use to be when they first arrived to Ontario. Everytime I've walked in their restaurants are half empty.

The stock could be on its way to becoming a broken trust. I think it's like other trusts when they run out of money they tap the public markets...

[iluvnascar]

I think the Restauarant Royalty Trusts are more of a safe haven than a risky investment. If food prices rise....prices will rise......and increased revenue will flow to the unitholders. And I have a hard time believing that people will stop eating out (and ordering from) those relatively inexpensive and casual eateries.

It seems to me that the downside we've seen in the sector reflects a tough winter but perhaps more importantly, a decline in tourism due to the Canadian dollar. If SSSG has plateaued for the time being, I think we will start to see modest increases as price inflation weaves its way into their menus.

Interestingly, Boston Pizza stock has been quite strong in the last month; Prime (EAT.UN) has been steady to up; Pizza delight/Mike's/Score (PDM.UN) stock has been steady; and SIR (SRV.UN) is doing so well it just raised its payout.

The yields on these trusts are ridiculously high....reflecting, in part, lack of liquidity and the knowledge that they will take a big tax hit in 2011. Nevertheless, I think they have potential to show VERY modest growth in distributable income and will head into 2011 with 10%+ tax-efficient yields.

[pitz]

The yields on these trusts are ridiculously high....reflecting, in part, lack of liquidity and the knowledge that they will take a big tax hit in 2011. Nevertheless, I think they have potential to show VERY modest growth in distributable income and will head into 2011 with 10%+ tax-efficient yields.

Well if you take the 11.5% yield, and put a 30% tax on it, you're down to 8.05%. (worse, if you're in a 40% tax bracket!)

Assume growth of 3-4%, and the total (after-tax) return should be 8%+4$ = 12%.

For the sake of comparison, Shoppers Drug Mart is trading at a taxed P/E of 20, an E/P of 5%, but with a 15%/annum growth rate. So that would imply a 20% after-tax return.

You can run through the same sort of calculation for Telus... P/E of 12, growth as fast as the economy, if not slightly faster. The implied return is around 12%.

So I don't see the yield on BPF.UN to be particularly high. Shoppers is riskier than Telus/BPF. But the implied return, if they can sustain earnings growth, is commensurately higher. BPF.UN doesn't appear to be a majorly mispriced security, IMHO (unlike much of the trust universe), but its probably something that a cash-seeking investor could safely buy and not lose sleep over at night.