Boston Pizza Income Fund(Symbol-BPF.UN)

[adrian2]

So to clarify things, does this new structure result in the paying of 'eligible' dividends?

In BPF.UN's case, ISTM next year's distribution will be 100% eligible dividends, while in PZA.UN's case, a significant part of the payout will be ROC and the rest eligible dividends.

[adrian2]

If so, then even with the SSSG negative growth, my original estimate of a 30% tax rate on earnings was (obviously) on the high side, and the 9.5c-10.0c/share/month scenario seems even more plausible.

For the next year or two, they will stay an income trust and pay the SIFT tax of about 32%.

They'll have to convert by the end of 2012 to ensure a tax-free rollover for current unitholders.

[Justise]

Pitz,
The IBES estimate of 2011 CDPU is $1.01 i.e. after tax distribution which is pretty near to your estimate.
But for those Canadian investor with BP in their taxable account, with the dividend tax credit, as many know the taxation is almost a washout or almost a non-event financially.

Adrain2,
If you were to do a comparision between COS.UN [which you also posted] and BPF.UN, what do you get? Granted, you may say that we are comparing apples with oranges. However, the base line is the $$$$$ that we are concerned.

1st $:
BP is having a much lower P/E than COS.

2nd $:
Because BP is having a lower P/E, therefore the yield is much higher.

3rs $:
Assuming all other parameters remain unchanged i.e. market conditions etc. remain unchanged, BP has 90 + years of shelf life to collect almost 12% of yield for taxable accounts Vs. COS's 40yr reserve i.e. 40 yrs. of shelf life to collect much lower yield.

4th $:
BP has no capex whereas COS has capex to reduce CF & EPS.

5th $
BP's distribution is NOT dependent on profit, whereas COS's distribution/dividend will to a big extent depends on profit. Therefore, it will be logical to say that there is much less risk for BP as compare to COS which has capex to be concerned with.

Nobody knows the future with regard to oil price, wheat price, the economy, inflation etc. But what I know is that base on the above comparisions, I am having much less risk and higher yield for a longer period assuming all other conditions remain unchange.

By the way, upstream one guy wrote that the yield has been around 12%; without punching on my calculator, mentally ball park, that means one would get back the invested capital back in 6 yrs or slightly less on a componded basis assuming DRIP.

[Justise]

Continuing my up-thread, for those who would do their own DRIP [dividend reinvestment Plan], Jim Flaherty’s tax is actually a blessing in disguise because:

1. As mentioned before, for those investing in taxable account, with dividend tax credit, it is a washout or a non-event for most, but the stock price was affected on downdraft to the tune of 30%. Therefore, for those who reinvested their dividends are adding the stock at around 30% discount [simplistic assumption].
2. For those who don’t study closely the balance sheets etc., the accounting as Pitz pointed out, was accounting taking charge for future taxation and therefore distorted the reported bottom line EPS. Hence another depressing news affecting the share price downwards which is good for those doing DRIP.


For those who posted up-thread, buying BPF.UN [ BP] at around $11.20, the yield is around 12%. For simplicity, suppose a person P, were to initially invested $100K, we don’t know how the overall economy and market is going to behave, but suppose we assume that overall, there is no improvement but also no deterioration i.e. to say that we assume the share price will remain at $11.20 and with dividend tax credit, the net dividend is still $1.38 as at present. With DRIP, the value of the $100K holding will go to $200K in around 6 years and will likewise double again to $400K in another 6 years; then double again from $400K to $800K in another 6 years i.e. to say that the total value of the BP stock holding will go from $100K to $800K in 18 years. That is assuming there is no inflation and assuming no additional leverage by BP.

Just think about it.

[adrian2]

Adrain2,
If you were to do a comparision between COS.UN [which you also posted] and BPF.UN, what do you get? Granted, you may say that we are comparing apples with oranges. However, the base line is the $$$$$ that we are concerned.

Besides mis-spelling my alias, you may have me confused with someone else. I have never owned BPF.UN, nor had I owned (or talked about, IIRC) COS.UN. I do own one of BP's competitors, PZA.UN. So your comparison is of little interest to me.

[grant]

I guess, if BPI and its restaurants remain viable, why wouldn't they, upon expiration of the license agreement, simply re-brand the operations? 4% is quite an overhead for franchisees, many of whom, on Yahoo, you allege, aren't making money.

This seems like a facetious question but I'll answer it with some serious comments.

We can't guess what life will be like in 90 years so let's contemplate if the trademark lease was expiring today:

1) "Boston Pizza" has huge brand value. All that money they spend on advertising is about brand awareness. Have you ever noticed the quick-serve BP kiosk at GM place (or other sports arenas)? They are not there to make money. They are only there so BP can put their logo on the corner of the rink where it's on camera every 15 seconds during the hockey game. That's the level of serious BPI is about their brand. Rebranding would mean throwing away the many decades of value built up in the name.

2) In tangible sense, re-branding restaurants would cost HUGE sums of money. Not just physically replacing all the signage & materials. But also the human power to recreate all the lost trademarked materials. And even all that would be dwarfed by the instant loss of sales from customers who visit the restaurant BECAUSE of the brand.

3) Legally I expect BPI would be on the hook to maintain the rights to the trademark because they re-licence them to franchisees. Out of 200+ franchisees, at least one of them is definitely going to force BPI (if it doesn't already) to address the question "how do you compensate me if you lose the trademark before the expiry of my franchise?"

4) If BPI ever wiggled out from under that 4%, the franchisees would NOT see their fees reduced. That whole line of thought is a total red herring. Franchisees clearly would resist rebranding, since they bought a franchise BECAUSE of the branding. If they wanted to get out from under royalties, they would have chosen a different franchise or simply gone independent.

5) BPI, through the partnership, has a claim on a decent % of the royalty pool (which keeps growing as stores are opened). So there is financial incentive for them to keep the royalties flowing.

6) Furthermore, BPI only gives up 4% of the 7% of their royalties. The other 3% stays in pocket. More incentive not to rock the boat.

7) I expect (guess) there are provisions in the lease that allow for perpetual renewals. It is quite clear that this fund was designed to give a permanent lease to BPI.

Absent some unexpected change in the BP business model, the lease will definitely get renewed. It's too expensive not to.

[grant]

Pitz,
The IBES estimate of 2011 CDPU is $1.01 i.e. after tax distribution which is pretty near to your estimate.

Justise, to clarify: I am actually the one estimating 8.33 - 8.50c/mo ($1.01/yr = 8.41c/mo)

Pitz is much higher with an estimate of 9.5 - 10.0c/mo (i.e., $1.14+/yr)

[Justise]

Noted with thanks, Grant,
Pitz’s figure of $1.14+/yr is probably achievable with a combination of the followings for 2011:

1. BP continues NCIB.
2. SSSG
3. Inflation

If not in 2011, there is a high probability that $1.14+/yr can be achieved in 2012, when the tax is to be reduced to 25%.

[pitz]

Noted with thanks, Grant,
Pitz’s figure of $1.14+/yr is probably achievable with a combination of the followings for 2011:
1. BP continues NCIB.

Credit is probably all tapped out, and the shares aren't exactly all that cheap. If anything, I fear that they might end up having to re-issue the shares, probably as some sort of shareholder-unfriendly, "bought deal", to pay off the loans that expire ~2012-ish. Not the end of the world at current prices, but I'm really uncomfortable with the thought of the company taking on more loans. If shareholders want leverage...that's what margin accounts are for .

2. SSSG

Not all that likely. Things are definitely softening up. CRE rents are also coming down, which, maybe not for BP's, but will also drive costs down for their competition.

As for 'food prices', food is such a small input to the cost of running a restaurant like BPs, that its laughable.

3. Inflation

How? Housing is collapsing, along with the income of the trades that build it. Don't see them flocking to BPs.

If not in 2011, there is a high probability that $1.14+/yr can be achieved in 2012, when the tax is to be reduced to 25%.

Management has deliberately held back on increases for the past few years, in spite of the improvements to their position, via the NCIB. If the SSSG and overall sales numbers had remained flat, without the new tax on distributions, then the distributions should have risen. But I agree with others, that there will be a small cut, although it certainly will not run anywhere near as deep as might have been suggested.

[Justise]

Management has deliberately held back on increases for the past few years, in spite of the improvements to their position, via the NCIB. If the SSSG and overall sales numbers had remained flat, without the new tax on distributions, then the distributions should have risen. But I agree with others, that there will be a small cut, although it certainly will not run anywhere near as deep as might have been suggested.

Pitz,

Just curious what are you revised takes on the CDPU for 2011 and 2012.

I for one think that management will do another NCIB sometime this year. The NCIB will still be accretive. And also the debt to earning is still very small compare to most others. Since the interest cost was and is low, some income trusts surprisingly went into NCIB which was unusual for income trusts prior to the income trust taxation legislation.

To do NCIB is much safer than acquiring another company at a premium and mostly with much, much larger leverage. Moreover, as BP is effectively a ‘toll collector’, I am really surprised at your logic of expressing discomfort for another NCIB when the debt is really relatively small. Just don’t sound logical for a margin investor. I am, of course, curious.

[pitz]

Justise, there are a number of restructuring methods that potentially could be in play here.

I don't think we've seen the 'last' of the restructuring.

My personal favourite would be to restructure into a 'split share' regime, whereby, the current trust structure is devolved into a coupon-paying debt instrument, at, say, 8%/annum, and an equity instrument, which has a dividend yield of fully tax paid-up earnings.

A taxable investor could put the 8%/annum instrument into a RRSP or TFSA, while keeping the equity outside, achieving essentially similar tax efficiency as was achieved with the income trusts.

I think this trust only trades at $12 in this environment because there is so much uncertainty, and the trustees have not been very interested in consulting with unitholders as to the future of the business once it is restructured.

I suppose they could do another NCIB. Going up to 30% debt probably wouldn't be the end of the world and probably wouldn't pose problems on the refinancing end.

Since the interest cost was and is low, some income trusts surprisingly went into NCIB which was unusual for income trusts prior to the income trust taxation legislation.

At $8, or even $12, the units are so depressed that not doing the NCIB would've been stupid, or the whole thing would've been susceptible to a LBO by BPI or even the franchisees.

[Justise]

I think this trust only trades at $12 in this environment because there is so much uncertainty

To put the issue of uncertainty in the right perspective for which most fund managers constantly talked about for income trusts are:

1. Uncertainty generally on the particular income trust’s decision or indecision on the conversion to corporation or other possible structure.
2. The impending taxation rate post 2010 for which some are saying 30% or more, but management announced 26.5% for 2011 and 25% for 2011.

On both fronts, BP management cleared the air recently removing both uncertainties and both are positive news. Any better structure as your suggestion, for example, is a bonus. And the share price moved higher on those news.

[pitz]

On both fronts, BP management cleared the air recently removing both uncertainties and both are positive news. Any better structure as your suggestion, for example, is a bonus. And the share price moved higher on those news.

The announcement didn't exactly instill much confidence in me (would have preferred a roadmap), but, out of litigation fears, of course, management of public firms are reluctant to publicly discuss future plans.

I think its fairly safe to assume that the directors of this company aren't really all that sympathetic to RRSP owners, relative to taxable investment owners, because RRSPs more than likely only make up a small chunk of their wealth.

[Justise]

On both fronts, BP management cleared the air recently removing both uncertainties and both are positive news. Any better structure as your suggestion, for example, is a bonus. And the share price moved higher on those news.

The announcement didn't exactly instill much confidence in me (would have preferred a roadmap), but, out of litigation fears, of course, management of public firms are reluctant to publicly discuss future plans.

I think its fairly safe to assume that the directors of this company aren't really all that sympathetic to RRSP owners, relative to taxable investment owners, because RRSPs more than likely only make up a small chunk of their wealth.

Even if management has a road map, it would be a corporate secret untill an appropiate time for news release and/or action and the investment community would then say that the ingenuity and quality of management matters.

For those who know, the logical move is to transfer in kind from RRSP account into taxable account by a swap and therefore the taxation issue is a washout or a non-event for the majority. It is probably safe to assume that the majority of retail investors are ignorant of this matter. Therefore, it will be beneficially more accretive for management to do another NCIB some time this year.

[grant]

1. BP continues NCIB.
2. SSSG
3. Inflation

1- if BP thinks like me, they won't begin any more NCIB until AFTER an distribution cut, as that's when the price will fall and offer best repurchasing value.

2 & 3- basically at war with each other. BP every year is trying to raise menu prices as much as it can, but it knows if they go too high, customers will stay away. That's why they started specials that were unthinkable 3 years ago ("10 items for $10!"). When they offer those specials it's actually DE-flationary, but necessary from a business point of view to keep SSS from falling too much.

BP is run by smart guys (except for tv ad department) who methodically try to wring every penny they can from the franchise. But they've enjoyed inordinate growth success in the past decade so it will be even harder for them to fight the macroeconomic forces that indicate stale SSSG in the next little bit.

[pitz]

1- if BP thinks like me, they won't begin any more NCIB until AFTER an distribution cut, as that's when the price will fall and offer best repurchasing value.

But the price has already fallen, from $17, to $12, in the wake of the Flaherty announcement. You think its going to fall further? Take a look at JAZ.UN's "fall" (actually a 8.15% rise) after they announced their plans to convert to a corporation.

Pretty risky business, to be banking on a significant distribution cut. Down to 10 cents/share/month at the worst, IMHO.

2 & 3- basically at war with each other. BP every year is trying to raise menu prices as much as it can, but it knows if they go too high, customers will stay away. That's why they started specials that were unthinkable 3 years ago ("10 items for $10!"). When they offer those specials it's actually DE-flationary, but necessary from a business point of view to keep SSS from falling too much.

The 'special' menu items don't earn any revenue for the purposes of the royalty calculation. I'm not convinced that people who eat at BP's are particularly price sensitive though. Its much like Shoppers Drug Mart; yes, they charge more for almost everything, but people still shop there anyways. Penny pinchers probably don't use restaurants at all.

I do see early signs of a mad dash to Canada by some of the US chains looking for any revenue. Over the longer term, this could be kind of dangerous, as, for instance, having a Cheesecake Factory or a Chilis in the same shopping complex as a Boston Pizza, would likely dent the sales of a BP's.

Not to mention that Cara still wants to add quite a few restaurants in Canada.

But they've enjoyed inordinate growth success in the past decade so it will be even harder for them to fight the macroeconomic forces that indicate stale SSSG in the next little bit.

[grant]

Pitz,

The distribution has been accounced to be 8.4c/mo, which is EXACTLY what i predicted back in April, 2010. (i.e., between 8.33c/mo -> 8.50c/mo)

While I run my victory lap, perhaps you can consider the idea I might actually have a good grasp of some of this trust's fundamentals.

The 'special' menu items don't earn any revenue for the purposes of the royalty calculation.

At first I was shocked that you would attempt to present such an egregiously false statement as if you knew it to be fact.

But then I remembered you tried the same stunt in claiming the BPF trust were lessees of the trademarks and would mysteriously lose them in 90 years.

I'm not convinced that people who eat at BP's are particularly price sensitive though.

You may be smarter about this than BP's marketing team, maybe if you can correct their misconceptions you'll earn a big payday?

I'm not privvy to their decision making, but I do know for a fact that as recently as 4 years ago, it would have been HERESAY to suggest $10 dinner specials or burgers at BP Inc.

for instance, having a Cheesecake Factory or a Chilis in the same shopping complex as a Boston Pizza, would likely dent the sales of a BP's.

I think you're barking up the wrong tree here, but I'm glad we share a belief that BP's SSSG is facing challenges in the coming years.

[pitz]

The distribution has been accounced to be 8.4c/mo, which is EXACTLY what i predicted back in April, 2010. (i.e., between 8.33c/mo -> 8.50c/mo)

I haven't seen an announcement to that effect; have you? Although there was a press release which gave preliminary, non-forward-looking guidance. Such guidance only offered a first order assumption of what the distribution might be. Until a distribution is actually announced, I think your 'conclusion' is a bit premature to come to. Especially in light of the accretive affect of the NCIB which has taken significant numbers of shares off the market, more than compensating for the SSSG losses.

At first I was shocked that you would attempt to present such an egregiously false statement as if you knew it to be fact.

This was on conference calls, that promotions driven by the 'corporation' were exempt from royalties, as well as, (IIRC), sales of alcohol.

I'm not privvy to their decision making, but I do know for a fact that as recently as 4 years ago, it would have been HERESAY to suggest $10 dinner specials or burgers at BP Inc.

Prices keep going up at the ones I frequent in Western Canada, and the only 'special' that remains is Pasta Tuesdays (which isn't even a BPI-driven promotion, but something they've always done to bring in business on the weakest night of the week). Don't know which ones you frequent, but, despite the downturn, anecdotally, business is just as good as ever. Unitholders and the stock market obviously agrees as they've driven the unit price up to $14.65, which is pretty much its best level since I've been holding it (bought at $12, collected over $3 now in payments, over an interval of one of the worst downturns the western Canadian economy has ever seen).

$10 for a burger is still plenty, since, with a soft drink, and a tip, that ticket is still coming out to $15. Throw in one incremental item (more likely to have one of those if you're getting the meal 'cheap') such as an appetizer or dessert, and you're up to $20 easily.

Also, I'm not sure how the accounting for alcohol is done, or whether the trust derives revenue from the non-alcohol portion of an alcoholic drink (ie: the shot of liquor costs $2.50, but the martini mix and glass service tags on another $4). I suspect they do, but I'd have to do some research on that.

I think you're barking up the wrong tree here, but I'm glad we share a belief that BP's SSSG is facing challenges in the coming years.

Don't forget food inflation, which is another beauty of this trust -- its revenue is derived as a percentage of total revenues, and not from realized margins.

Having said that, I would probably sell if this thing hits $18. And probably buy more if it slumps and hits $11 on a general stock market decline.

[grant]

The distribution has been accounced to be 8.4c/mo...

I haven't seen an announcement to that effect; have you?

I can't remember, but apparently I did because that's what was paid yesterday: http://www.bpincomefund.com/en/news-roo ... lders.aspx

Until a distribution is actually announced, I think your 'conclusion' is a bit premature to come to. Especially in light of the accretive affect of the NCIB which has taken significant numbers of shares off the market, more than compensating for the SSSG losses.

I can't believe you still claim NCIB will result in higher distributions. You don't believe the math, you don't believe BPF... well at least you're a happy investor despite that.

Also, I'm not sure how the accounting for alcohol is done, or whether the trust derives revenue from the non-alcohol portion of an alcoholic drink (ie: the shot of liquor costs $2.50, but the martini mix and glass service tags on another $4). I suspect they do, but I'd have to do some research on that.

no need: the entire price of an alcoholic drink are royalty free (at least in canada).

Don't forget food inflation, which is another beauty of this trust -- its revenue is derived as a percentage of total revenues, and not from realized margins.

"this" trust? Nearly all, if not every, restaurant royalty trusts operate the same way. There's nothing special about BPF in that regard.

The "beauty" means franchisees suffer a disproportionate amount of pain during hard times. (not that i'm complaining, better them than me!!)

Unitholders and the stock market obviously agrees as they've driven the unit price up to $14.65, which is pretty much its best level since I've been holding it (bought at $12, collected over $3 now in payments, over an interval of one of the worst downturns the western Canadian economy has ever seen).

I'm very glad you've done well. There's no arguing with making money. It certainly looks like you can reliably collect $1.01/unit every year for many years to come.

[pitz]

I can't believe you still claim NCIB will result in higher distributions. You don't believe the math, you don't believe BPF... well at least you're a happy investor despite that.

Well taking 15% of the shares off the market, and only paying a little over 3%/annum interest, should, in the absence of negative SSSG and other dilution, increase the pre-tax distribution.

BTW, I ceded your correctness on the Yahoo board a few weeks ago.

"this" trust? Nearly all, if not every, restaurant royalty trusts operate the same way. There's nothing special about BPF in that regard.

Well, in contrast with, for instance, the Priszm Income Fund (QSR.UN), which held operating interests, and not just trademarks in KFC's, Taco Hell's, and Pizza Huts.

The "beauty" means franchisees suffer a disproportionate amount of pain during hard times. (not that i'm complaining, better them than me!!)

Indeed. They get to keep all the margin expansion during the good times though. It all works out unless the franchisees themselves start going bankrupt. At BP's prices, hard to see that happening, since food inputs aren't really all that significant compared to what those folks charge, and labour costs, etc.

[Rickdl]

[quote="pitz]Well, in contrast with, for instance, the Priszm Income Fund (QSR.UN), which held operating interests, and not just trademarks in KFC's, Taco Hell's, and Pizza Huts. [/quote]Priszm doesn't own the trademarks. They just owned some of the franchisee's similar to how an individual franchise owner does. If your a franchise owner, you don't actually own the trademarks of your franchise. So Priszm had the operating interests but did not have any of the trademarks, just the right to use them at their franchises under certain conditions and they're currently at risk in losing some of their franchises but anyways are trying to sell just about ALL their franchise so if they're successful in that eventually there won't be a Priszm anymore.

[pitz]

Priszm doesn't own the trademarks. They just owned some of the franchisee's similar to how an individual franchise owner does. If your a franchise owner, you don't actually own the trademarks of your franchise. So Priszm had the operating interests but did not have any of the trademarks, just the right to use them at their franchises under certain conditions and they're currently at risk in losing some of their franchises but anyways are trying to sell just about ALL their franchise so if they're successful in that eventually there won't be a Priszm anymore.

Exactly; its quite a lesson in contrasts between the BPF business model, which has mostly been perfectly fine over the past few years with only minimally negative SSSG, and accretive buybacks -- and the Priszm model where they are exposed to margin compression, and I would argue, mismanagement of the brand and of the individual "restaurants" (using the term generously) owned by the trust.

I do find it a little interesting that CMG can trade at 42X earnings, while BPF trades at 11-12X. Talk about a massive disconnect in the market (although I love CMG's food, and eat it whenever I can ).

[Justise]

Unitholders and the stock market obviously agrees as they've driven the unit price up to $14.65, which is pretty much its best level since I've been holding it (bought at $12, collected over $3 now in payments, over an interval of one of the worst downturns the western Canadian economy has ever seen).

I'm very glad you've done well. There's no arguing with making money. It certainly looks like you can reliably collect $1.01/unit every year for many years to come.[/quote]


The management did a brilliant job with the NCIB when the stock was tanking. For those like Pitz buying BPF at $12 or lower, this one is a very nice yield play with some 12% yield or higher(as high as 16% for those picking up near to the low) before trust tax i.e. pre-2011 and still in effect will collect around 12% or higher with dividend tax credit in taxable account. The capital gain aside as the bonus, this is indeed a very safe high yield play.

[Webber22]

Does anyone who why this stock has fallen around 10% lately ?

[adrian2]

Does anyone who why this stock has fallen around 10% lately ?

I don't own BPF, but I have Sir Royalty, which is in the same space. SRV.UN was trading 7-10 days ago in the $9 range, yesterday it closed at $8, today it's down another 6...8%. My holdings are relatively minimal, so I did not try to find out more.