Cash on the Barrel

01/20/2010 12:01 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Canadian trusts Penn West Energy and Primaris Retail continue to throw off attractive yields after shuffling portfolios, writes Gavin Graham in The Income Investor.

Penn West Energy Trust (TSX: PWT.UN, NYSE: PWE) reduced its distributions twice in 2008-2009, from 34 Canadian cents per month to 15 cents per month. With oil [near] US$80 per barrel and with gas prices having rebounded from last summer's multi-year lows, it seems unlikely that any further reductions are contemplated. Indeed, if it were not for the upcoming change in taxation, it would be reasonable to assume that Penn West would be raising its payout, as Canadian Oil Sands (TSX: COS.UN, OTC: COSWF) has done.

However, given the C$5.9 billion in tax pools generated by its operations over the last few years, Penn West will certainly not need to pay the trust tax at anything near its full rate. In the third-quarter results released in November, the directors announced their intention of maintaining the 15 cents per month payout, subject to the present level of oil prices and maintenance of the 179,600 barrels per day equivalent (boe) production for the first three quarters.

They also announced their intention of converting to an exploration and production (E&P) corporation prior to the end of 2011, with a combination of organic growth and dividends producing a return on capital that will position them with other senior independent North American oil and gas producers.

In October, Penn West exchanged certain assets in the Shaunavon, Saskatchewan development for light oil assets contiguous to its existing assets in Pembina and Dodsland, Alberta, and also received $434 million in cash, reducing its ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) to 1.9x. Capital expenditures were halved in 2009 to reflect the change in circumstances, while the 15-cents-per-month payout represents a 54% payout rate. The trust rose 24% over the last 12 months. The current yield is 9.3%.

Primaris Retail REIT (TSX: PMZ.UN, OTC: PMZFF) successfully raised $82 million in a convertible issue in the third quarter, which it then used to help fund the purchase for C$357.7 million of two institutional quality shopping centers from Ivanhoe Cambridge in November: 100% of Sunridge Mall, the dominant enclosed mall in north-east Calgary and 50% of the largest enclosed shopping center on Vancouver Island, Woodgrove Centre. These represent a 12% increase in the size of Primaris' portfolio.

For the third quarter, occupancy was down marginally at 96.4% vs. 97.7% last year. Funds from operations (FFO) were down 13.1% to $18.9 million (30.4 cents per unit), but most of this reflected the $3.5 million costs of internalizing the property management for the REIT as well as lower interest rates on its cash.

Same-property net operating income was off only 1.8%, reflecting an increase in the external management fees; ignoring this, it would have risen 0.6%, a good result given the 2.9% reduction in sales per square foot. The REIT is up 42% over the last 12 months. Current yield is 7.6%.

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