Vancouver lawyer Meelie Dong is always on the lookout for a good investment. She did not have to go far for her latest inspiration.
Her father is 93 and still living in his own home—and that got Dong wondering how thousands of her fellow baby boomers will house themselves in their old age.
Her financial adviser offered a possible answer. Barry Reichmann, the eldest son of Olympia & York founder Paul Reichmann, is currently buying up retirement homes across Canada and folding them into his CPL Long Term Care Real Estate Investment Trust. Dong’s adviser predicted that CPL (for Central Park Lodge) will grow dramatically as it houses an increasing number of retired Canadians. So far, he has been right: CPL investment units have more than doubled in value this year to $13.50, and have an annual yield of eight per cent. “It has been a great investment,” says Dong. “I just wish I had bought more.”
Over the past four years, thousands of socalled GIC refugees, fed up with low interest rates on bank deposits and guaranteed investment certificates, have stampeded into investment trusts, which are less risky than stocks but offer higher yields than fixed-income products. So far this year, 33 trusts have come to market, worth a combined $4.7 billion. Eager to cash in, Canadian companies have spun off trusts consisting of real estate holdings, oilfields, sugar refineries and coal mines. Units in individual trusts trade on the stock market like shares, but unlike equities, many also pay a fixed monthly income. The investments also offer another possible advantage: unit holders share in any tax breaks, such as write-downs on equipment, for which the trust is eligible. “There is a feeding frenzy going on,” says Alan Berge, an investment adviser at C. M. Oliver & Co., a Vancouver-based brokerage. “The public is disappointed with four-percent GIC rates, but investors will bite if they can get 8.75 per cent and be relatively safe.” Eric Lerner, president of Pension Real Estate Advisors Inc. in Toronto, says companies are launching investment trusts in part
to raise money for expansion—and in some cases even underwrite the cost of an acquisition. In July, Onex Corp. of Toronto and Vancouver-based Balaclava Enterprises Ltd., controlled by the city’s Belkin family, completed a $407-million takeover of B.C. Sugar Refinery Inc. Last month, the purchasers said they intend to raise $427 million by placing B.C. Sugar’s western operations in a trust to be known as the Roger’s Sugar Income Fund. The fund will sell debenture units yielding about 9.5 per cent annually.
The popularity of investment trusts has allowed companies to unload assets at prices far higher than they once would have fetched. On June 18, Calgary’s Mannix family announced that it intended to sell Pembina Corp., which operates pipelines and oil and gas fields, and Manalta Coal Ltd., the country’s largest coal producer. But instead of selling to another company or individual, the Mannix family rolled those operations into the Pembina and Manalta In-
come Trusts. Demand for the initial issue—which sold for $10 a unit with a yearly dividend of 87 cents—was three times greater than the supply. So far, the family has raised $2.2 billion, $500 million more than analysts predicted the Mannixes would have received had they sold to another company.
Unfortunately for investors, income trusts are more difficult to assess than stocks or bonds. Berge says buyers have to consider the management strength behind the trust and the underlying value of the assets. In Manalta’s case, the coal is a finite asset; unless the company finds new reserves, the trust will eventually be worthless. In some other cases, the trust is underpinned by the price of a specific commodity. The price Roger’s Sugar receives for its product, for example, could go down in periods of oversupply, reducing both the price of the unit and the income it generates. Says Lerner: “Interest on a GIC will come through year after year, but in trusts, the underlying cash flow is not as secure.”
Tax considerations also complicate the purchase of a trust unit. In most cases, taxes on the initial investment are deferred until the units are sold. The tax bill on income generated by those units, however, can vary from year to year and from trust to trust, depending on expenses and write-downs.
Dong, for example, will have to pay tax on only 10 per cent of the income she received in 1997 from her CPL Real Estate Investment Trust units. “Knowing the tax differences between the various units is very important,” says Berge. “Eventually, you will have to pay Ottawa for the money you receive.” Even so, with interest rates expected to remain low for the foreseeable future, analysts do not expect the sector to cool off anytime soon.
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