By the Numbers

First quarter results are all in for Canadian Edge Portfolio trusts. The news wasn’t all rosy, not surprising given the volatile environment. The good news, however, is even the underperformers are still very much in the game for strong results the rest of the year. And the rest really did blow the doors off, demonstrating they’re healthy businesses that are becoming more valuable.

Buying and holding strong businesses is goal No. 1 at CE. Earnings season is our reality check. And to stay in our good graces, companies have to deliver, whether they’re organized as income trusts or corporations.

In the May issue of CE—e-mailed to you last Friday—I highlighted the Portfolio trusts that had reported to that point. They included energy trusts ARC Energy Trust (TSX: AET.UN, OTC: AETUF), Penn West Energy Trust (NYSE: PWE, TSX: PWT.UN), Peyto Energy Trust (TSX: PEY.UN, OTC: PEYUF) and Vermilion Energy Trust (TSX: VET.UN, OTC: VETMF); environmental services trust Newalta Income Fund (TSX: NAL.UN, OTC: NALUF); recently converted corporation Trinidad Drilling (TSX: TDG, OTC: TDGNF); power and infrastructure trusts Pembina Pipeline Income Fund (TSX: PIF.UN, OTC: PMBIF), AltaGas Income Fund (TSX: ALA.UN, OTC: ATGUF), Bell Aliant Regional Communications Income Fund (TSX: BA.UN, OTC: BLIAF), Boralex Power Income Fund (TSX: BPT.UN, OTC: BLXJF) and Macquarie Power & Infrastructure Income Fund (TSX: MPT.UN, MCQPF); business trusts Yellow Pages Income Fund (TSX: YLO.UN, OTC: YLWPF) and TransForce Income Fund (TSX: TIF.UN, OTC: TIFUF); and RioCan REIT (TSX: REI.UN, OTC: RIOCF).

The energy trusts were the clear standouts: They rode solid production, steadying costs and rising realized selling prices to strong cash flow gains. That was also true of the oil and gas trusts that reported this week.

Our three natural gas-focused trusts were the most explosive. Advantage Energy Income Fund (NYSE: AAV, TSX: AVN.UN) came in with a 15.3 percent increase in funds from operations (FFO) per share, driving its payout ratio down to just 53 percent. And with output rising and realized first quarter selling prices only a little more than USD8 per million British thermal units (MMBtu), gains should be even greater later in the year. Advantage Energy Income Fund remains a strong buy up to my new target of USD14.

New Aggressive Portfolio holding Daylight Resources Trust (TSX: DAY.UN, OTC: DAYYF) turned in a 37 percent increase in FFO from the first quarter of 2008 and a 24 percent sequential FFO increase from the fourth quarter of 2007. Again, the key was rising production and higher realized prices for natural gas, a trend that should continue as the trust’s realized selling price in the first quarter was less than USD8 per MMBtu. Buy Daylight Resources Trust up to USD12.

Paramount Energy Trust (TSX: PMT.UN, OTC: PMGYF) turned in slightly disappointing numbers entirely because of a loss incurred from hedging. I was able to speak to the trust’s chief financial officer, Cameron Sebastian, while moderating a panel at the Las Vegas Money Show this week. His contention that these losses will prove temporary is sound, as is his explanation that the hedge position was needed to lock in the economic value of acquisitions made last year.

Production is up 30 percent year-over-year, the payout ratio has sunk to just 48 percent, and management has laid out a plan to aggressively reduce debt over the next few years. Obviously, much depends on what happens to gas prices. But after last year’s struggles, Paramount is squarely on track for growth. Paramount Energy Trust is a buy for aggressive investors up to USD10.

More-diversified Provident Energy Trust’s (NYSE: PVX, TSX: PVE.UN) payout ratio also plunged in the first quarter, hitting 59 percent as operations fired on all cylinders. FFO rose 73.2 percent while production rose 61 percent, and the midstream business enjoyed solid margins and revenue growth.

The key catalyst for the shares over the next several months is likely to be what management does with the US oil and gas production operations, which it appears to be selling. But Provident Energy Trust is a solid trust with a great mix of assets and a buy up to USD14.

Last but not least, Enerplus Resources (NYSE: ERF, TSX: ERF.UN) turned in a 33 percent increase in cash flow and a 10.8 percent jump in distributable cash flow per share. The quarter included the cost of acquiring former Focus Energy but only a fraction of the benefit.

The numbers again confirm that Enerplus has been built to last. And with a realized price for gas in the quarter of just USD7.52 per MMBtu, the best is yet to come. Buy Enerplus Resources up to USD50.

One further point about our oil and gas trusts concerns the massive decline in payout ratios. Rising oil and gas prices are the main reason for rising cash flow.

But managements’ decisions to plough cash into the business—rather than pay it all out—is a clear sign they’re concerned first with sustainability. Low rates also offer the best possible protection for distributions from trust taxation in 2011.

My main caution with oil and gas trusts now is price. The temptation when a sector runs is always to back up the truck. Resist that urge and adhere to my buy targets.

Wires, Pipes and Power

Energy infrastructure is one of the steadiest businesses on the planet. And our trust picks in that sector proved it again with solid first quarter results. Reporting this week, Atlantic Power Corp (TSX: ATP.UN, OTC: ATPWF) and Algonquin Power Income Fund (TSX: APF.UN, OTC: AGQNF) turned in solid numbers, shrugging off the negative impact of the rising Canadian dollar on cash flow from their US operations.

Atlantic’s results were skewed higher by a onetime reversal of a reserve but were impressive even stripping that out. Algonquin’s payout ratio was more than 100 percent for the quarter, mainly because of seasonal factors that make it a weak time of year. But cash available for distribution per share rose 5 percent over 2007 levels, and its assets continued to run well, with cash flow from operations surging 42.9 percent.

Algonquin Power Income Fund remains a buy up to USD9.50. Atlantic Power Corp—which looks ripe for a dividend increase—is a buy up to USD12.

Keyera Facilities Income Fund (TSX: KEY.UN, OTC: KEYUF) turned in another strong quarter, as distributable cash flow per share rose 10 percent. The key is the trust’s ability to keep adding fee-generating assets, and it’s off to a good start already this year as well after closing deals on two new midstream facilities. Keyera Facilities Income Fund is a buy up to USD22.

Getting the Business

Turning to business trusts, Energy Savings Income Fund (TSX: SIF.UN, OTC: ESIUF) did feel the impact of a weakening US dollar and economy, a consequence of its ongoing growth in this country. But despite that, sales still rose 13 percent, gross margin surged 18 percent, and the payout ratio remained a modest 61 percent.

The upshot: This is one trust that can handle a difficult environment and stay on track with its long-term strategy. Buy Energy Savings Income Fund up to USD18.

Arctic Glacier Income Fund’s (TSX: AG.UN, OTC; AGUNF) CEO promised us last month that there would be “no surprises” in the trust’s first quarter earnings. And as this week’s report demonstrated, he delivered.

Arctic’s chief challenge remains legal issues, and unfortunately, there’s no indication the clouds will blow away any time soon. It’s still not a target in the US Dept of Justice investigation of the US ice industry, however, and the acquisition of KoldKist indicates it’s sticking to strategy.

The most important thing about these results is they show Arctic is still executing on its plans, which include growing its way past any 2011 tax liability. That’s why we like the trust. Hold Arctic Glacier Income Fund.

AG Growth Income Fund (TSX: AFN.UN, OTC: AGGRF), as expected, suffered a hit to its profitability in the first quarter because of supply bottlenecks that prevented it from taking advantage of robust sales and order backlog. Management reports that these logistics woes have now been resolved, setting the stage for a powerful recovery the rest of 2008.

For the second quarter in a row, the payout ratio ballooned to more than 100 percent. That’s normally a disqualifier for a trust in my view. But with agricultural equipment and related products in a robust bull market, I’m willing to wait another quarter for AG to return to growth. Those who don’t already own AG Growth Income Fund should buy it up to USD32.

In the words of its CEO, GMP Capital Trust (TSX: GMP.UN, OTC: GMCPF) encountered “the worst conditions in 23 years” in its first quarter. The bad news is there was an impact on revenue (down 18 percent from last year’s first quarter) and cash flow (down 48.8 percent). The good news is the trust’s underlying business is still sound, it continues to pursue strategic initiatives, and distributable cash flow still basically covered the dividend during the quarter. The trust also maintained a high return on equity of 29 percent.

Looking ahead, conditions could remain difficult for a while, but at least some corners of the Canadian market (notably oil and gas trusts) have surged in recent months. Moreover, management appears committed to maintaining the dividend at its current level until we do see a recovery.

This is the premier investment house franchise in Canada, and I do expect it to pay off for us. GMP Capital Trust is a buy up to USD25 for those who don’t already own it.

TransForce Income Fund has completed its conversion from trust to corporation, changing its name to TFI Holdings and its Toronto symbol to TFI. The conversion should enable the trust to grow at a more rapid rate in coming years, as well as to take advantage of acquisition opportunities in a very weak market for transportation and logistics.

As first quarter earnings attest, business has slumped for a variety of reasons. But the new dividend level is certainly very well covered by earnings. And once market conditions do start to improve, the company is set to be a major beneficiary. TFI Holdings is a buy up to USD9 for those who don’t already own it.

Finally, the three REITs reporting this week turned in another robust quarter. Canada’s property market continues to buck the negative trends in the US. More important, our picks are positioned in the best places.

Artis REIT (TSX: AX.UN, OTC: ARESF) put up the biggest numbers. Distributable income per share rose 42.9 percent on a 94.9 percent jump in revenue and 104.6 percent outburst in net operating income, the best measure of REIT margins. Occupancy rose to a superior 97.5 percent, as Artis continued to add solid properties in Canada’s burgeoning western provinces.

The REIT also earned a 30 percent increase in rents on expiring leases and will earn similar boosts in returns in coming quarters. The payout ratio sank to 65 percent, and debt was kept under control as well. All in all, it was another quarter of confirmation that Artis is on the right track. Buy Artis REIT up to USD18.

Canadian Apartment Properties REIT (TSX: CAR.UN, OTC: CDPYF) enjoyed its fastest first quarter growth in FFO per share in some time, with a 16.4 percent boost. The first quarter is traditionally a seasonally weak one because of heating costs.

But the REIT offset that with acquisitions in its western province expansion, cost controls and boosting portfolio quality (98.2 percent occupancy). The apartment market, as in the US, never saw the extremes of other property sectors. As such, it’s solid and has growth potential for the players. Buy Canadian Apartment Properties REIT up to USD20.

Northern Property REIT (TSX: NPR.UN, OTC: NPRUF) enjoyed a 17.9 percent increase in first quarter distributable cash flow per unit. Sales rose more than 33 percent as the trust continued to add new assets and raise rents and occupancy on existing ones.

The REIT’s focus on out-of-the-way markets and government-quality tenants continues to pay off. The payout ratio is now down to 80.5 percent, making a sizeable dividend hike likely. Buy Northern Property REIT up to USD25.