Boston Pizza Royalties Updated Report

Boston Pizza Royalties Income Fund is updated and rated Strong Buy at $18.40 to yield 7.1%.

This entity has declined about 20% since it was around $23 in March of this year and also it was $23 in the Spring of 2013.

Several months ago it announced an usual transaction whereby it was increasing the royalty it receives from Boston pizza food sales to 5.5%. This was a substantial increase from the 4.0% that had applied since inception of the Trust in 2002. This was to be paid for mostly by issuing new units to the founders of Boston Pizza but was to be about 9% accretive to distributable cash per unit. That was a substantial rise considering that normally the distributions per unit might be expected to rise at more like just 2% per year due to food inflation.  After the transaction the company did increase its cash distribution by 6.2%. All else equal, this might have been expected to increase the unit price by about 6.2% for a price of about $24.50. For that reason, I was a buyer when they issued new shares at $22.10.

The reasons for the decline in price may include the following:

The share or unit count increased by about 30%. Therefore there are many new owners who were not previously owners. When the share price did not immediately go higher than the $22.10 price they paid many of these new owners may have been inclined to sell, pushing the price down

The economic outlook for Canada has weakened somewhat and perhaps there is a fear that the distributable cash flow could decline with lower restaurant sales.

The market spreads or required return on commercial debt has increased and this could mean that the market simply is requiring a higher yield on an entity like Boston pizza.

My thinking is that Boston Pizza yielding 7.1% and where the distribution has a history of rising slowly over the years is too high a yield. I expect the market to push that yield down by pushing the unit price up. This will be assisted when Boston Pizza (likely) continues to report strong increases in distributable cash per unit for the next three quarters due to the recent accretive transaction. Given the yield was bumped up only 6.2% on a transaction that was about 9% accretive I expect that the distribution could also be increased another couple of percent in the next nine months.

In summary, not in spite of, but because of the price drop here I continue to find the Boston Pizza Royalty units to be attractive.





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