In this issue:

Next regular issue: April 19

Printable PDF

CHANGES TO BALANCED PORTFOLIO

By Gordon Pape, Editor and Publisher

I am a firm believer in having a balanced portfolio at all times so in September 2011, I created this model Balanced Portfolio for income investors. The goals were to combine above-average cash flow with reasonable risk.

The initial valuation was $25,027.75, and the target was to achieve a return that at least matched the best available five-year GIC rate plus two percentage points.

That means the target has varied over time with the rise and fall of interest rates. Right now, the best five-year rate I can find is 3.25%, so we are looking for an annual return on this portfolio in excess of 5.25%.

Here’s a summary of how the securities we currently hold performed over the six months since I last reviewed this portfolio in September. Prices are as of the close of trading on March 29.

iShares Canadian Short Term Bond Index ETF (TSX: XSB). This is a defensive ETF, investing in short-term bonds with maturities of five years or less. Its purpose is to add stability and modest cash flow to the portfolio. The price was down $0.18 per unit in the past six months but we received distributions of $0.3824 per unit, so we ended up with a small net gain for the period.

iShares Canadian Universe Bond ETF (TSX: XBB). Surprise! Even with the general rise in interest rates, this bond ETF, which covers the entire Canadian fixed-income sector, managed a small gain in the latest six months. It was only $0.10 per unit, but in a period of weak bond prices we will take it. We also received monthly distributions of $0.522 per unit as a bonus.

iShares International Treasury Bond ETF (NDQ: IGOV). This ETF, invests in government bonds from around the world, except the U.S. More than 75% of the holdings are rated A or higher so the credit quality is very good. We added this fund in September to diversify our bond holdings and to try to boost returns. It has done well for us so far, gaining $1.87 in the latest review period. The distributions are minimal however, with only US$0.021 paid out in December.

Cineplex Inc. (TSX: CGX, OTC: CPXGF). Cineplex shares continue to struggle, losing $8.20 in the most recent period. The dividends are good, with monthly payments of $0.14 a share but the company itself is clearly having problems.

Inter Pipeline (TSX: IPL, OTC: IPPLF). Interest-sensitive stocks have been under pressure in recent months and this company falls into that category. The shares are off $1.88 since the last review. One piece of good news: the monthly distribution was increased by half a cent in November to $0.14 per unit ($1.68 per year). The shares yield 7.5% at the current price.

Brookfield Renewable Energy Limited Partnership (TSX: BEP.UN, NYSE: BEP). This renewable energy limited partnership has traded in a narrow range in the past 18 months. In the latest period, the shares were down $0.98 but we received two distributions, totalling US$0.9575 per unit. The distribution was increased by 4.8% to US$0.49 per quarter, effective in February.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This is another Brookfield partnership but in this case the assets are infrastructure ? everything from coal terminals and railways to power transmission lines. The price is up almost $1 since September and we received an 8% distribution increase to US$0.47 per quarter.

BCE Inc. (TSX, NYSE: BCE). BCE shares were down $2.23 in the latest six months. However, we recovered $143 of that in dividends so the overall loss was small.

Cash. We invested $2,025.19 in a high interest savings account with EQ Bank that paid 2.3%. We earned interest of $23.29 for the period.

Here’s how the portfolio stands now. Commissions have not been factored in. For simplicity, Canadian and U.S. dollars are treated as being at par for purposes of the calculations, although obviously, the dividends received from the two Brookfield partnerships are worth more in Canadian dollar terms.

Income Investor Balanced Portfolio (a/o March 29/18)


Security

Weight %

Total Shares

Average Cost

Book Value

Market Price

Market Value

Cash Retained

Gain/Loss %

XSB

18.5

250

$28.45

$7,112.50

$27.31

$6,827.50

$122.66

– 2.3

XBB

11.6

140

$31.99

$4,484.30

$30.69

$4,296.60

$306.00

+ 2.6

IGOV

8.4

60

$49.74

$2,984.40

$51.61

$3,096.60

$1.26

+ 3.8

CGX

9.3

110

$40.06

$4,406.70

$31.35

$3,448.50

$288.75

-15.2

IPL

7.9

130

$19.05

$2,476.45

$22.36

$2,906.80

$302.05

+29.6

BEP.UN

13.0

120

$27.59

$3,310.90

$40.06

$4,807.20

$468.71

+59.3

BIP.UN

18.9

130

$20.02

$2,602.60

$53.53

$6,958.90

$429.86

+183.9

BCE

11.3

75

$44.20

$3,315.20

$55.44

$4,158.00

$465.54

+39.5

Cash

1.1

 

 

$369.63

 

$392.92

 

 

Total

100.0

 

 

$31,062.68

 

$36,893.02

$2,384.83

+26.4

Inception

 

 

 

$25,027.75

 

 

 

+56.9

Comments: This was not a good six months for this portfolio. The bond section held up quite well, but we were hurt by the heavy loss in Cineplex and smaller declines in Inter Pipeline and BCE. The end result was a 1.36% setback for the period.

That reduces the cumulative gain to date to 56.9%. That works out to an annual compound growth rate of 7.18%. That’s better than our target but I am not happy with the recent results, so we are going to make some changes.

Changes: We will sell our position in Cineplex. It offers a nice yield, but it has fallen out of favour with investors and recorded significant losses in the past year that have hurt our overall performance. Based on the current market value and retained earnings, we will realize a total of $3,737.25.

We will use the money to buy 270 units of Dream Global REIT (TSX: DRG.UN), which closed on March 29 at $13.75. The cost will be $3,712.50. The remaining $24.75 will go to our cash account.

This real estate investment trusts invests exclusively in commercial real estate properties located outside of Canada. To date, the focus has been entirely on Europe where the REIT owns approximately 20 million square feet of gross leasable area of office, industrial, and mixed-use properties across Germany, the Netherlands, Austria, and Belgium. The trust pays a monthly distribution of $0.0666 ($0.7992 per year), which works out to a yield of 5.8% at the current price. The chart shows a strong upward movement over the past years with the units trading at well above their 50- and 200-day moving averages.

As well, we will use some of our cash to add to existing positions as follows:

XBB ? We will buy 10 units at a cost of $306.90. This will bring our position to 150 units. We will use all the retained earnings and take $0.90 from cash to cover the difference.

IPL ? We have not lost faith in this pipeline company. We will buy 10 more shares for a cost of $223.60 in the hope of a turnaround in the price. That brings our total to 140 shares and reduces retained earnings to $78.45.

BEP.UN ? We will add 10 units for a cost of $400.60, bringing our total to 130. We will have cash remaining of $68.11.

The total cash balance of $1,582.65 will be left on deposit with EQ Bank at 2.3%.

Here is a look at the revised portfolio. I will review it again in September.

Income Investor Balanced Portfolio (updated March 29/18)


Security

Weight %

Total Shares

Average Cost

Book Value

Market Price

Market Value

Cash Retained

XSB

17.9

250

$28.45

$7,112.50

$27.31

$6,827.50

$122.66

XBB

12.1

150

$31.94

$4,791.20

$30.69

$4,603.50

$0

IGOV

8.1

60

$49.74

$2,984.40

$51.61

$3,096.60

$1.26

DRG.UN

9.7

270

$13.75

$3,712.50

$13.75

$3,712.50

$0

IPL

8.2

140

$19.29

$2,700.05

$22.36

$3,130.40

$78.45

BEP.UN

13.7

130

$28.55

$3,711.50

$40.06

$5,207.80

$68.11

BIP.UN

18.3

130

$20.02

$2,602.60

$53.53

$6,958.90

$429.86

BCE

10.9

75

$44.20

$3,315.20

$55.44

$4,158.00

$465.54

Cash

1.1

 

 

$416.77

 

$416.77

 

Total

100.0

 

 

$31,346.72

 

$38,111.97

$1,165.88

Inception

 

 

 

$25,027.75

 

 

 

Follow Gordon Pape’s latest updates on Twitter: http://twitter.com/GPUpdates

 

Return to the table of contents…

GAVIN GRAHAM?S UPDATES

Note: Prices are as of mid-day on April 2.

Uni-Select Inc. (TSX: UNS; OTC: UNIEF)

Type: Common stock
Exchanges: TSX, OTC
Trading symbols: UNS, UNIEF
Originally recommended: June 25/15 at C$22.30 (split adjusted), US$17.80
Current price: C$19.95, US$16.39
Annual payout: $0.37
Yield: 1.85%
Risk: Moderate
Recommended by: Gavin Graham
Website: www.uniselect.com

Comments: Quebec-based Uni-Select is the largest Canadian auto-parts supplier and the largest independent U.S. automotive paint distributor through its FinishMaster chain. Last August it purchased The Parts Alliance, the second-largest independent U.K. auto parts distributor, with 161 stores, for 205 million ($330 million). The shares have fallen 15% in the last month on what were regarded as disappointing earnings, taking them back to below my original recommendation, although we took a 50% profit on half our position after one year.

In fact, Uni-Select’s numbers were quite good. Revenues were up 42.6% to $415 million, of which acquisitions added $117.6 million, with the Parts Alliance being responsible for $93 million. Uni-Select’s Canadian operations saw sales up 10%, to $123 million and actually recorded organic like-for-like (LFL) sales growth of 1.5%, which would have been 5.9% without the loss of an independent distributor from the system at the beginning of 2017.

Its FinishMaster U.S. operation saw sales rise 10%, to $199 million, but had issues with the string of hurricanes in the U.S. south, a product line changeover, and higher discounts for some of its new acquisitions, which operate multi-store franchises, with the results that EBITDA fell 10% to $19.6 million. The Parts Alliance has a lower margin business model and acquired BBC with seven stores during the quarter with associated costs, as well as opening two new sites, but recorded 3.7% LFL growth. While adjusted EBITDA was up 10% to $28 million for the quarter, adjusted earnings were down 11% to $11.6 million ($0.27 per share).

For the year to Dec. 31, revenue grew 21%, to $1.45 billion, with acquisitions contributing $280 million. Canada achieved organic growth of 3.9% LFL growth despite the loss of the system member, while the U.S. saw a marginal decline. Adjusted EBITDA grew 9.2% to $117.5 million, but adjusted earnings after excluding the effects of the hurricanes and acquisition costs fell 6%, to $55.1 million ($1.30 per share).

Uni-Select is selling at the same price as it was three years ago despite having transformed the organization. It is the market leader or number two in all three of its markets (Canadian and U.K. auto parts, and U.S. paint), it is generating cash, and it is capable of raising its operating margins.

As the North American auto market continues to age as drivers keep their cars and trucks longer, Uni-Select is protected from the slowdown in auto sales now occurring. It has the ability to continue to acquire complementary smaller operations to supplement its organic growth, such as Dash Distributors in Alberta and Spectrum Coatings in Minnesota last quarter.

Action now: Trading at around 17 times last year’s depressed earnings and having raised its quarterly dividend by 8.8% again last year, to $0.0925, for a yield of 1.85%, Uni-Select remains a Buy.

The Keg Royalties Income Fund (TSX: KEG.UN, OTC: KRIUF)

Type: Income trust
Trading symbols: KEG.UN, KRIUF
Exchanges: TSX, Grey Market
Current price: $18.22, US$14.03
Originally recommended: June 21/06 at $13.38, US$12.28
Annual payout: $1.14
Yield: 6.26%
Risk: Moderate
Recommended by: Gavin Graham
Website: www.kegincomefund.com

Comments: Readers have commented on the acquisition in February of The Keg Restaurants’ management company by Cara Operations, the owners of other restaurant chains such as Swiss Chalet, St. Hubert, Kelsey’s, and East Side Mario’s, for $105 million and 3.8 million Cara shares. Cara may need to pay another $30 million over the next three years if certain targets are achieved.

Owners of The Keg royalty trust should not be concerned as Fairfax Financial and CEO David Aisenstat, who each own 50% of the management company, confirmed that the royalty trust will continue in its present form, receiving 4% of the gross revenues of the 100 Keg restaurants in the royalty pool.

In fact, Cara, which also has Fairfax as its majority shareholder, has asked Mr. Aisenstat to run the premium division at Cara, which includes Milestones, Bier Market, and Landing, as their LFL sales growth has been below the 4.8% same restaurant growth at The Keg in the first nine months of 2017. Cara is looking to distinguish itself from its competition, as sit-down dining traffic fell 4% in 2017, while sales were down 2%, to $21 billion, according to market research firm NPD.

Meanwhile, the quick service (fast food) segment saw sales up 3%, to $27 billion, and traffic up 2%. “Cara is cherry-picking some of the top brands within the Canadian marketplace,” said Robert Carter at NPD. “Both St. Hubert and The Keg have the highest customer loyalty and customer satisfaction within the full-service restaurant sector.”

The Keg revenues were up 1.6%, to $147.8 million, for the quarter ended Sept. 30, 2017, and 4.2%, to $447.3 million for the nine months. Same-restaurant sales grew 3% in Canada and 5.2% in the U.S. for the quarter, making SSSG 2.8% in total and 4.8% and 2.4% for the first nine months, equivalent to 4.6%. Meanwhile, royalty income increased 2.8%, to $5.9 million, for the quarter and 5.2% to 18.1% for the first nine months. The trust increased its monthly distribution by 3.1%, to $0.0946 a month, last November, making the annual payout $1.1135, and announced an extra $0.03 special distribution payable in February 2018.

Action now: The Keg remains a Buy for its strong operating performance competitive yield and rising distributions.

In this issue:

Next regular issue: April 19

Printable PDF

CHANGES TO BALANCED PORTFOLIO

By Gordon Pape, Editor and Publisher

I am a firm believer in having a balanced portfolio at all times so in September 2011, I created this model Balanced Portfolio for income investors. The goals were to combine above-average cash flow with reasonable risk.

The initial valuation was $25,027.75, and the target was to achieve a return that at least matched the best available five-year GIC rate plus two percentage points.

That means the target has varied over time with the rise and fall of interest rates. Right now, the best five-year rate I can find is 3.25%, so we are looking for an annual return on this portfolio in excess of 5.25%.

Here’s a summary of how the securities we currently hold performed over the six months since I last reviewed this portfolio in September. Prices are as of the close of trading on March 29.

iShares Canadian Short Term Bond Index ETF (TSX: XSB). This is a defensive ETF, investing in short-term bonds with maturities of five years or less. Its purpose is to add stability and modest cash flow to the portfolio. The price was down $0.18 per unit in the past six months but we received distributions of $0.3824 per unit, so we ended up with a small net gain for the period.

iShares Canadian Universe Bond ETF (TSX: XBB). Surprise! Even with the general rise in interest rates, this bond ETF, which covers the entire Canadian fixed-income sector, managed a small gain in the latest six months. It was only $0.10 per unit, but in a period of weak bond prices we will take it. We also received monthly distributions of $0.522 per unit as a bonus.

iShares International Treasury Bond ETF (NDQ: IGOV). This ETF, invests in government bonds from around the world, except the U.S. More than 75% of the holdings are rated A or higher so the credit quality is very good. We added this fund in September to diversify our bond holdings and to try to boost returns. It has done well for us so far, gaining $1.87 in the latest review period. The distributions are minimal however, with only US$0.021 paid out in December.

Cineplex Inc. (TSX: CGX, OTC: CPXGF). Cineplex shares continue to struggle, losing $8.20 in the most recent period. The dividends are good, with monthly payments of $0.14 a share but the company itself is clearly having problems.

Inter Pipeline (TSX: IPL, OTC: IPPLF). Interest-sensitive stocks have been under pressure in recent months and this company falls into that category. The shares are off $1.88 since the last review. One piece of good news: the monthly distribution was increased by half a cent in November to $0.14 per unit ($1.68 per year). The shares yield 7.5% at the current price.

Brookfield Renewable Energy Limited Partnership (TSX: BEP.UN, NYSE: BEP). This renewable energy limited partnership has traded in a narrow range in the past 18 months. In the latest period, the shares were down $0.98 but we received two distributions, totalling US$0.9575 per unit. The distribution was increased by 4.8% to US$0.49 per quarter, effective in February.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This is another Brookfield partnership but in this case the assets are infrastructure ? everything from coal terminals and railways to power transmission lines. The price is up almost $1 since September and we received an 8% distribution increase to US$0.47 per quarter.

BCE Inc. (TSX, NYSE: BCE). BCE shares were down $2.23 in the latest six months. However, we recovered $143 of that in dividends so the overall loss was small.

Cash. We invested $2,025.19 in a high interest savings account with EQ Bank that paid 2.3%. We earned interest of $23.29 for the period.

Here’s how the portfolio stands now. Commissions have not been factored in. For simplicity, Canadian and U.S. dollars are treated as being at par for purposes of the calculations, although obviously, the dividends received from the two Brookfield partnerships are worth more in Canadian dollar terms.

Income Investor Balanced Portfolio (a/o March 29/18)


Security

Weight %

Total Shares

Average Cost

Book Value

Market Price

Market Value

Cash Retained

Gain/Loss %

XSB

18.5

250

$28.45

$7,112.50

$27.31

$6,827.50

$122.66

– 2.3

XBB

11.6

140

$31.99

$4,484.30

$30.69

$4,296.60

$306.00

+ 2.6

IGOV

8.4

60

$49.74

$2,984.40

$51.61

$3,096.60

$1.26

+ 3.8

CGX

9.3

110

$40.06

$4,406.70

$31.35

$3,448.50

$288.75

-15.2

IPL

7.9

130

$19.05

$2,476.45

$22.36

$2,906.80

$302.05

+29.6

BEP.UN

13.0

120

$27.59

$3,310.90

$40.06

$4,807.20

$468.71

+59.3

BIP.UN

18.9

130

$20.02

$2,602.60

$53.53

$6,958.90

$429.86

+183.9

BCE

11.3

75

$44.20

$3,315.20

$55.44

$4,158.00

$465.54

+39.5

Cash

1.1

 

 

$369.63

 

$392.92

 

 

Total

100.0

 

 

$31,062.68

 

$36,893.02

$2,384.83

+26.4

Inception

 

 

 

$25,027.75

 

 

 

+56.9

Comments: This was not a good six months for this portfolio. The bond section held up quite well, but we were hurt by the heavy loss in Cineplex and smaller declines in Inter Pipeline and BCE. The end result was a 1.36% setback for the period.

That reduces the cumulative gain to date to 56.9%. That works out to an annual compound growth rate of 7.18%. That’s better than our target but I am not happy with the recent results, so we are going to make some changes.

Changes: We will sell our position in Cineplex. It offers a nice yield, but it has fallen out of favour with investors and recorded significant losses in the past year that have hurt our overall performance. Based on the current market value and retained earnings, we will realize a total of $3,737.25.

We will use the money to buy 270 units of Dream Global REIT (TSX: DRG.UN), which closed on March 29 at $13.75. The cost will be $3,712.50. The remaining $24.75 will go to our cash account.

This real estate investment trusts invests exclusively in commercial real estate properties located outside of Canada. To date, the focus has been entirely on Europe where the REIT owns approximately 20 million square feet of gross leasable area of office, industrial, and mixed-use properties across Germany, the Netherlands, Austria, and Belgium. The trust pays a monthly distribution of $0.0666 ($0.7992 per year), which works out to a yield of 5.8% at the current price. The chart shows a strong upward movement over the past years with the units trading at well above their 50- and 200-day moving averages.

As well, we will use some of our cash to add to existing positions as follows:

XBB ? We will buy 10 units at a cost of $306.90. This will bring our position to 150 units. We will use all the retained earnings and take $0.90 from cash to cover the difference.

IPL ? We have not lost faith in this pipeline company. We will buy 10 more shares for a cost of $223.60 in the hope of a turnaround in the price. That brings our total to 140 shares and reduces retained earnings to $78.45.

BEP.UN ? We will add 10 units for a cost of $400.60, bringing our total to 130. We will have cash remaining of $68.11.

The total cash balance of $1,582.65 will be left on deposit with EQ Bank at 2.3%.

Here is a look at the revised portfolio. I will review it again in September.

Income Investor Balanced Portfolio (updated March 29/18)


Security

Weight %

Total Shares

Average Cost

Book Value

Market Price

Market Value

Cash Retained

XSB

17.9

250

$28.45

$7,112.50

$27.31

$6,827.50

$122.66

XBB

12.1

150

$31.94

$4,791.20

$30.69

$4,603.50

$0

IGOV

8.1

60

$49.74

$2,984.40

$51.61

$3,096.60

$1.26

DRG.UN

9.7

270

$13.75

$3,712.50

$13.75

$3,712.50

$0

IPL

8.2

140

$19.29

$2,700.05

$22.36

$3,130.40

$78.45

BEP.UN

13.7

130

$28.55

$3,711.50

$40.06

$5,207.80

$68.11

BIP.UN

18.3

130

$20.02

$2,602.60

$53.53

$6,958.90

$429.86

BCE

10.9

75

$44.20

$3,315.20

$55.44

$4,158.00

$465.54

Cash

1.1

 

 

$416.77

 

$416.77

 

Total

100.0

 

 

$31,346.72

 

$38,111.97

$1,165.88

Inception

 

 

 

$25,027.75

 

 

 

Follow Gordon Pape’s latest updates on Twitter: http://twitter.com/GPUpdates

 

Return to the table of contents…

GAVIN GRAHAM?S UPDATES

Note: Prices are as of mid-day on April 2.

Uni-Select Inc. (TSX: UNS; OTC: UNIEF)

Type: Common stock
Exchanges: TSX, OTC
Trading symbols: UNS, UNIEF
Originally recommended: June 25/15 at C$22.30 (split adjusted), US$17.80
Current price: C$19.95, US$16.39
Annual payout: $0.37
Yield: 1.85%
Risk: Moderate
Recommended by: Gavin Graham
Website: www.uniselect.com

Comments: Quebec-based Uni-Select is the largest Canadian auto-parts supplier and the largest independent U.S. automotive paint distributor through its FinishMaster chain. Last August it purchased The Parts Alliance, the second-largest independent U.K. auto parts distributor, with 161 stores, for 205 million ($330 million). The shares have fallen 15% in the last month on what were regarded as disappointing earnings, taking them back to below my original recommendation, although we took a 50% profit on half our position after one year.

In fact, Uni-Select’s numbers were quite good. Revenues were up 42.6% to $415 million, of which acquisitions added $117.6 million, with the Parts Alliance being responsible for $93 million. Uni-Select’s Canadian operations saw sales up 10%, to $123 million and actually recorded organic like-for-like (LFL) sales growth of 1.5%, which would have been 5.9% without the loss of an independent distributor from the system at the beginning of 2017.

Its FinishMaster U.S. operation saw sales rise 10%, to $199 million, but had issues with the string of hurricanes in the U.S. south, a product line changeover, and higher discounts for some of its new acquisitions, which operate multi-store franchises, with the results that EBITDA fell 10% to $19.6 million. The Parts Alliance has a lower margin business model and acquired BBC with seven stores during the quarter with associated costs, as well as opening two new sites, but recorded 3.7% LFL growth. While adjusted EBITDA was up 10% to $28 million for the quarter, adjusted earnings were down 11% to $11.6 million ($0.27 per share).

For the year to Dec. 31, revenue grew 21%, to $1.45 billion, with acquisitions contributing $280 million. Canada achieved organic growth of 3.9% LFL growth despite the loss of the system member, while the U.S. saw a marginal decline. Adjusted EBITDA grew 9.2% to $117.5 million, but adjusted earnings after excluding the effects of the hurricanes and acquisition costs fell 6%, to $55.1 million ($1.30 per share).

Uni-Select is selling at the same price as it was three years ago despite having transformed the organization. It is the market leader or number two in all three of its markets (Canadian and U.K. auto parts, and U.S. paint), it is generating cash, and it is capable of raising its operating margins.

As the North American auto market continues to age as drivers keep their cars and trucks longer, Uni-Select is protected from the slowdown in auto sales now occurring. It has the ability to continue to acquire complementary smaller operations to supplement its organic growth, such as Dash Distributors in Alberta and Spectrum Coatings in Minnesota last quarter.

Action now: Trading at around 17 times last year’s depressed earnings and having raised its quarterly dividend by 8.8% again last year, to $0.0925, for a yield of 1.85%, Uni-Select remains a Buy.

The Keg Royalties Income Fund (TSX: KEG.UN, OTC: KRIUF)

Type: Income trust
Trading symbols: KEG.UN, KRIUF
Exchanges: TSX, Grey Market
Current price: $18.22, US$14.03
Originally recommended: June 21/06 at $13.38, US$12.28
Annual payout: $1.14
Yield: 6.26%
Risk: Moderate
Recommended by: Gavin Graham
Website: www.kegincomefund.com

Comments: Readers have commented on the acquisition in February of The Keg Restaurants’ management company by Cara Operations, the owners of other restaurant chains such as Swiss Chalet, St. Hubert, Kelsey’s, and East Side Mario’s, for $105 million and 3.8 million Cara shares. Cara may need to pay another $30 million over the next three years if certain targets are achieved.

Owners of The Keg royalty trust should not be concerned as Fairfax Financial and CEO David Aisenstat, who each own 50% of the management company, confirmed that the royalty trust will continue in its present form, receiving 4% of the gross revenues of the 100 Keg restaurants in the royalty pool.

In fact, Cara, which also has Fairfax as its majority shareholder, has asked Mr. Aisenstat to run the premium division at Cara, which includes Milestones, Bier Market, and Landing, as their LFL sales growth has been below the 4.8% same restaurant growth at The Keg in the first nine months of 2017. Cara is looking to distinguish itself from its competition, as sit-down dining traffic fell 4% in 2017, while sales were down 2%, to $21 billion, according to market research firm NPD.

Meanwhile, the quick service (fast food) segment saw sales up 3%, to $27 billion, and traffic up 2%. “Cara is cherry-picking some of the top brands within the Canadian marketplace,” said Robert Carter at NPD. “Both St. Hubert and The Keg have the highest customer loyalty and customer satisfaction within the full-service restaurant sector.”

The Keg revenues were up 1.6%, to $147.8 million, for the quarter ended Sept. 30, 2017, and 4.2%, to $447.3 million for the nine months. Same-restaurant sales grew 3% in Canada and 5.2% in the U.S. for the quarter, making SSSG 2.8% in total and 4.8% and 2.4% for the first nine months, equivalent to 4.6%. Meanwhile, royalty income increased 2.8%, to $5.9 million, for the quarter and 5.2% to 18.1% for the first nine months. The trust increased its monthly distribution by 3.1%, to $0.0946 a month, last November, making the annual payout $1.1135, and announced an extra $0.03 special distribution payable in February 2018.

Action now: The Keg remains a Buy for its strong operating performance competitive yield and rising distributions.