JotCast | 11/30/23 Capitalist Times Live Chat

Return to

11/30/23 Capitalist Times Live Chat

powered by

Prev Page View Full Chat Next Page

Roger Conrad

4:49

As I noted in the November REIT Sheet, WP Carey hasn't officially set a new dividend rate yet. But management did pretty much lay out the math for us as to how much the post-spinoff company will start out paying. Mainly, guidance for adjusted FFO per share is $4.60 to $4.80 per share, based on what appear to be pretty conservative assumptions for rents, investment volume of $1.5 bil, the planned sale of remaining office properties and lost FFO of 50 cents for the NLOP spinoff. Management also said it expects a "payout ratio in the low to mid-70s" percent range--which comes out to a one-time reduction "of approximately 20% from Q4, or 85.7 cents, a yield of 5.5% based on the current price--which I would expect to grow at least 4-6% a year based on growth of the industrial/logistics property business.

Roger Conrad

4:50

Starting annual rate $3.428 per share.

Fred

4:51

Did the OPEC+ meeting result in a decrease in fossil fuel production as initial reported? Naively that should result in a decrease in oi production and a price increase in oil, but the market reaction implies that was not the outcome.

Elliott Gue

4:51

Yes, OPEC plus extended existing cuts and layered in an additional 900,000. Oil fell today a bit I think for two reasons:

They were expected to do something like this, which is why oil prices have rallied a bit since late last week. So, it was kind of a buy-the-rumor-sell-the-news reaction.
Frankly their additional cuts were confusing and structured as a "voluntary" arrangement rather than an official target. I suspect they needed to announce more cuts and decided to sort the details out later.

That said, oil prices are sill up from where they were two days ago and Saudi did extend its cuts into 2024, which was the key point in my view. I tend to think that OPEC will watch the market and if prices did start to fall further, you might see unilateral action from Saudi by early January. On top of that speculators are leaning bearish crude which makes the market vulnerable to short squeeze on any good news.

Alex M

4:58

Hi Roger. I was looking at the latest earnings release for Healthcare Realty Trust (HR). Their quarterly FAD of around $100 million didn't cover their dividend payment of $119 million. With a yield north of 8%, do you think this is a value trap or an attractive entry point? Thanks.

Roger Conrad

4:58

Leasing medical buildings has been a tough business this year, even for Healthcare Realty Trust--which is the blue chip of the group, having recently consolidated the merger of Healthcare Trust of America. The property portfolio itself is still producing solid rents, with cash net operating income advancing 2.3% in Q3 from a year ago on 2.8% rent growth and expense management. Occupancy actually increased 20 basis points to 89.2% and there appears to be some leasing momentum as well, with performance of "legacy" HTA assets in particular improving. HR also was able to cut variable rate debt and offset CAPEX with asset sales. And overall interest expense rose by just 1.5%. You're right to point out that funds available for distribution were about $20 mil less than the dividends paid and just $6 mil higher on the 9 months basis. I do think management runs this pretty aggressively, so a shortfall in a particular quarter does not necessarily mean the dividend is endangered.

Roger Conrad

5:04

Continuing with HR, on a normalized basis the Q3 FFO payout ratio was just 79.5%. And debt maturities are not onerous, with only $200 mil in floating rate borrowings due in 2024. Rather, the real danger here is the health of tenants--highlighted in a Q3 retention rate of just 76% versus the "long-term expectation of 80% or higher." And the company is also seeing higher operating expenses (up 4.8%) due to a 9% lift in labor costs. So while I don't see the dividend in immediate danger--especially given management commitments--I think we need to watch carefully whether or not the REIT hits target 4-6% NOI growth going forward. And I think there are better REITs for conservative investors.

Victor

5:10

Elliott, According to treasury.gov, in FY 2023 total government spending was $6.13 trillion and total revenue was $4.44 trillion, resulting in a deficit of $1.70 trillion, an increase of $320 billion from the previous fiscal year. For fiscal year 2023 the debt to GDP was 123%. As of October 2023 it costs $89 billion to maintain the debt, which is 19% of the total federal spending. Biden and most democrats refuse to cut any spending, actually they would love to spend more in green energy, social programs, subsidies and student loans. Their spending agenda is endless. This is clearly unsustainable. I feel very concerned about this issue and I would like to see how you feel about it in the short term and also in the long term. Thanks.

Elliott Gue

5:10

I think there are long-term sustainability issues. And in the short-to-intermediate term my view is that the biggest risk is a "crowding out" effect -- it's something I wrote about over on my Substack here:

https://open.substack.com/pub/freemarketspeculator/p/treasurys-payday-...

At risk of getting too esoteric for a chat, I monitor the Fed's balance sheet on a week-to-week basis and, in particular, the liabilities side of the balance sheet. So when the Fed undertakes quantitative tightening, it sells/allows Treasuries held outright to roll off its balance sheet. This reduces the asset side of the Fed's balance sheet which, in turn, needs to be offset by an increase in other assets or a decline in liabilities.

There are really only two ways to balance QT -- a decline in bank reserves (that's bad for the economy) or a decline in the reverse repo facility (RRP). The RRP is basically a facility where money market funds park assets overnight at the Fed risk-

Elliott Gue

5:10

free and get a rate similar to the Fed Funds rate. Now, what's happened since the June debt ceiling deal is that Treasury has issues an avalanche of Treasury Bills (short-term government binds). They're relying on T-Bills rather than long-term bonds (say 10-, 20- or 30-year debt) because they're struggling to find adequate demand on longer term government bonds at auction. Since June, the RRP has been eviscerated, declining in value by $1.4 trillion as money market funds have removed money from RRP to buy T-Bills, which offer a few extra basis points of yield. Since money market funds are pretty passive the decline in RRP has had limited economic impact while it has allowed Treasury to fund an eye popping deficit ($1 trillion quarterly refunding statements). Only problem is that money market funds can't buy longer term bonds and the RRP wont last through to April or May of 2024 at the current rate of dissipation. In my mind, this opens the risk that by Q2 of 2024 more of the money needed to fund the deficit

5:11

Will need to come from bank reserves – basically this would happen if individuals started buying government bonds or corporates and they used cash on deposit at a commercial bank to do so. When bank reserves fall, that’s when you can go from all is well to “credit crunch” in short order. Also, when a person uses money in their checking account to buy a bond, that’s money that doesn’t go to other uses like buying stuff (consumption), investing in stocks or small businesses or private debt securities – in effect the government’s borrowing needs suck up private capital at an alarming pace.
Granted, these things don’t matter until they matter. But it’s a huge, underappreciated (and probably very boring to most people) risk I see.

Peter

5:13

I've been thinking about investing in ETRN. How much of the benefit from the MVP is already priced in and how much growth can we expect?

Roger Conrad

5:13

Hi Peter. How much of the benefit of opening the Mountain Valley Pipeline is priced in for Equitrans is a bone of contention on Wall Street--demonstrated by 6 buys, 6 holds and 2 sells among analysts tracked by Bloomberg Intelligence who cover the stock. I come down on the side of those who believe there's quite a bit more value to be realized. For one thing, it's not finished yet. And there's no doubt in my mind ETRN is priced for the risk of further cost overruns, with the new target in service date of Q1 2024. More important, however, is what happens after--when the utilities that own the other 51% of MVP start to shop their ownership interests. And the easiest way for a buyer to get a dominant share will be to buy ETRN and its 49% stake--with former parent EQT and lead MVP customer the most likely bidder. Either way, I still look for a low to mid-teens price for ETRN next year.

Ron

5:17

I have a small position in WTRG which has declined in price. Would appreciate your thoughts on adding to this position now or looking elsewhere.

Roger Conrad

5:17

Hi Ron. I don't have a lot to add to my answer to a question on Essential Utilities a bit earlier. Bottom line is I think it's cheap and has multiple levers to pull to keep growing earnings and dividend at or above the target range of 5-7%. This year's share price performance has been disappointing--due mostly to investor doubts utilities will be able to keep investing at the current pace in a higher for longer interest rate environment. But I think Q3 results--which I highlight in the November Utility Report Card comments--and guidance update show pretty clearly the company is still on track. And while all water utilities have seen valuation premiums contract over the past year, I think Essential's continuing resilience will ultimate get it back to a 20 plus earnings multiple. This looks like a great place to buy, rather than sell.

Victor

5:20

Elliott, CCJ has been in a solid uptrend. What could derail this one?

Elliott Gue

5:20

In my view uranium (CCJ mines it) is in its 3rd great bull market since the 1960s. Typically what derails a bull market in uranium is supply; the uranium market isn't as transparent as oil, for example, but what we're clearly seeing/hearing is that some utilities are getting pretty eager (desperate) to lock down long term supply. And because prices were so low for so long there's just not enough mined supply to meet demand, forcing reliance on secondary sources and stockpiles. The last uranium bull market ended when Kazakhstan supply boomed and flooded the market. But, I don't think we'll see that again because supply there leveled off years ago. Also they have some potential transport security issues with moving their product to market -- let's just say their neighbors include Russia and Turkmenistan. Meanwhile big producers like CCJ have also had problems with mine restarts, declining ore quality, etc. Spot uranium prices over $80 to $90/pound are needed to incentive new mine supply (we're at $81 or so).

Elliott Gue

5:20

My guess is you'll need to see prices above that level for some time before you see enough supply to really bring about an end to this bull market. I can't see that happening in the next 12 months -- more likely, we see more upside for the next 2 to 3 years.

Guest

5:24

Hello Roger: I diligently follow your prudent admonitions to purchase your "best in class" recommendations. I believe I know what they are with your renewables (NEP+NEE) and midstream (EPD). In your REIT Sheet I am not so sure - I know you are fond of ARE and PLD, but are the OTC's (such as SmartCentres and RioCan REIT) which are below "Dream Buy" prices also "best in class"? Could you kindly remind us readers which of your 18 recommended stocks in the REIT Sheet would qualify as best in class? Thanks.

Roger Conrad

5:24

Thanks for that question. For the stocks on the Recommended list, I've tried to pick out the best in class from multiple sectors. Risk among the various sectors does vary depending on the environment, which is why I also rate REITs by "Risk Level" in the quarterly data bank, now including 85 REITs. For example, Farmland Properties (NYSE: FPI) operates in a much more volatile business than does life science facility owner Alexandria REIT (NYSE: ARE), which I rate as conservative. RioCan and Smartcentres are also rated Aggressive, mainly because our returns and dividends are affected by changes in the US dollar/Canadian dollar exchange rate. Mall operator Simon Properties (NYSE: SPG) is also aggressive, as that business is vulnerable to recessions.

Roger Conrad

5:25

I will notate the Conservative vs Aggressive in TRS issues without the databank going forward for clarity. Thanks for the suggestion.

Victor

5:30

Elliott, CF had a good run for a few months but it's been dropping in value for the last two months. Is this one affected by lower oil prices? Your thoughts. Thanks.

Elliott Gue

5:30

Their sensitivity is more to gas -- in particular the relative price of US and TTF (EU) and JKM (Asia) gas prices. European gas prices are up and down -- the headwind is elevated storage ahead of winter while the tailwind for prices is the potential for a cold winter there from El Nino that would deplete inventories. Also, recall that Europe's electric grid is very weather dependent due to reliance on intermittent solar and wind. SO, near term trend probably depends on where EU gas prices go near term -- longer term, farmers need to reapply nitrogen fertilizer every year, inventories remain tight and prices are already on the low side of the 4 year range. So I see more upside than downside there.

Guest

5:32

Roger: 4 questions: 1. Is PAA a partnership that gets taxed as an MLP and therefore we shareholders get favorable tax treatment on the distributions? 2. Is the same true for PAGP? 3. In your last EIA issue on page 14 you were very bullish on the company and especially its 19% dividend increase. Would you describe PAGP a "best in class" company? If not, is it still a prudent purchase to make because it is in your High Yield Energy Target List? 4. Is HESM a "best in class" stock to purchase? Thanks for all of your help!!!

Roger Conrad

5:32

Yes, both Plains All American Pipeline (NYSE: PAA) and its general partner Plains GP Holdings (NYSE: PAGP) are both MLPs and get favorable tax treatment on distributions. I rate Plains as "Aggressive" for risk--as opposed to "Conservative" or "Speculative"--primarily because revenues are heavily leveraged to volumes, rather than locked in by capacity contracts as is the case with most of the midstreams we own. I think they're a great company and fully expect PAGP to beat its highs of the previous cycle, which was the upper 80s. And this is a great time to bet on companies that have upside leverage to the energy upcycle. But in a downturn, the other midstreams in our Model portfolio would offer more safety. Hess is also rated Aggressive because it depends almost entirely on a single company for business, parent Hess Corp. But I like it for yield and upside from a possible takeover.

Mack

5:41

Question re HESM. As it stands now, CVX is buying HES which will include a good chunk of HESM stock. But CVX is not buying the HESM shares that are publicly traded.What is likely to happen with HESM. If CVX sell the HESM shares it gets from HES, will HESM be able to survive as a standalone company? Seeems like lots of unknowns. Thanks.

Roger Conrad

5:41

Hi Mack. I don't think the fact Chevron isn't making an offer for Hess Midstream now means it won't down the road. In fact, several months after the company closed on the former Noble in October 2020, it made a high premium offer for the shares of the former Noble Midstream it didn't own, which it closed in May 2021. The key to that deal was Noble Midstream was the primary servicer of the wells Chevron acquired when it bought the parent. Absorbing that company allowed it to cut costs, as well as stop paying out dividends. Hess Midstream is basically Hess Corp's personal midstream company in the Bakken. Once Chevron buys Hess, it will have to honor those capacity based contracts with Hess Midstream--and absorbing the rest of HESM will offer even greater cost savings. No guarantee they will make an offer of course and I don't claim to read minds. But if Chevron does sell for some reason, HESM still has Global Infrastructure Partners as a sponsor--and CVX will still have to pay on those contracts.

Roger Conrad

5:42

CVX could also sell Hess Corp's Bakken properties and just exit the whole region. But even then, the acquirer will have to honor the contracts.

James

5:50

Hi Elliott, HES stock price has been in the dumps since being acquired by CVX, which is unusual considering they were being acquired. In the last few days, HES stock price went lower than CVX even though HES shareholders will receive 1:025 shares of CVX. What does the stock action of HES tell you?

Elliott Gue

5:50

Since the deal was announced, HES has traded based on what CVX's own stock does . CVS shares have been under some pressure, like most energy stocks, due to the recent pullback in oil and gas prices. Also, CVX sold off following its earnings report on October 27th mainly because their production as a little light. So thr decline in HES has nothing really to do with HES, it's entirely a function of what happens to CVX shares, because the deal will likely close and HES will be worth 1.025 times as much as CVX on a per share basis when it does close.

Normally, I'd expect a target company like HES to trade at a slight discount to the value of the implied takeover price. This reflects some uncertainty about the timing of the deal and, of course, the cost of capital (interest rates) over time. That's generally been the case for HES this time around. I see what you're saying about yesterday -- HES closed at a premium to its takeover value. I wouldn't read much into that, it's likely just a function of light

Elliott Gue

5:50

trading volumes this week coupled with some wild swings in the market/oil at the close yesterday. While I do expect a lot of M&A in energy stocks in the next 12 to 24 months, do NOT expect huge premiums as is common in all-cash deals in other industries. The way all of these deals are being structured is as all-stock deals where the shareholders in the acquired company retain exposure to the assets they're selling via their stake in the acquiring company. In most cases, XOM and CVX included, I'd argue that these deals make those assets more valuable because you (almost instantly) squeeze out costs and generate more free cash flow from the same assets. And the market punishes energy companies seen as overpaying for targets, so look for deals to be struck at prices where they're accretive. Your gain from deals like CVX/HES is likely to come from longer term appreciation not an overnight pop on deal announcement.

Roger Conrad

5:54

Hi James. Adding to what Elliott has said, one possible catalyst for selling as a statement issued by several senators requesting anti-trust review of this deal as well as ExxonMobil's takeover of Pioneer. We agree with most observers that this is basically a political statement, as it would be very hard to prove in court that these mergers significantly boost these companies' power to limit competition, or to pursue the senators' charge that these companies intend to "move significantly more oil and gas out of the US." But it is possible this is negatively affecting Hess Corp's share price, pushing it below takeover value. Either way, more a reason to stick with your HES and HESM.

Randy D

5:59

Roger, I enjoyed hearing you on Chuck Jaffe's podcast yesterday! My question is about Chevron CVX and Hess HES. Earlier this year, Chevron was up above 180, and now it's at 143. Hess was at 164, and is now down to around 140. Why do you think this is happening, and when would be a good time to buy shares in either or both? Thanks

Roger Conrad

5:59

Hi Randy. Thanks for tuning into the podcast. I really enjoy discussing stocks with Chuck. For anyone who's interesting in listening in, it's now posted on the Conrad's Utility Investor website.

Regarding your question, as Elliott and I just answered in the previous question, we think this selloff is overdone. I've had a buy on Chevron for sometime at a price of $150 or lower, and this is a great time to pick up shares below that level. I've personally owned this stock since well before the Texaco merger and I expect it to continue to be a huge winner--with Hess shareholders participating going forward. We're still early stages of this energy upcycle.

Michael C

6:06

Thanks for these chats! I have owned EXC for a long time but it has been going down since May 22. I am looking to sell and buy something with higher dividend, suggestions?

Roger Conrad

6:06

You're welcome Michael. Exelon really hasn't acted much differently from other utility stocks this year. In fact, the sector has basically been downtrending for 12-18 months, depending on what stocks you look at. The year to date return is -7.5%, which is basically where the Dow Jones Utility Average is. The company had solid Q3 results, narrowing its 2023 guidance with the same mid-point and affirming the annual growth target of 6-8% a year. Rather, the catalyst for selling is same as it's been for other utilities--which is an overly pessimistic investor consensus that higher for longer interest rates are going to undermine CAPEX-led growth. I think that will reverse over time as the sector in general and EXC in particular continue to post strong results, pushing these stocks back to where they traded a year ago and beyond. Until then, though, I think we have to be patient. But for a higher dividend, there are many opportunities in the energy midstream sector--which is also headed a lot higher.

Guest

6:07

Thanks for holding these chats! Has the OPEC+ announcement today changed your view on oil prices the next 3 months?

Elliott Gue

6:07

Thanks for the question. I've covered today's OPEC+ deal in response to a few prior questions. To summarize I see the announcement as pretty much what was expected and I think the post-OPEC sell-off is probably mainly just buy-the-rumor, sell-the-fact. In fact, oil is still slightly higher than where it was two days ago at the close on Tuesday. So, no real change in the outlook -- oil is usually weak in November and bottoms by early December. If oil were to weaken further, I would also expect additional action from OPEC.

Frank

6:11

Up in Canada, any thoughts on Peyto PEYUF and Freehold Royalties FRHLF

Roger Conrad

6:11

We track both in our Energy and Income Advisor "Canada and Australia" coverage universe, which can be accessed on the EIA website under the "Portfolios" tab. We currently track 42 names there. Freehold the oil and gas royalty trust is a buy at USD11 or lower, producer Peyto is a buy at 12 or lower. I think you have to consider Freehold's dividend especially as variable. And Peyto's could be negatively affected by a prolonged dip in gas prices. But I think longer-term both are going to head a lot higher as the energy upcycle unfolds. Peyto just completed a major acquisition of Repsol Exploracion's properties in the Deep Basin area of Alberta, further increasing low cost reserves.

Connecting…

Your current subscriptions

None

Register now to continue managing your subscriptions

E-mail Address	Chat Owner	Status	Remove

Enter your email address to be notified when Sherry Roberts hosts a chat