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12/30/21 Capitalist Times Investing Live Chat
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AvatarRoger Conrad
1:57
Hi everyone and welcome to our final CT online webchat for 2021! Hard to believe another new year is upon us. Thank you for joining us today.
1:58
As always, there is no audio. Just type in your questions in the Q&A box and Elliott and I will answer them as soon as we can concisely and comprehensively. We will email you a link to the complete transcript of this chat after we sign off, which will be when all the question in the queue have been addressed, as well as those we received via email.
1:59
We'll start by uploading answers to emailed questions received prior to the chat:
Q. I have life subscriptions to both CUI and The REIT Sheet and have the following questions:
 
• What percentage of a typical portfolio could/should consist of REITS? So you have any suggestions or guidance?
 
• Of the 80+ coverage universe in the REIT Sheet, you do not include Easterly Government Properties (NYSE: DEA) or Arbor Realty Trust (NYSE: ABR). Is there any reason for this? Could you offer any guidance for these two? Is there a possibility for inclusion for these two?
 
• Is there a possibility for separation of the text/narrative portion of the REIT Sheet from the universal coverage portion of the advisory as you do in CUI ?
 
Thank you for your many years of sound advice. I have truly prospered.--John R.
 
A.Hi John.
2:00
Thanks for your kind words. I have picked up coverage of Easterly and it is listed in the data bank at the end of the current REIT Sheet, which hopefully you’ve received by now. I rate it a buy up to 23 for yield as well as the stability of its portfolio of US government agency-leased buildings. I have not done so with Arbor to this point. One reason is I already track a number of mortgage REITs and I’m particularly high on them as a sector despite their high yields. An exception would be KKR Real Estate Finance Trust, which actually has a higher yield than Arbor and a strong parent backing it up. Arbor’s dividend is growing, which is a plus. But the nature of M-REITs is they’re a black box—they can do well for a long time and then very poorly with almost no warning.
 
Generally speaking, no one sector should make up more than 20 percent or so of a balanced and diversified portfolio. In the case of REITs, we’re really talking more about a form of corporate organization than a specific business, so investors
can go higher if spread around different sectors. But anyone who does that should be pretty sure about the underlying business of what they’re buying, so as not to become over exposed to the same risks.
 
As for formatting of the REIT Sheet, I will see what’s possible. It is quite long with the table and I realize it can be a strain on anyone printing it out. Thank you for the suggestion.
 
 
Q. In his 04 dec alert (https://conradsutilityinvestor.com/12-04-21-the-enable-midstream-sale-...), Roger wrote, "I initially recommended Centerpoint’s now converted preferred in June 2020 for two reasons...." Where can I find that recommendation? Thanks—Bur D.
 
A. Hi Bur. I made the initial recommendation of the Centerpoint preferred in an Alert dated June 10, 2020. You can find the piece by clicking on the “Alerts” tab on the Conrad’s Utility Investor website, scrolling to the bottom of the page, clicking on the number “2” and then scrolling down again.
2:01
 

Alternatively, you can type “Centerpoint” into the box with the magnifying glass in the top right hand corner of our Home Page. The box is colored white and is labeled “Economy, Stocks, Expert Analysis.” You can also search any other company I’ve tracked over the first 101 issues of CUI—as well as Alerts and other content. It’s part of your membership to CUI.
 
 
Q. This is for Thursday’s Chat. Roger: Any thoughts on the future value of Exelon Corp’s (NYSE: EXC) breakup next year--i.e. what are the pieces worth separately? Thank you again for all you and Elliot do for subscribers.--Bill G.
 
A. Hi Bill. I think the two halves of Exelon will be worth north of $60 a share in the relatively near-term, and possibly as much as $100 in the longer-term depending on future US policy regarding nuclear power. For those who aren’t familiar, the two parts will be a (1) multi-state regulated utility that keeps the Exelon name and should be priced in the low to mid-40s soon after separation, and (2) a primarily nuclear
power generation company with a large retail arm that should initially be worth at least $15 to $20 per current share.
 
With New York regulators approving the separation, this deal should have no problem closing in Q1 2022 as planned. One reason Exelon shares have done well this year—including an end-year rally—is investors are realizing the nuclear/retail company is a viable entity after Illinois passed sweeping decarbonization legislation. The company has also been moving toward participating in development of small scale nuclear plants that could one day replace the aging larger ones in its fleet.
 
Admittedly, my answer here is speculative. The biggest variable is where the overall stock market will be when the split is consummated, but energy prices and political developments could also play a role. But I’m comfortable holding through the split, and that despite this year’s gains for Exelon shares the sum of the parts will wind up worth more than the current whole is.
 
 
 
Q. Hi Roger. I’m just wondering if there was an Edison Electric Institute (EEI) conference report from this year’s November event? Thanks—Dan E.
 
A. Hi Dan. I did not attend EEI in person this year, so I did not produce a report as I have in past years. I did review the conference presentations, including those by the individual companies that attended. It’s definitely not the high quality experience being there is. And I look forward to when the event returns to pre-Covid format that allows the degree of interaction it has in previous years. But I did nonetheless pick up some interesting insights, which I share in the individual company “Comments” section of the December issue Utility Report Card.
 
 
Q. I’m retired and need safe, reliable income. I’m going to increase my position in either BCE Inc (NYSE: BCE) or Verizon Communications (NYSE: VZ). I have chosen BCE unless you change my mind. BCE has a nicer dividend. BCE probably has a chance at better dividend growth. Perhaps the VZ dividend is “safer”
2:02
”…better pay out ratio? Which way would you steer me…have good base positions in both.--David O.
 
A. Hi David. As I hopefully indicated in the December issue of CUI, I view both of these companies as very cheap stocks paying high and safe dividends and offering significant upside in 2022—especially as 5G uptake accelerates.
BCE has increased its dividend at a faster rate than Verizon the past couple years. And given that Verizon is likely to be focused on paying down debt as well as returning capital to shareholders the next couple years, that could be the case in 2022 as well as 2023. On the other hand, BCE is priced in and pays dividends in Canadian dollars, which I believe will be a positive next year but could also add volatility.
In any case, both of these companies are Conservative Holdings in CUI in good stead. I like them both and see no problem investing in either at this time. If you’re interested in how other analysts see them, BCE has 6 buy recommendations versus 10 holds and 1 sell among analyst
tracked by Bloomberg Intelligence. Verizon’s numbers are 9 buys, 21 holds and 1 sell—so there’s plenty of room for sentiment to improve on either.
 
Q. Hi Roger- happy and healthy holiday wishes to you. I’m very curious to hear your thoughts about the recently announced AES Corp (NYSE: AES) acquisition of Community Energy. So far I haven’t found any announced details on the purchase price, or how soon the deal would contribute to earnings. But the first corporate announcements emphasize it’s a big expansion of the renewables project pipeline. How big is the acquisition relative to AES’s existing businesses? Any idea if the deal impacts AES efforts to improve credit ratings? Sincerely.—Dan N.
 
A. Hi Dan. So far, that’s pretty much all the information on this deal that’s been released to the public. It is a big deal for AES’ own efforts in this business, though as management also pointed out in the primary press release it signed power sales agreements for 4 gigawatts of capacity this year and already has a
2:03
new projects pipeline of 40 GW.
 
Those numbers would seem to indicate this is an incremental rather than transformational expansion. And that increases the odds the acquisition adds to earnings without meaningfully increasing financial risk, including AES’ eventual upgrade to investment grade by Moody’s from the current Ba1 with positive outlook.
 
Bottom line is based on what we currently know, I see this as positive for AES—both because it brings more business now and because Community Energy Solar developed roughly 5% of utility scale solar built in the US to date, which means potential servicing revenue as well. And I continue to rate the stock a buy up to 28 for those who don’t already own it.
 
Q. Hi Roger. I wanted your opinion on Enel Chile (NYSE: ENIC) now after the country’s elections. I’m trying to decide whether to take the loss to offset gains or to hold. Thanks--John M.
 
A. Hi John.
The victory of the left in Chilean elections has at a minimum increased regulatory uncertainty in that country. The record of such governments is they ultimately don’t bring as much anti-investor intervention as is initially feared. And in this case, it would seem to be very much in the new administration’s interest to keep Enel Chile’s 64.1 percent owner and ultimate parent Enel SpA (Italy: ENEL, OTC: ENLAY) investing in renewable energy resources—given its goal of cutting emissions and limited options for getting that done. That doesn’t mean they won’t act otherwise. But the gigawatt of solar, wind and storage Enel announced in late November is a big deal. And from its current level, there’s a lot of political risk reflected in Enel Chile’s share price.
 
On the other hand, I would also argue Enel SpA shares are also reflecting political risks that have very little potential to really undermine profitability—even if Chile goes to far as to threaten nationalization of Enel Chile. And they would definitely
get a lift if Chile proves as I expect to be less of a real risk for a company investing in renewable energy.
 
I have a buy up to 3 for Enel Chile on that basis. But it is difficult to see it reversing this year’s losses quickly and Enel SpA offers much the same upside from better news in Chile without the direct risk. One strategy for those interested in taking a tax loss could be to switch to Enel SpA, which is a member of our Aggressive Holdings.
2:23
Q. What do you think of Brandywine Realty Trust (NYSE: BDN)? And what's your best value pick for REITS right now?—Eric
 
A. Brandywine isn’t one we currently cover in The REIT Sheet, though we certainly could pick it up in the future. Briefly, it’s an office property company that’s seeing the pressures of that sector, with “core” portfolio just 90.2% occupied (91% a year ago) and 92.7% leased and flat year-over-year FFO/share. They did see some uptick in rents in Q3 for both renewals and new leases, the payout ratio is manageable at 55.9% and they were able to hold 2021 guidance after Q3 results—though that seems to depend on being able to boost occupancy. Interest expense was reduced by -6.9% and the balance sheet is still rated investment grade (BBB- stable outlook from S&P).
2:24
Finally, they’ve also been able to continue with some development efforts. That would all seem to imply the current dividend level can hold, though it’s also noteworthy that it was not increased the past two years. But my main question with REIT--and with a few rare exceptions all office REITs now--is what kind of impact the pandemic will have on office rents and occupancy, meaning how much will businesses now allow working from home and therefore downsize their common spaces when leases expire. There will be a need for office space. But I also think we’re going to have to see downsizing and consolidation of the current number of players—some relatively favorably with M&A but others by reducing CAPEX and dividends. So this is a sector I’d tread with care.
 
As for a top value pick in the REIT space, I had several in the most recent REIT Sheet, which we sent out just before Christmas. But one I think is worth a look is KKR Real Estate Finance Trust, which highlight in that issue and have just added to a list
of top picks. The chief appeal is the 8% plus dividend. But I also like the deep expertise KKR provides as the parent company, which makes me less concerned about what I believe is the chief drawback of all mortgage/loan focused REITs—we’re never going to know what’s inside them at any given time.
Jack A.
2:26
Hi:

What is the best way to leverage a pure play in the predicted increase in the price of WTI? What are your thoughts about UCO as an investment?........... My thoughts are that picking a particular stock leaves us vulnerable to company specific developments, and, so far, the midstream names have not followed very well with the increase in the price of WTI.................  Also, besides PXD, what other oil companies have hedges expiring soon and can give us the best leverage to an increase in WTI?
Thank you
AvatarElliott Gue
2:26
We have recommended UCO as a trade on a few occasions in EIA's sister publication CT Trader. It's a good way to establish a leveraged position in oil itself (rather than energy stocks). The main downside to UCO is the tracking error issue, that stems from the way UCO tracks DAILY changes in the price of WTI. This isn't a major problem provided your holding period is 3 to 6 months or less. In another sister publication to EIA, Income Options, we're currently trading oil via call options on USO, which is another way of getting leverage. As for energy stocks, midstream names aren't a great way to play oil itself because, while we like many of them as investments, most don't benefit directly from a $10/bbl increase in oil prices. If you want to play oil itself via energy stocks, you're much better off going with an E&P like PXD or you could look at an ETF that tracks the producers broadly -- XOP is one we've recommended for trading in the past.
AvatarElliott Gue
2:26
As for hedges, PXD is the biggest beneficiary in the portfolio right now and last time I looked it really was a standout in the industry in terms of upside leverage to oil prices in 2022...I have it on my to-do list to review the E&Ps' hedge books when we start getting updated data in January.
Eric
2:31
Why is KMI increasing their debt:EBIDTA ratio projection for year-end 2022 and is that the reason the stock has fallen since earnings release?
AvatarRoger Conrad
2:31
Hi Eric. I think what Kinder is saying is that they're not counting on a repeat of the windfall they received from Winter Storm Uri last year--which delivered a major one-time lift to EBITDA in 2021. They did use a portion of that money to make two acquisitions that will raise EBITDA going forward--the Stagecoach Pipeline system in the Northeast that they can integrate with existing assets, and Kinetrex--which gives them a major presence in renewable natural gas and potentially hydrogen. They also used free cash flow to continue to reduce debt, which has helped lock them in a solid BBB credit ratings with stable outlooks from S&P, Moody's and Fitch. As a result, they will remain comfortably within their debt/EBITDA target range.

I've said Kinder's weak performance since late October when they released Q3 earnings is basically for the same reason other midstream stocks have slumped--it's clear the volumes recovery is taking longer to materialize than it has in previous energy cycles.
Buddy
2:33
Is EIA being merged in the Capitalist times?  The monthly EIA chat seems to be history and there isn't a EIA December issue.  What's up?
AvatarElliott Gue
2:33
No, Capitalist Times is the publishing firm Roger and I founded about 9 years ago, so it's the parent company of all of the publications we publish. EIA is an independent publication and will remain so. We've historically hosted chats for EIA as well as some of our other publications (including Conrad's Utility Investor). This month, given the holidays, we have just merged the chats into a single chat in an effort to ease scheduling issues. Earlier this week, we sent out a detailed issue with our updated outlook for commodity prices (oil and gas) and we're planning another issue for the first few days of January.
AvatarRoger Conrad
2:33
Continuing on Kinder, we believe we will ultimately see the volumes recovery. But in the meantime, this company has clearly adapted its financial policies to the current environment of tepid volumes, which continuing to position itself with acquisitions/expansion to take advantage of a return to higher volumes. It may take a bit more patience to wait for the payoff. But I have no problem continuing to recommend this stock for a high and growing dividend now and big capital gains later.
Buddy
2:37
What is the outlook for FTI?  They seem to be signing some significant contracts, yet the stock is trading at its long term low.  Is there some significant upside eventually with this stock?
AvatarElliott Gue
2:37
Eventually I think FTI is a good name. However, they're basically an offshore play and it often takes a few quarters for offshore activity to turn up after the rest of the services space has started to see cyclical improvement. So, we continue to like SLB on the services side right now and that's already recommended in the portfolio. BKR is a second name I'm watching in services -- we wrote it up a few issues ago but haven't yet added it to the portfolio.
Eric
2:39
Thanks for all you've done this year!  For fresh money, do you favor large integrated oil producers, E&P, midstreams, downstream or renewable sectors?
AvatarRoger Conrad
2:39
Thanks Eric. I hope by now you've had a chance to read the Energy and Income Advisor Alert Elliott wrote and we published earlier this week. It's a great macro discussion for energy. And we'll be paring it with an issue on our top 6 energy picks for 2022 early in January.

Our view is that there are bargains in every sector, which is why we have representatives from all in the Model Portfolio. Producers will see a big benefit from continuing high oil and gas prices, which will continue to lift free cash flow allowing them to cut debt and start returning a lot more cash to shareholders in 2022 (some already are doing so including portfolio picks EOG, Pioneer and others.

Midstream companies have lagged because we've yet to see a real volumes recovery as we have at this stage of previous cycles. We see them as attractive for yield now and cap gains for the patient.
Jeff
2:43
Elliott, what do think about VNOM
AvatarElliott Gue
2:43
We like VNOM. They're a royalty and mineral interests play focused on the Permian Basin and they were created by Diamondback (FANG), which is a quality producer in the region. Like all variable dividend/distro plays, you have to be prepared for dividends to take a big step back when oil prices get hit but we have the stock as a buy under $25.
Eric
2:51
I still dont get how IEP yeilds 16% and people aren't jumping all over it, what am i missing? The dividend looks like its been pretty stable for quite a while too.
AvatarRoger Conrad
2:51
There's clearly a great deal of skepticism Icahn Enterprises will hold the quarterly dividend of $2 per share--I would argue the current betting is for at least a 50% cut next year. Obviously, a lot is within management's discretion, and like all private capital entities, it's often difficult to get a real read on what's inside. Financials are also usually not particularly helpful--since there's a loss of 47 cents for the first nine months of 2021 and at least nine different businesses and three investments that have a significant impact on results. EBITDA has also been extremely volatile--$715 million for the first nine months of the year versus a loss last year. Dividend payments were more than three times that.

Icahn does have levers to pay to come up with the dividend payments near-term--notably asset sales. And the $75 per share hostile takeover attempt on Southwest Gas proves again it's never a boring company to hold. But neither should IEP be considered a typical LP/REIT, or an income investment.
AvatarRoger Conrad
2:51
Icahn Enterprises is a bet on Icahn, period.
Jeff
2:52
Elliott, what is your opinion on  PXD, EOG and CEQP
AvatarElliott Gue
2:52
PXD and EOG remain two of our favorite E&Ps and both are recommended in the model portfolio. I'd argue PXD is the highest quality US shale producer (there are a couple of other legitimate contenders) and I think the market underappreciated the dividend potential in 2022, particularly as hedges roll off. They've now paid out two special dividends $1.51 and $3.02 in addition to their regular quarterly payout that's now been raised to $0.62. I think they could pay out 10% or more of the current share price (about $180 to $190) in 2022. EOG is a quality producer...frankly, I do wish they'd adopt a similar cash flow return methodology to PXD, but I also like their natural gas exposure which puts the name "over the top" in terms of recommending it in the portfolio. CEQP has a solid yield 9%+ and has made some smart acquisitions this year -- I think they've adapted well to volume declines across some of their assets.
Ed O.
2:56
What is your opinion on Chevron ...has a good yield ....and recommended by many services
AvatarElliott Gue
2:56
We like Chevron though our top pick in the model portfolio among the supermajors right now is ExxonMobil (NYSE: XOM). XOM has a higher yield than CVX at this time plus we really like the way management invested in new low-cost plays straight through the downturn, which is setting them up particularly well to benefit from what we believe will be a multi-year upcycle for oil and gas. The market appears to be beginning to recognize this -- XOM is up about 55.6% in 2021, a little over 10 percentage points more than CVX.
Don C.
2:59
Roger/Elliott--for decades, I have read about how a rise in interest rates hurts utilities as their financial structure allows them to have significant debt relative to companies in other industries. With interest rates at historic lows, did some of your recommended utes lock in to low term financing at low rates? If so, will this insulate them somewhat if Jay Powell & Co. truly have multiple rate increases in 2022 and beyond?

Thank you so much for all that you do for subscribers.
AvatarRoger Conrad
2:59
Thanks Don. I think any company that uses a large amount of debt finance is at risk to an increase in interest expense the next several years. But regulated utilities in general do enjoy several layers of protection against the risk of higher rates this time around. First, they continue to take advantage of generation-low borrowing costs to lock in lower rates for longer. Look for more on what individual companies are doing in the January issue Utility Report Card comments--where I'll be updating how companies stack up on Quality Grades.

Second, regulators adjust utilities' return on equity/rate base to reflect changes in interest rates. That's had a negative impact for several companies recently--notably Pinnacle West in Arizona. But provided utilities have support of regulators, rising rates would push ROEs higher over time.
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