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AvatarRoger Conrad
2:06
Hi everyone and welcome to the CUI subscribers only on-line chat. First, a couple of ground rules. There is no audio. Just type in your question and I'll get to it as soon as I can. Second, there will be a published transcript of all questions and answers available shortly after I close the chat. Finally, I will keep the chat open as long as there are questions to answer in the queue, as well as from emails we've received prior to the chat.
2:07
I want to start with some questions we received prior to the chat:
Q. Mr. Conrad. Do you have any thoughts on Simon Property Group (NYSE: SPG)? It has a nice yield and a history of dividend increases. But it’s trading near a yearly low and has mall exposure (Amazon). Cheers?—Ben F.

A. Shopping mall REITs like Simon must adapt to the fact that online commerce continues to increase its piece of the retail pie. That means getting smarter about where to locate properties as well as what’s inside. One thing we have seen is that while there are numerous vacancies industry wide, Americans still have an appetite to visit malls that provide the right kind of experience.

I’ve been impressed with Simon’s ability to keep up occupancy (94.4% in Q2) by shifting to a portfolio of “mixed use” facilities the past several years. Growth hasn’t exactly been at a breakneck pace but has been steady with Q2 FFO increased 4.9% adjusted for items, and first half FFO growing even faster at 7.3%. Management has also been effective expanding globally and now has interests in 42 outlets
internationally, including nine in Japan. That requires local expertise to do well. That’s supportive of a mid-single digit annual dividend growth rate.

My main problem recommending Simon the past several years has been valuation. That’s no longer a concern with the shares yielding north of 5%. Rather, the challenge will be maintaining solid growth when the economy next turns lower. I believe this REIT has the critical mass, portfolio quality and balance sheet strength to do so and I think it’s a value at a price of 150 or lower.

Note that I track Simon and several dozen other REITs in my “REIT Sheet,” which is a new feature of CUI’s sister advisory Deep Dive Investing.
2:08
Q. What are a couple of your top picks for a takeover within the next year time frame?—Kurt C.

A. I think Aggressive Holding Suburban Propane Partners (NYSE: SPH) will catch a bid sometime in the next 9 to 12 months, most likely from Canadian company Superior Plus (TSX: SPB, OTC: SUUIF). Superior is in the process of selling its specialty chemicals unit, which will provide funds for management’s stated strategy of making another major propane distribution acquisition. In the meantime, the propane distributor is generating enough cash flow on a yearly basis to fund both modest growth through acquisitions as well as its dividend of nearly 9 percent. I continue to rate its shares a buy up to 24.
I recently wrote a piece for subscribers about onshore wind and mentioned Aggressive Holding Pattern Energy (NSDQ: PEGI) as a possible takeover target in the yieldco space. The shares definitely reflect that potential now and in any case trade well above our buy target of 20. But readers who bought in on the many occasions when Pattern traded below that level are sitting well now. My plan has been to raise the buy target when this company resumed regular dividend growth. That’s still my intent.

Look for another piece on utility M&A in the upcoming (September) issue of CUI, along with other top picks. Activity has slowed a bit this year as valuations have risen. But the history of utilities remains a history of mergers, as companies boost scale to boost long-term resilience. And there’s still plenty of opportunity for anyone with a time horizon of 9 to 12 months, and especially the next 2-3 years.
Q. Hi Roger. Though it’s not in CUI, I still own W.P. Carey (NYSE: WPC) from your long-ago recommendation. As usual, this is a good one--continuing nice yield and dividend $. Also, it gives some diversification to my CUI portfolio and other holdings. Do you have any current thoughts, including a buy below price? Thanks—Rick

A. Rick. This is another REIT I’m now covering in Deep Dive Investing’s “REIT Sheet.” Management I believe has continued to deliver on the strategic plan it set out several years ago, most recently demonstrated by affirmed guidance for 2019 AFFO of $4.95 to $5.50 per share, which continues to support modest dividend growth. Consistently high occupancy (98.2%, average weighted lease term 10.4 years) across a geographically and functionally diversified portfolio is also pretty good assurance that the REIT will be able to continue growing modestly if the global economy slows over the next year or so.

My only reservation about this REIT is that investors seem
2:09
to have caught onto its appeal and it’s no longer as cheap as it once was. I would be a buyer on a dip to 80 or so. But at this point, W.P. Carey shares appear to be fully valued.
Q. With $100 billion expenditures forecasted for 5-G, which equipment manufacturers will be the big winners. I would think a few would be excellent investments. As always appreciate your diligence.--Jim N.

A. Thanks Jim. It looks like the 5-G equipment world may be divided into the Huawei ecosystem and everyone else as the US/China trade war escalates. That’s basically a lifeline for the “everyone else,” as Huawei was really starting to dominate, though like all government interference in markets it will cause a lot of distortion.

One likely unintended consequence is it puts another stake in the heart of small to mid-sized US telecoms, which already lack the resources to keep up with the bigger industry players in the race to build competitive networks. Huawei had offered a lower cost solution and now they will have to seek out the remaining players on what are likely to be far worse terms. There’s an informative Wall Street Journal article today on that subject.
I agree there are likely to be some interesting players on the equipment side. But given how roiled this sector is now by trade upheaval, I think the less obvious players are best, one being a CUI Plus pick Texas Instruments (NYSE: TXN). This semi-conductor giant has already been a winner for us, in part because it has far less direct exposure to the trade war than the rest of its sector. It trades a bit above our buy in price of 115 but would certainly be a buy below that level and we see a great deal of upside from there.
Q. I missed the instructions to sell Amerigas Partners (NYSE: APU) from a few months ago and now I'm up against the deadline and what to do with $7,000 of stock in the takeover. Any suggestions would be quite welcome.—Michael O.

A. Amerigas’ takeover value has unfortunately dropped since our sell recommendation, mainly because shares of parent UGI Corp (NYSE: UGI) have slipped and the lion’s share of the offer is in stock. I believe UGI will go higher going forward based on a solid business plan that will fuel consistent dividend growth from operations with a clear line of sight to future earnings—fuel distribution, regulated utilities and contracted midstream assets.

Nonetheless, our advice for income investors is still to swap into Suburban Propane Partners (NYSE: SPH). One of the less favorable terms of the merger is that Amerigas units will pay a far lower dividend once exchanged for UGI shares. Suburban’s payout as I noted above is secure and there’s also upside from a potential takeover.
Doug
2:11
Is there a reason why you do not add EPD to your portfolio?
AvatarRoger Conrad
2:13
Doug, it is actually a core recommendation of CUI's sister advisory Energy and Income Advisor. We continue to cover it in CUI as one of a very limited number of MLPs that have utility characteristics--i.e. very strong positions in essential infrastructure. The main reason we don't include it in the actual model portfolios is we want to avoid overlap between our advisories when it comes to portfolio performance. But I will continue to provide buy/hold/sell advice on Enterprise, which is now a buy up to 33.
Sue
2:14
Some presidential candidates are proposing that the US become a socialist country.  What are your thoughts on investing and protecting your investments if this were to come to pass or we started further down this path.  Thanks for your answer.
AvatarRoger Conrad
2:17
If there's one group of companies that has experience with a high level of government regulation--which is really what we're talking about here when it comes to businesses operating--it's electric, natural gas, water and communications utilities. Currently, electric, gas, water and larger communications companies are doing a very good job staying on the same page as the state and federal officials who oversee their sectors. For example, US electrics have been able to accelerate growth rates as particularly state governments have ramped up demands for decarbonization of electricity.
2:19
Bottom line is I'm pretty comfortable with the best in class of this sector to adapt to what, for example, a Democratic Washington might propose. And these large companies could actually benefit from a national healthcare system that takes the burden off of them to provide employee healthcare.
2:22
As for the larger issue of the US becoming a socialist country, I'd be really careful about what's said in the political season. I recall a lot of people saying President Obama would be jacking up taxes and confiscating wealth, etc and left the stock market in March 2009 for that reason--right at the ultimate bottom. That was a truly disastrous decision. The way not to make one like it is to leave your personal politics aside when you make investment decisions.
2:23
Elections do bring consequences. But as I write almost every year in the December CUI that follows the results, the actual consequences for investors are pretty much never where the talking heads and politicians say they are.
amigoman
2:23
Hi Roger, I am wondering if you could recommend the best discount broker to use to buy your recommended stocks?
AvatarRoger Conrad
2:26
I think interactivebrokers.com is the best if you want to buy anything off the beaten path, like most of the foreign stocks I recommend. On the other hand, any broker should be able to buy any of the US listings, which are the vast majority of what's in the Portfolio as well as in the Report Card coverage universe. In any case, it's so cheap to trade these days the best advice I can give is to use a service that you find workable and easy to keep up with--especially when it comes to accounting issues.
terry
2:26
Why has EXC an D dropped so much?
AvatarRoger Conrad
2:29
Hi Terry. I featured Exelon Corp (NYSE: EXC) as one of the August Focus stocks mainly because it did retreat, though I will point out that the shares are now back over our recommended entry point of 45. The reason for the decline was concern about wholesale electricity prices with natural gas and oil prices softening this summer and concerns the US economy is slowing. But this company is still executing on its long-term plan to fund utility rate base growth with free cash flow generated at the nuclear plants--and is doing a good job managing the costs with plant closures as well.
2:30
Exelon is rumored as one of the potential bidders for the business of the fallen Just Energy (NYSE: JE). A bid that's considered too high could send shares under 45 again. But I think this is a company on track for mid-single digit growth going forward and a solid value proposition at 14.3 times expected 2019 earnings, a big discount to the DJUA's high teens multiple.
2:32
As for Dominion, it's actually up this year by around 8% not including dividends but it has definitely been a laggard, largely because of investor concerns the Atlantic Coast Pipeline won't get built. But I believe the stock continues to have multiple drivers of long-term growth and is a good value proposition trading in the mid-70s.
Denny H.
2:32
What's your take on the midstream, specifically AM and ET?

Thanks,
AvatarRoger Conrad
2:35
Shares of both Energy Transfer LP (NYSE: ET) and Antero Midstream (NYSE: AM) have been under pressure since early 2019 as investors worry softer oil and gas prices will depress US shale output and therefore throughputs for midstream systems. Fear has been more acute at Antero, since it depends heavily on parent Antero Resources (NYSE: AR) as its parent and largest customer. I believe Antero has laid out a plan to maintain cash flows and meet management guidance for distribution growth. The $300 mil buyback will help and is on the back of solid Q2 results.
2:38
The Antero plan relies heavily on AM's ability to process large amounts of water for the parent at its recycling facility, which will cut drilling costs to match lower selling prices for gas and will provide needed volumes for AM. I believe they can execute it but the reliance on that aspect of the business is why shares currently yield an elevated 16%. In contrast, ET has multiple growth drivers, very high distribution coverage (2X plus), many customers and is cutting debt faster than guidance. I believe we'll see a return to regular distribution growth next year at the latest.
2:39
Of the two, Energy Transfer is the best for conservative investors. We cover both in our High Yield Energy List, a new feature of CUI's sister advisory, Energy and Income Advisor.
Pat M.
2:39
Would you go over the prospects for TEF and CHL and explain the companies' business outlook versus the invertors psychology. I also own a couple of Canadian companies TFIFF and Canadian Apts CDPYF. Are these still good companies to own.

                I really appreciate your efforts!
AvatarRoger Conrad
2:43
Telefonica and China Mobile were the subject of a Utility Roundup I wrote last week, which is not posted to the site. Basically, I think investors are overestimating the political risk to both companies, and therefore underestimating the growth and financial strength of their underlying businesses. Both companies had very solid Q2 results that were in line with management guidance.  Investors, however, were more concerned about a potential economic contagion from Argentina spreading to Brazil and elsewhere in South America, threatening economic growth, currency values and eventually regulation of companies.
2:46
That risk is more than priced into TEF's current valuation of 8.46 times expected 2019 earnings. China Mobile, meanwhile, is visibly benefitting from the US trade war as the Chinese government is not only off its back in terms of regulation but is effectively subsidizing its investment in 5-G. I expect it's going to take some calming developments in Argentina and regards the US/China trade tensions before investor fears are fully mollified. And that may take some time, at least until worries shift somewhere else. I've been frustrated holding TEF especially, as no matter how much progress is made shoring up revenue and cutting debt, the shares have slid.
2:48
But as with CHL--which sells for just 14.3 times expected 2019 earnings--so long as the business moves in the right direction, investors will eventually follow. My patience with these stocks isn't unlimited. But at a time when the best in class electric utility NextEra Energy (NYSE: NEE) goes for 26.4 times expected 2019 earnings, the laggards are in many ways the most attractive stocks to buy for the long term, again so long as they perform as businesses.
2:50
TFI International is the same solid company it was when I recommended it in my old advisory Canadian Edge over a decade ago. It's cyclical as are all transport stocks and is a bit expensive now but it's a solid franchise--still  growing in an industry that remains dispersed especially in Canada.
2:52
Canadian Apartments is one of the stocks I track in Deep Dive Investing's REIT Sheet. It's still a very solid REIT in a secure niche with a very strong balance sheet, just as it was when I recommended it in the old CE. And like the former TransForce, it's been a consistent winner. It's a little pricey now and I recommend other Canadian REITs more strongly, but still a good holding for the long haul.
John R
2:52
With the market at such lofty levels and valuations stretched in addition to likely taking money off the table with many of the model portfolio stocks, is there plans for additional portfolio stocks ?
AvatarRoger Conrad
2:55
I'm always looking for high quality stocks trading at bargain prices. Since mainstream blue chip utilities first hit extreme valuations in summer 2016, I've found such bargains in regulated utilities, yieldcos, telecoms, fuel distributors and even water stocks. In fact, if you look at the "date added" column in the Portfolios as shown on the CUI website, you'll see quite a few latter day additions even among the highest quality fare like Comcast Corp and Sempra Energy. The key to getting them was waiting for our target buy prices to be reached and then jumping on them--even when others seemed to be giving up.
2:58
There are multiple approaches to dealing with high valuations in a long-lived bull market. Mine is the three-part approach I come back to in the Portfolio Update of every issue of CUI: Pare back anything weak, pare back anything overvalued and build cash, and third keep an active list of stocks to buy when they hit good entry points--or best of all "dream prices" that should not be hit except under extreme circumstances but are increasingly as money sloshes around the markets at growing velocity.
3:01
The main drawback of my strategy is it requires a great deal of patience--and frankly some months it's very hard to spot value. To date, I've been able to find Focus stocks I really like every month--and those I do recommend are strong recommendations. But the day may come when I have to be disciplined enough to keep cool and just advise readers to be patient. That's more or less the way it is with essential services company bonds right now. The day will come when bargains are all around us--that will be a time when few want to buy. But so long as we know where value lies, we'll be able to take advantage.
TW
3:02
Roger,

What would be good sound investment advice/area(s) to invest for a retired person not wanting ( can’t afford ) to lose money when this next
what appears to be eminent recession hits us? .....Keeping in mind also very much needing the income to live on (6%)?

Bonds??( low interest?)  Preferred Stock?  CD’s ( again low interest)?     - Where/What ???????

Thanks for all you do for us Roger!
AvatarRoger Conrad
3:06
Thank you for reading! As I wrote in the August CUI Feature article, I'm very wary of most fixed income right now, especially long-dated bonds and bonds of companies that are getting weaker on the inside (declining revenue etc). And unfortunately, that's pretty much where most of the yield is now. No one is worried much about rising interest rates or inflation now of course, but locking up money in a 30 year bond yielding less than 4% is a formula for low income at best and at worst big time capital losses, if there's almost any movement out of bonds. I would call the Vanguard Intermediate Term Tax Exempt fund an exception given its long-term record, superior diversification and focus on high credit quality and generally short to intermediate term maturities--ensuring safety as the very low expense ratio maximizes yield.
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