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9/24/24 Capitalist Times Live Chat
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AvatarRoger Conrad
1:50
Hello everyone and welcome to this month’s Capitalist Times live webchat. We really appreciate your participation today and look forward to a lively session.
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As always, there is no audio. Just type in your questions and we’ll answer them as soon as we can comprehensively and concisely. We will be sending you a link to the transcript of the complete Q&A, probably tomorrow morning. And it will be published on the Conrad’s Utility Investor and Energy and Income Advisor websites as well.
 
Let’s start with some questions we received prior to the chat.
Q. Good morning, Roger. I hope this finds you well.  
 
My family and I thank you for more than 18 years of your sage advice, beginning with UF, CE and MLP Profits and currently with CUI, CUI+, EIA, the REIT Sheet, etc. My question is re Safehold, Inc (SAFE). I've looked through several issues of the REIT Sheet and perhaps I've missed it, but I don't see anything re Safehold; is it not a company you follow and/or recommend? Thank you for your comments.--Chuck B
 
A. Hi Chuck
 
First of all, thank you for those kind words. Nothing makes me happier in this business to hear that our advice has made a difference.
Safehold Inc (NYSE: SAFE) isn't a REIT I've picked up yet. But thank you for the suggestion and I expect to add it to coverage.
 
This is a different REIT than it was just a couple years ago, when it merged with the former iStar and subsequently spun off a big chunk of that company's "legacy" business as Star Holdings (NSDQ: STHO). This was in large part a "simplification" deal, as the two companies at that point were sharing a management team in an "affiliate" relationship. Fitch at the time affirmed Safehold's then BBB+ credit rating with a positive outlook, as did Moody's at Baa1. Management at the time also cited $25 million in expected operating cost reduction by 2026. The merger and spinoff closed March 31, 2023. 
 
Since then, Moody’s has raised Safehold's credit rating to A3, while Fitch has kept the positive outlook on its BBB+ mark. One reason for the high marks is a conservative dividend policy. The quarterly dividend of 17.7 cents per share has not been raised since the merger/spinoff--and it's
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the same rate paid since the REIT last raised its payout in June 2022. The business model has been challenged by higher for longer interest rates, though the company has been successful issuing new leases with decent rent coverage as well as securing capital on reasonable terms. And earnings in Q2 covered the payout by more than 2-to-1.
 
Safehold should see stronger operating conditions as the Fed pivots to lower interest rates. I'm not particularly drawn to the company's 2.6% yield. But I will probably pick it up as a hold. Note that Star Holdings remains a major shareholder at 18.93%.
 
 
Q. Hi Roger. After the TC Energy spinoff of South Bow would you please compare the characteristics of each of the two pieces. I plan to keep only one and I would like your help deciding which one. Thank you.—Teresa P.
 
A. Hi Teresa. My advice right now is to plan to hold both pieces of TC Energy (TSX: TRP, NYSE: TRP) at least through the spinoff, which management has now set for October 1 for shareholders of record
September 25.
 
In my view, the remaining TC is the piece that will be most attractive to long-term, income-focused investors. This is where the company had been devoting the vast majority of its CAPEX in recent years, particularly the natural gas midstream business but also nuclear power (Bruce Power) and renewable energy. And there are multiple opportunities to invest more in coming years.
 
Management has also become adept at enlisting First Nations and private capital as financial partners in projects. I expect it to be able to deliver on mid-single digit percentage dividend growth going forward.
 
South Bow, in contrast, is likely to be a takeover target shortly after becoming independent. The company's primary asset is the Keystone XL system. And if there is a Republican White House next year, I think there's a real possibility the now shelved "northern leg" project will be revived--which would also be a major incentive for a high premium takeover. Management has pledged to pay a dividend with modest
growth in the meantime.
 
TC management has affirmed on numerous occasions that the combined dividend of remaining TC and South Bow will be at least equal to the current rate of 96 cents Canadian. That should help stabilize prices for both pieces of the company following the spin off. And when earnings and dividend are announced November 7, we'll have a good opportunity to see what's in store for both companies--and what we want to do with them. 
 
Q. Hi Sherry. I just saw Roger's free article on Vistra. I purchased some Vistra at his suggestion after reading about it in his Utility report and have benefitted greatly.
 
In the article, Roger suggested considering taking some money off the table and putting the funds in other energy stocks with the potential to take off like Vistra. Does Roger have three or four companies to consider? What percentage of Vistra would he suggest trimming?—Arthur H.
 
A.Hi Arthur. The advice I've been giving in CUI when my recommended stocks trade above the "consider taking
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profits" level is to consider selling roughly half the position and taking a ride on the rest. Vistra has had an up and down last few months, rallying hard this month on the news that Microsoft (NSDQ: MSFT) is basically financing Constellation Energy’s (NYSE: CEG) restart of Three Mile Island 1 in Pennsylvania.
 
Both Constellation and Vistra have run quite a bit this year—Vistra is up almost 200% year to date while Constellation is ahead by 120%. There’s a lot to like about the nuclear theme in the US. And as you know, I’ve written extensively about it in Conrad’s Utility Investor. But these are monster gains and both stocks are pretty in uncharted territory at this point. So anyone who hasn’t cash in at least a few shares is risking losing a pretty good gain, if the momentum turns against the broader stock market.
 
As for where to put the money, my two best fresh money buys every month are the Conservative and Aggressive focus stocks. I'll have a couple more in early October. I've also written quite a bit
about renewable energy, nuclear power and AI bets the past couple months. So stocks featured there are also strong buys, provided they're still trading below my highest recommended entry points.
 
 
Q. Roger, with Coastal GasLink Pipeline and Kitamat LNG export facility finally nearing completion, I’m interested in a deep dive into Canadian Natural Gas opportunities for stocks and other areas of interest. This should have an impact on Canadian exports as well as the international LNG markets. Your analysis will be welcome. Kenney G.
 
A. Hi Kenney. Canada’s buildout of Pacific coast energy export infrastructure has been a slow train coming. As we’ve written in Energy and Income Advisor, that’s been for a number of reasons—one of which has been a string of legal challenges to almost any new project at the federal, provincial government (BC), regulatory and court levels as well as from various First Nations sometimes on environmental grounds and often as attempts to get a bigger piece of the profits.
 
 
 
What’s changed apparently is there’s a building consensus that energy exports are positive for the economy and that projects’ environmental impacts can be minimized. And that in turn has increased investor confidence that when they commit to projects, government won’t change the rules at the 11th hour.
 
It’s still going to be some years before exports really have an impact on Canadian gas. But we’re already seeing huge opportunities in BC for well placed midstream companies like Altagas and Pembina. And local producers like ARC are also showing strength.
 
Bottom line, we’re due an update in EIA. Thanks for the suggestion.
 
 
Q. First, let me thank you for the excellent deep dive-for someone like me who sweats the details, the dive was better than any tea leaf reading I'm able to do. My query revolves around nuclear power. I have held Southern Company (NYSE: SO) for years- even before the word Vogtle was coined. Once Vogtle came into the picture years ago, I added to my position thinking that if Vogtle
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3 and 4 ever came on-line that the business/stock would see an uplift, and despite years of travail and cost overruns, the uplift did occur. 
 
I doubt there will be any more nukes the size of the Vogtle plants, but I do sense a bit of a revival of interest in nuclear power. After all, it is one of the cleanest sources of energy around even though it has many naysayers. However, mini-nukes-500 mw for example-could seemingly shoulder some of the load coming from data centers and other AI-like projects. I'd like to know what CUI thinks of my posited mini-trend, and if so, are there any ute plays out there which may be planning mini-nukes. I do not expect to find any more SO-like plays, but the economically necessary power generation has to come from somewhere, so why not nukes.--James G.
 
A. Hi James. In the August 5 issue of Conrad’s Utility Investor, I highlighted three major opportunities in US nuclear power—(1)increased profitability of currently operating nuclear plants, (2)restarts of plants shut in the
last 10 years or so for economic reasons and (3)new building, both of large and smaller scale reactors or SMRs.
 
Of the three, the first is the surest as companies boost output by improving components, benefit from higher realized selling prices as data centers and electrification drive up demand and take full advantage of Inflation Reduction Act tax credits.
 
I see few if any risks to this avenue for growth the next few years. And I think we’ll see more restarts of currently retired reactors, provided of course Constellation is successful restarting TMI and Holtec can get Palisades in Michigan up and running.
 
What’s a lot more speculative is if we will see any new large or small scale reactors in the US reach commercial scale in the next decade. There’s a lot of enthusiasm in government now for new projects, and that’s spread to insurance and financial companies. But to get anyone to build anything—from more AP-1000s to SMRs—developers and regulators are going to have to have a lot more assurances that
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ultimate costs can be accurately estimated. And that’s going to require a lot more work simplifying permitting as well as technical progress to lock down costs of new and old designs.
 
I do think we’ll see new reactors built. But many now view Southern Company’s experience at Vogtle as a cautionary tale, rather than a triumph. And that seems to include Southern’s management as well as the Georgia regulators who supported it and made the project possible. So my main bets in nuclear are on 1 and 2.
 
If anyone is interested in nuclear and is not a CUI subscriber, contact Sherry at 877-302-0749 to find out more. Thanks for your question.
 
 
Q. Hi Roger. With the recent headlines of Verizon’s purchase of Frontier can you provide your opinion and what if any action we should take with regard to our VZ holdings.
 
A Barron’s pundit is already panning the deal as among other things it will add significantly to their debt and take much longer to pay down. It seems to be somewhat of a reverse course on VZ’s part as
not too long ago they sold of significant plan to Frontier only to buy it back now. Kind regards—Jim C.
 
A. Hi Jim. Briefly, I think the math works. The networks are complementary. And it will be a lot easier for Verizon to finance Frontier’s fiber build with its much, much lower cost of capital. Pairing fiber the 5G wireless is shown to greatly reduce churn rates for both services. And the cost savings are quite substantial with this deal adding to VZ earnings almost immediately.
 
VZ did sell some of the territory it’s acquiring now for around $11 billion in the previous decade—it’s now paying $9.5 billion for the whole company, $20 billion including assumed debt after a massive fiber upgrade has already been made and revenue growth is positive. I think you can always find ways to poke holes in any deal.
But this looks pretty win/win. 
 
 
Q. Roger: Good morning. I have a question concerning taxation of
Traditional IRA's that I need to get answered before I sell any of my
CEG or VST shares. It is my understanding in such accounts we can make
profitable or losing sales with NO tax consequences with taxes coming
into play when (and if) we actually remove funds from the account. At
that point the sales that were profitable would be added to our other
taxable income to be accounted for on our federal tax return. Is this
correct? Thanks for your valuable insight on many matters.—Jimmy C.

A. Hi Jimmy. Constellation Energy (CEG) and Vistra Corp (VST) are common stocks and pay qualified dividends. So there should be no taxation issues in the year you sell shares from an IRA.

Taxation after you start withdrawals is based on whatever your tax rate is then—provided you wait until you’re at least 59 1/2. But so long as you’re not pulling out funds from an IRA, there’s no tax on what you do inside of it. 
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OK. That's all we have from the emails. If for some reason you don't see your question, please re-enter it in the chat.
Sheldon C.
2:05
Hello,

What type of REITs would you currently hold? Does Essential Properties meet your criteria? What seems to be the problem with Hannon Armstrong?
AvatarRoger Conrad
2:05
Hi Sheldon. We track a coverage universe of 80-85 real estate investment trusts in our REIT Sheet. If you're interested, please give Sherry a call at 877-302-0749 anytime M-F, 9-5 ET.

We pretty much cover the waterfront in TRS in the broad coverage universe, from traditional property types like residential, office, retail, industrial to the "non-conventional" such as self storage, data centers, farmland, financial etc. And the model portfolio of 19 names is basically well-run REITs from across that spectrum. I feature two best fresh money buys every month. I do cover Essential Properties--have rated it buy at 24 or lower, so it's essentially a hold at the current level.
Lee O..
2:13
adam rozencwajg has opinion that shale including permian basen is reaching peak as soon as next year and doomberg thinks we have plenty of production for foreseeable future. these are my interpretations. what are your thoughts
thanks
AvatarElliott Gue
2:13
EIA changed the way it estimates US oil production in the summer of 2023, so production figures prior to June 2023 aren't directly comparable to current production. However, if we adjust the EIA figures using their own "unaccounted for crude oil" factor, US oil production is essentially flat since late 2022 overall. I suspect Permian production is up somewhat and that's been offset by declines elsewhere.

Rystad publishes some estimates of Permian oil output and these show rapid growth through the first 9 months of last year; this corresponds to very strong drilling activity from private producers in the region dressing up for sale. Year-to-date in 2024, Permian production is up around 80,000 bbl/day on the Rystad numbers vs. growth of 540,000 bbl/day last year (Dec 2023 vs Dec 2022).

Bottom line: I continue to believe Permian production is closer to a peak than is commonly believed. Most likely scenario is that production flattens out in the next 12 to 18 months and then plateaus for a period of time
AvatarElliott Gue
2:13
rather than a major decline. However, the point is the sort of US production growth to which markets have grown accustomed is over and estimates from IEA and others showing 500,000+ bbl/day of US supply growth  in 2025 are not consistent with what we're seeing on the ground.
Susan P.
2:16
As always, thanks for this opportunity to ask you questions:

Roger often references management guidance when offering his thoughts about specific companies. Over the years, what's Roger's overall assessment of management's guidance. In other words, how accurate and honest have you found managements' guidance and comments to be from your years dealing with them. Elliott's perspective is welcome as well. I understand this is broad query but, your wisdom on much credence to give managements' information would be instructive. You two are the exception to what I perceive to be many Wall Street analysts--at times--too "close" of a relationship with company officers' counsel.

Thanks very much to both of you for your hard work and wisdom.
AvatarRoger Conrad
2:16
HI Susan. Good question. I think how much credence you can give management is really a company-by-company thing--and getting a good read on how well a particular team delivers on its promises over time is really only something you can determine by observing over time. They have to earn your confidence.

Obviously, management is not all seeing. But it's always fair to ask the question did the company perform as management said it would? Meeting earnings guidance is a good short hand measure for delivering on promises--and if a company cuts guidance several quarters in a row it's often a very bad sign. But there are also numbers unique to companies that we watch--and we do bring them to your attention in our various advisories.
Gary C.
2:22
HASI - I understand the structure change and that this is no longer a REIT.
Given that I purchased it when it was a REIT - at what price do you recommend taking profit on HASI and do you recommend holding some long term?

These are great newsletters and have been very helpful !
Thanks
AvatarRoger Conrad
2:22
Hi Gary. Thank you for those kind words. Hannon Armstrong is now "HA Sustainable Infrastructure Capital," traded under the same NYSE symbol "HASI." it's now a C-Corp rather than a REIT. But the underlying business of lending to and making equity investments in energy efficiency and renewable energy projects--mostly "behind the meter"--is still the same. The company has gained considerable scale since I started recommending the stock in the previous decade. We took the opportunity in Conrad's Utility Investor to cash out at the peak of the renewable energy bubble in early 2021. And in retrospect, we re-entered a bit early and had to endure some downside before the recent recovery.

I think at this price, Hannon is worth sticking with. The cloud of higher for longer interest rates is lifting, making it easier to raise capital. And once the election is behind us, it will become clear the company doesn't depend on subsidy or tax credits to build business. If I were to take a profit, it would be on a rise to 50
Susan P
2:32
Apologies if this chat repeats and mistakenly sent prior one:
AvatarRoger Conrad
2:32
No worries. Did I answer your question about management guidance sufficiently? Basically, what we're looking for is not any specific number, just a track record of delivering on what they've said and hopefully even beating it. We're not expecting perfection. But being able to forecast with some degree of accuracy demonstrates management is aware of risks to its business and has been proactive addressing them. And that's ultimately more valuable for us as investors assessing risk than hitting a number.
Dan N
2:41
Hi Roger - thanks for hosting these periodic chats.

1) I saw the announcement that BCE was selling its stake in a set of sports franchises for a few billion. My first instinct was to think selling non-core assets is probably good for debt reduction, and I tend to think most sports franchises are valued higher than their profitability merits. Your opinion?
AvatarRoger Conrad
2:41
Hi Dan. I think that's accurate. BCE is selling a 37.5% minority stake in Maple Leaf Sports and Entertainment to telecom rival Rogers for about $3.5 bil (equal to 14% total debt) but is keeping broadcast rights, which is what the company wanted. I think it's likely proceeds go mainly to debt reduction, which has become more of a priority for BCE following credit rating cuts by Fitch, Moody's and S&P earlier this month. Another negative is Canadian regulators have decided to order companies like BCE to provide wholesale access to fiber networks already built--though they've exempted anything built going forward through 2029. But this looks like a good move that should remove some of the financial pressure from the company.
Susan P.
2:53
You're both terrific to field these questions:

Elliot's Sept 9th substack article (FMS) gave wise counsel around interest rates under the subheading "Be Careful What You Wish For"...Your detailed history of rate cutting cycles, esp when a 50 basis point has taken place, was instructive. Elliott wrote that was "still too early" to take action to prepare for the equity and bond market fallout from Fed policy and a yield curve starting to disinvert. Additionally, I appreciated Elliott's explanation on how the slope of the yield curve (after it disinverts and turns positive rapidly) has indicated a Fed-mistake recession 4 out of the last 5 rate cutting cycles over the past 40 years. With that backdrop, any further thoughts on it being "too early" since the Sept 18th's 50bp cut. 

Thanks again for your insight.
AvatarElliott Gue
2:53
Thanks for the question and the kind words about the Sept. 9th piece. The incoming economic data has been softer, but not recessionary, at least not if you take the numbers at face value. So, it's a little odd the Fed opted for 50 basis points over 25 this month.

The main reason I thought they might go 50 bps is that markets were expecting 50 and this Fed doesn't like surprises. Also, when markets started to tack in favor of 25 about a week before the meeting, it appears the Fed leaked some media stories to push expectations back in favor of 50.

Historically, since the Greenspan era in 1987, the Fed has only opted to start with a 50 bps cut when the central bank fears it's behind the curve. I believe there may be an emerging consensus at the Fed that believes they're way too tight right now and risking recession.
AvatarElliott Gue
2:53
One of the issues with economic analysis/forecasting is that trends rarely evolve in a linear fashion. In other words, the economy doesn't slowly deteriorate over a long period before entering recession; generally it's a situation where things look "OK" and then deteriorate rapidly. I suspect there's a fear the payrolls numbers have been providing the central bank a false sense of security that the economy was holding up well; the recent spate of revisions suggest the jobs market may have been softening faster faster than previously thought
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Just this morning FOMC member Austan Goolsbee, previously one of the more hawkish members, came out and said he believes we’re “hundreds of basis points,” above the neutral rate. He went on to say the Fed must “stay ahead of labor market weakness.”
The yield curve has confirmed these fears with the 10 yr/2-year now disinverting to +20 basis points, very close to the +25 to +50 bps range I typically look at as a signal of rising recession risks.
In the face of all this, the stock market is holding up well. There’s some rotation underway as the S&P 500 hits new all-time highs, but the Nasdaq remains under its July peak. So, stocks are still screaming “soft landing,” and I continue to believe it’s too early to aggressively position for a recession/S&P bear market there.
We’re getting a slightly more muddled message from the bond market. We’ve definitely seen some buying of longer-term Treasuries and I believe we’ll see more upside; in particular I like intermediate-term Treasuries here, which we added to the Smart Bonds portfolio back at the end of August using the ETF “VGIT.” Normally, you see longer-term Treasuries perk up (yields fall) as the bond market starts to price in rising recession risks.
However, high-yield bonds are strong, which isn’t what you’d normally expect to see when the US economy is approaching recession. Bank loans are holding up well also despite the fact default rates have ticked higher in recent quarters. Inv. Grade corporates are solid and I think there’s more upside there too. None of this is recessionary.  
All told a very mixed picture out there and we remain near a tipping point – if the data were to weaken a bit more I think you could start to see the “Fed behind the curve” narrative take over and then recession probabilities would spike. Historically though, stocks perform very well in the latter stages of economic expansions and bull markets, so it still feels too early to aggressively position for the recession outcome.
Bonds, I think it’s time to start buying duration and shifting into intermediate term Treasuries and IG corporates. At the same time I still think it’s too early to sell certain corners of the high yield bond market or to completely exit areas like bank loans.
Apologies for what’s probably a less-than-satisfying answer. However, I’m a big believer in gradually shifting portfolio exposure rather than making dramatic moves and I still think it’s too early to position for an imminent recession.
Dan N
2:59
2) Sticking with telecom, I'm very happy that VZ is buying out Frontier. My household is among the FIOS customers that was 'sold' by VZ to Frontier several years ago, and we immediately missed having VZ customer service. From a business standpoint, what does this buyout portend about the industry? Moments ago I had the impression that VZ was trying to undercut cable and fiber with 5G internet, but now it's acquiring established fiber internet business? Has customer preference now clearly indicated willingness to pay for premium service, and 5G will remain a persistent also-ran? Will there be a rush to grab the best fiber assets available by buyout, like Shen Tel? And don't I recall a major strategic review going on at CCI about possibly selling their whole fiber business?
AvatarRoger Conrad
2:59
Good question. I think it's just the latest phase of the great consolidation of US telecom--which ironically can be traced to telecom deregulation in 1996 when regulators broke up the local phone monopolies. Back in the 90s, I used to track roughly 100 telecoms. Now, the wireless Big 3 pretty much rule--even big cable is losing customers to fiber and "their" wireless service is basically reselling Verizon's.

I agree that 5G right now resemble the rollout of 3G--a big leap in tech that companies couldn't monetize because there weren't meaningful new apps and people wouldn't pay more for it. I suspect 6G now in the works will be more like 4G, which they did monetize big time. But only the Big 3 will be strong enough to deploy--as by combining 5G and fiber they're basically going to run everyone else out of business who doesn't merge.
Guest
3:02
You're both terrific to field these questions:
Elliot's Sept 9th substack article (FMS) gave wise counsel around interest rates under the subheading "Be Careful What You Wish For"...Your detailed history of rate cutting cycles, esp when a 50 basis point has taken place, was instructive. Elliott wrote that was "still too early" to take action to prepare for the equity and bond market fallout from Fed policy and a yield curve starting to disinvert. Additionally, I appreciated Elliott's explanation on how the slope of the yield curve (after it disinverts and turns positive rapidly) has indicated a Fed-mistake recession 4 out of the last 5 rate cutting cycles over the past 40 years. With that backdrop, any further thoughts on it being "too early" since the Sept 18th's 50bp cut? The potential of a  "great correction" seems wise to consider and wonder if you have any sense of its timing as you look forward this year and/or into 2025.
Thanks again for your insight.
AvatarElliott Gue
3:02
I think I covered most of this question just above. In terms of timing, the market normally peaks above 3 to 6 months ahead of recession though there are situations where we see a longer lead time (such as 1 year back in 2000). If the data deteriorates rapidly from here, I can see the market topping this year. However, I still am not seeing enough deterioration to suggest imminent recession. More likely in my view, would be a recession starting Q2 or Q3 of 2025 with a top in early 2025.
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