While I’ve read a lot about the JFK assassination over the past 30-odd years, I am not a conspiracy theorist. I think a lot of that story is untold, but the notion that Lee Harvey Oswald fired the shots that killed the 35th U.S. president is the hypothesis requiring the fewest assumptions.​

Having said that, I think there’s some conspiring going on around Noranda Income Fund.

Noranda is an income trust that owns an electrolytic zinc processing facility in Quebec—the second-largest such facility in North America. It gets its raw material, zinc concentrate, from Glencore Canada, and Glencore pays it a processing fee for refining the zinc.

Here is what we know: It is unequivocally true that Noranda’s zinc concentrate supply agreement with Glencore Xstrata PLC’s Glencore Canada unit expires on May 2, 2017. It is also unequivocally true that there is no new deal even on the horizon that will provide Noranda’s zinc concentrate after that date.

Of course, about 28 months are left for Noranda to make a new arrangement for zinc concentrate. But that didn’t stop investors from fleeing the stock, which has cratered from above $5 as recently as early November 3 to as low as $2 on December 1.

Why the panic? Noranda management’s description of the circumstances from the zinc supply agreement changed. Now it’s saying the company might have to shut down.

Management said that with the expiration of the Glencore Canada deal, “favourable pricing of concentrate supply comes to an end.” That wasn’t such a big thing—Noranda has a sweet deal for zinc concentrate from Glencore, and many analysts didn’t think the new terms would be as acceptable as the old. 

But Noranda further said that if it can’t get the zinc concentrate it needs after May 2017, the fund is considering several scenarios, including shutting down. Further, the cash it would need to shut down would have “a corresponding effect on cash available for distributions.”

That seems like an extreme step for no good reason. Unless, that is, you consider the grassy knoll factor. Glencore owns a 25% stake in Noranda and tried to buy it out and take it private at $3.90 per unit.

Glencore also has significant representation on Noranda’s board and a role in management.

Could it be that, as part of a negotiation strategy, Glencore is using as leverage that significant processing capacity exists and continues to be constructed in China? The introduction of lower-cost competition has resulted in overcapacity in global smelting and refining, and much lower treatment charges.

Glencore’s goal may be to convince Noranda that it has no other choice but to negotiate with it and to agree to reduce the price it charges for treating zinc concentrate. It’s possible as well that the global giant is angling for another buyout attempt under extremely favorable terms.

Regardless, Noranda has taken a huge hit, and its solid operating results are overshadowed by the long-term zinc-supply situation.

Although the current 22.4% yield screams otherwise, the $0.50 per unit annual payout rate is sustainable, and Noranda’s zinc-processing facility should retain value beyond May 2017 due to the cheap energy it gets from hydroelectricity.

It’s the second-largest zinc-processing facility in North America and the largest one in eastern North America, where the majority of zinc customers are located. These facts aren’t lost on Glencore or other potential suppliers, including Teck Resources Ltd., which owns an interest in the Red Dog mine in Alaska, the source of 5% of global zinc production.

If you still own the stock, hold it. Noranda’s zinc-processing facility will have significant value after May 2017 above the price the market’s currently attributing to it. And in the meantime, you’ll collect a healthy dividend yield.

As for new money, this is for aggressive investors only. Noranda Income Fund remains a buy but up to our adjusted buy-under target of $4.

Dreamscape

Several months back, in the August 2014 In Focus feature, we identified Dream Industrial REIT as the next real estate investment trust likely to join the CE Portfolio.

The following month, in the September 2014 Best Buys feature, we did add Dream Industrial to the Conservative Holdings. At the same time, we cut its affiliate Dream Office REIT to a hold, noting that fundamentals favored Dream Industrial over Dream Office. 

We still see that Dream Industrial is the superior play, and given weakness in Dream Office, we’re selling it. 

Here’s our thinking: According to CBRE, the Canadian office segment has experienced a significant rise in vacancies over the past year, mainly due to sluggish tenant demand and a general increase in sublet space. The vacancy rate declined slightly to 10.3% for the third quarter after reaching its nine-year high of 10.4% in the second quarter.

And vacancy rates in the Canadian office market could face pressure in the near term due to new supply coming on line in 2015, which could lead to flat or declining rental rates. Note, however, that Dream Office (TSX: D-U, OTC: DRETF) consistently posts better-than-average occupancy rates.

At the same time as the office market softens, the industrial markets are improving. The industrial availability rate and the vacancy rate continued to decline during the third quarter, reaching an eight-year low of 5.3% and a 10-year low of 3.5%, respectively.

The Canadian manufacturing sector continues to expand, and retailers continue to invest in their distribution networks. And that equals strengthening fundamentals—including strong demand for space and rising rental rates—for REITs with industrial exposure.

Although the performance of its unit price on the Toronto Stock Exchange hasn’t matched our optimism about its prospects, Dream Industrial’s (TSX: DIR-U, OTC: DREUF) recent financial and operating numbers demonstrate once again that it’s a better bet than Dream Office.

Dream Industrial, whose portfolio grew by 9.1% to 17 million square feet, reported that adjusted funds from operations (AFFO) per unit for the first nine months of 2014 were up 7.4% versus the same period in 2013. AFFO per unit for the third quarter were up 1%.

About 653,000 square feet of new leasing or renewals was executed during the quarter at rates 6.7% higher than rates on expiring leases. The REIT has commitments for 790,000 square feet of new leases or renewals for the remainder of 2014 versus 721,000 square feet of expiries.

As for Dream Office, AFFO for nine months ended September 30 were up 2.2% and were flat in the third quarter. Net operating income (NOI) was up 3.4% year-to-date but not much in the third quarter.

Headwinds for Dream Office are significant. The REIT will be able to maintain its distribution rate, though payout growth isn’t likely until some years in the future.

Dream Industrial REIT, which is yielding 7.3% at current levels, is a buy under USD11.

Conservative Update

In other Portfolio REIT news, Canadian Apartment Properties REIT posted another set of solid numbers for the third quarter.

Top-line operating numbers reflected steady growth and were in line with expectations. And management’s cost-savings plans are expanding margins. Same-property NOI grew by 3.7%, and margin rose by 70 basis points to 61.4%.

CAP REIT (TSX: CAR-U, OTC: CDPYF) reported a 3.2% decline in normalized FFO due to a higher unit count, as management issued new equity to fund acquisitions, including the expansion into Ireland. It’s the top-performing REIT on a year-to-date total-return basis among the 15 included in the S&P/TSX Composite Index at 26.8%. In U.S. terms, it’s posted a gain including dividends of 18.5%.

Trading at a 4% discount to net asset value and 15.8 times estimated 2014 FFO, CAP REIT, with its 4.7% yield, is a buy under $25.

EnerCare has been on a tear since mid July 2014, when an affiliate of major shareholder Augustus Advisors LLC expressed an interest in buying the company “at $13.50 to $15 per share.” The public release of the letter that contained this also included a critique of current management and its ability to maximize shareholder value.

Within a week, however, EnerCare and its management team announced a deal—the acquisition and re-integration of Direct Energy Marketing from Centrica PLC, which closed on October 20. The $550 million Direct Energy deal consolidates the Ontario water heater rental market and establishes the foundation for a Canada-wide home services franchise, including water heaters, furnaces, air conditioners, and other HVAC rental products.

And EnerCare (TSX: ECI, OTC: CSUWF) continues to put up solid financial and operating numbers. Third-quarter total revenue was up 3.8%, driven by 4% growth in water heaters.

The company continues to see increasing average monthly rental rates as a result of its HVAC strategy and improved customer retention.

The Direct Energy deal is transformative for EnerCare, allowing it direct access to its customers, control over all aspects of its operations and greater financial scale. The stock has posted a total return of nearly 50% thus far in 2014, but it still trades below our buy-under target. 

EnerCare, which is yielding 4.8%, is a buy under $14.

Aggressive Update

In addition to reporting outstanding third-quarter results, portable grain handling and storage equipment manufacturer Ag Growth International announced the acquisition of Vicwest’s Westeel division for $221.5 million.

Westeel, of Manitoba, makes grain bins (51% of sales), fertilizer bins (20%) and liquid fuel storage tanks (29%). The business is on track to generate adjusted EBITDA of $20 million for 2014.

Ag Growth (TSX: AFN, OTC: AGGZF) will finance the deal via an offering of subscription receipts and convertible debentures. Grain and wheat production is forecast to rise in Westeel’s markets in Western Canada, and the company’s numbers were already beginning to reflect this positive trend.

Adding Westeel augments Ag Growth’s one-stop-shop for customers and it improves the company’s geographic diversification.

The shares have spiked in the days following the acquisition and earnings announcement, bouncing from around CAD50 on the TSX as of November 28 to a close of CAD55 on December 4, or about $48.26 in U.S. dollar terms. That’s an all-time high.

We are raising our buy-under target on the stock to reflect positive fundamentals and expanding market share. But wait for a pullback to $48 to buy Ag Growth International.

Note that third-quarter financial and operating results for Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) are briefly summarized in How They Rate.