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Evaluating The 'Risk Premium' For CorEnergy


Although energy infrastructure is comparable to other real estate asset classes (cash flow is a high component ... central storage facilities located in the Pinedale Anticline in Wyoming. The system was acquired in 2012 and leased to a subsidiary of ...


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PROMarketplaceSeeking Alpha (function (doc) { var ls = window.localStorage; if (ls !== 'undefined' && doc.cookie.indexOf('user_id=') !== -1) { var n = encodeURIComponent('user_id').replace(/([.*?^=!:${}()|[\]\/\\])/g, '\\$1').replace(/%20/g, '(?:%20|\\+)'), c = doc.cookie.match(new RegExp('(?:^|;)\\s*' + n + '=([^;]*)(?:;|$)')); if (!!c) { var b = doc.getElementsByTagName('body')[0], cid = c[1]; if (!!b.getAttribute('class') && b.getAttribute('class').split(' ').indexOf('author-research') > -1) { ls.removeItem('mp-top-header-menu'); } else { var mpHeader; try { ls.removeItem('mp_header_html_' + cid); mpHeader = JSON.parse(ls.getItem('mp-top-header-menu')).value; } catch (e) { mpHeader = null; } if (!!mpHeader && !!mpHeader[cid]) { var t = doc.getElementById('mp_service_tab'), p = t.parentNode; p.removeChild(t); p.innerHTML = p.innerHTML + mpHeader[cid]; } } } } })(document);PortfolioPeopleNewsMarket NewsOn The MoveAll Market NewsTop NewsWall StBreakfastIPOsUS EconomyM&ANews by SectorTechEnergyHealthcareConsumerFinancialsCommoditiesEarningsEarnings CalendarTop Movers on EarningsEarnings AnalysisEarnings NewsEarnings Call TranscriptsMarket PerformanceBondsCommoditiesCountriesCurrenciesDividendsEmerging MarketsGlobal and RegionsGrowth & ValueMarket CapReal EstateSectorsStrategiesSmart BetaSubsectorsAnalysisStock IdeasTop IdeasIdea FilterContest WinnersLong IdeasShort IdeasSectorsEditor's PicksQuick PicksFund LettersDividendsREITsDividend IdeasDividend StrategyDividend NewsDividend Quick PicksEditor's PicksMarket OutlookGlobal MarketsToday's MarketEconomyGold & Precious MetalsCommoditiesForexReal EstateEditor's PicksInvesting StrategyPortfolio StrategyFixed IncomeBondsFinancial AdvisorsRetirementIPOsEditor's PicksETFs and FundsETF ScreenerETF AnalysisETF GuideMutual FundsClosed End FundsEditor's PicksSign in / Join NowGO»(function(w) { var getParam = function (name) { name = name.replace(/[\[]/, "\\[").replace(/[\]]/, "\\]"); var regex = new RegExp("[\\?&]" + name + "=([^&#]*)"), results = regex.exec(w.location.search); return results === null ? "" : decodeURIComponent(results[1].replace(/\+/g, " ")); }, rc = function(n) { var c = document.cookie.match(new RegExp('(^|;)\\s*' + escape(n) + '=([^;\\s]*)')); return (c ? unescape(c[2]) : null); }, paginate = function () { if (!w.aConf.pagination.singlePage) { document.write(' + '.sa-a #a-cont .p {display:none;} .sa-a #a-cont .p.p' + page + ' {display:block;}' + '); } }, noRbStrategy = function () { noRBandPagination = !!(log || fromPartner || fromInStream || !fromInsight || pages === 1); w.aConf.pagination = { limit: pLimit, pages: pages, page: page, singlePage: noRBandPagination, singlePageBtn: false }; w.aConf.roadblock = { timed: false, active: false, type: 'no_rb_strategy' }; }, softRbStrategy = function () { var hideRb = !!(log || fromPartner || fromInStream || !fromInsight); w.aConf.pagination = { limit: 100, pages: pages, page: page, singlePage: hideRb, singlePageBtn: false }; w.aConf.roadblock = { timed: !hideRb, active: !hideRb, type: 'soft_rb_strategy' }; }, hardRbStrategy = function () { firstArticle = parseInt(store.getItem('skipped_rb'), 10) === id; noRBandPagination = !!(log || fromPartner || fromInStream || !fromInsight || pages === 1); timedRBNotActive = noRBandPagination || (firstArticle && page === 1); rbNotActive = noRBandPagination || page Evaluating The 'Risk Premium' For CorEnergyMar.13.18 | About: CorEnergy Infrastructure (CORR) Brad Thomas Dividend growth investing, REITs, newsletter provider, valueMarketplaceIntelligent REIT InvestorSummaryI would have never imagined that my research would include midstream and downstream energy properties.CorEnergy’s assets critically support its partners in conducting their businesses in the U.Senergy industry.I am maintaining a BUY, but I believe NIBBLE is the best strategy.If you had asked me ten years ago if I was going to be covering U.Senergy infrastructure REITs, I would have said you’re nutsWith a background in “brick and mortar”, I would have never imagined that my research would include midstream and downstream energy propertiesAlthough energy infrastructure is comparable to other real estate asset classes (cash flow is a high component of total return), this specialty asset class also enjoys a resilient inflation hedge that includes underlying contractual features that give visibility over the long run to inflation-based returnsThese assets are subject to long-term triple net participating leases with energy companies and include pipelines, storage tanks, transmission lines and gathering systemsIn 2014, the IRS vindicated the "REIT-ability" for CorEnergy (NYSE:CORR) by allowing energy-infrastructure assets to be ruled a viable model as defined as real estateFormerly a business development company (or BDC), CorEnergy restructured in 2013 to become an energy infrastructure-focused REITMany of the energy infrastructure assets are characterized as real property under current REIT rules, and by attaching long-term leases to assets, CorEnergy partners with certain exploration and production companies to monetize the assets and free up internal capital for higher return projectsThe amount of infrastructure assets necessary to support the upstream growth in the U.Sgenerates ripple effects on asset development needsBy structuring sale/leaseback deals, CorEnergy has minimal operational and/or maintenance risk and the benefits offer tremendous value for the capital-constrained owner/operatorsThe niche infrastructure sale/leaseback sector is a small untapped category that is often overlooked by the MLPs and yields are too skinny for the BDCsBy modifying the capital structure to a REIT model, CorEnergy provides a compelling opportunity for companies that need financing to grow their businesses in the energy sector. The sale/leaseback business model is not new as many traditional Net Lease REITs utilize the platform to source new dealsW.PCarey (NYSE:WPC) was an early pioneer of the sale/leaseback model and a number of REITs like Realty Income (NYSE:O), STORE Capital (NYSE:STOR), and National Retail Properties (NYSE:NNN) are conducting regular S/L transactions Source: CORR Website What Are The Risks? CorEnergy is a guinea pig of sorts - the Kansas City-based REIT is the first Infrastructure REIT so there is somewhat of an acceptance riskAlthough I now cover a number of other Infrastructure companies like Hannon Armstrong (NYSE:HASI), Landmark Infrastructure (NASDAQ:LMRK), and InfraREIT (NYSE:HIFR), CorEnery is a unique player in the energy spaceIn other words, many investors don't really understand what CorEnergy does and there are certainly no true peers to compareHowever, there's also an opportunity: CorEnergy can build a foothold - as the premier partner of choice in energy infrastructure sale/leaseback transactionsInstead of competing for deals in the open market, CorEnergy can source off-market deals and essentially be the "go to" landlord of choiceBecause the leases are net lease structured, the only way the company would lose revenue is if the tenant defaulted under its lease contractHowever, if one of its properties fails for whatever reason, it would have an enormous impact on earnings and dividendsAs a measure to combat these risks, CorEnergy is continuing to grow in size such that it can mitigate tenant concentrationThe Portfolio CorEnergy owns mission-critical assets and lease payments are “operating” expenses, not “financing” expensesIt’s important to note that in bankruptcy, real property operating leases are subject to special provisions. Operating leases have priority in payment and bankruptcyThe CorEnergy revenue stream, therefore, is resilient and protected even during bankruptcyTherefore, the stock price moved with commodity prices in this cycle, while revenues and AFFO did not, demonstrating the benefit of CorEnergy’s business model for investors seeking infrastructure assets in their portfolioCorEnergy’s assets critically support its partners in conducting their businesses in the U.Senergy industry: The GIGS includes 153 miles of undersea pipeline that transports oil and water from six Energy XXI fields and one field operated by Exxon Mobil (NYSE:XOM) in the Gulf of MexicoThe 16-acre terminal includes four storage tanks, a saltwater disposal facility with three injection wells, and associated pipelines, land, buildings and facilitiesAt the time of acquisition, the GIGS system transports approximately 60,000 barrels/day (18,000 oil and 42,000 water) and has a total capacity of 120,000 barrels/dayThe Grand Isle Gathering System is CorEnergy’s largest asset and is leased to Energy XXI Gulf Coast (continues to serve production from the Gulf of Mexico)Energy XXI announced that they will continue as a standalone company following their strategic analysis by Morgan Stanley, and they recently released their 2018 capital budgetThey anticipate drilling six new wells in 2018, which is the most robust drilling plan for that company in the last four yearsDrilling will be focused in the West Delta and South Timbalier fields, both of which are located in what Energy XXI deems its core properties and each field is partially served by CorEnergy’s Liquids Gathering System in the Gulf of Mexico The Pinedale Liquids Gathering System (LGS) consists of more than 150 miles of pipeline, with 107 receipt points and four central storage facilities located in the Pinedale Anticline in WyomingThe system was acquired in 2012 and leased to a subsidiary of Ultra Petroleum (guaranteed by the parent company) under a triple-net participating lease with a 15-year initial termUltra Petroleum has had much success in the Pinedale field this past year, particularly with its horizontal drilling test announced recentlyIn 2017, CorEnergy received approximately $0.5 million of participating rents from UPL based on higher levels of productionGiven CorEnergy’s conviction in the reserve profile of this field and demonstrated level of utilization the company purchased a minority equity interest in the Pinedale LGS, which was previously held by CORR’s partner for initial capital for $32.9 millionPru also was going to remain involved in the asset and provided CORR with $41 million of asset level debt, which was utilized for the equity buyoutCorEnergy has been evaluating the purchase of the remaining interest in the Pinedale LGS as if it were a new asset, subject to the same level of diligence, processes and procedures as any other unrelated asset Acquired in January 2014, the Portland Terminal Facility is a 39-acre rail and marine transloading terminal on the Willamette River in Portland, OregonThe site has 84 tanks with a total storage capacity of approximately 1.5 million barrels and is capable of receiving, storing and delivering crude oil and refined petroleum productsThe property is leased to Arc Terminals (guaranteed by Arc Logistics) under a triple-net lease with a 15-year initial term. At the Portland Terminal, Zenith Energy completed its acquisition of Arc Logistics in DecemberThis provided Zenith with options including an option to buy the terminal from CorEnergy, which remains live through the end of the lease as well as early termination options at the 5th and 10th anniversary of the leaseIn January, CorEnergy agreed to extend that first notification period from February 1 to August 1 due to the recent fee of the acquisition by Zenith and the ongoing discussions with their new management team around long-term plans for the terminalCorEnergy believes the Portland Terminal's strategic location at the Pacific Northwest as well as the versatility of that terminal make it a valuable asset, and CORR is not anticipating that Zenith will exercise their termination option Omega Pipeline Company owns and operates a natural gas distribution system primarily serving the U.SArmy’s Fort Leonard Wood in south-Central MissouriIn addition, Omega provides natural gas marketing services to several customers in the surrounding areaOmega has a long-term contract with the Department of DefenseCorEnergy provides REIT-qualifying intercompany mortgage financing to MoWood, a taxable REIT subsidiary of CorEnergy that owns Omega, secured by the 70-mile pipeline systemAlso with regard to the Omega Pipeline, CorEnergy received a private letter ruling from the IRS which enabled the company to designate the income from its contract with Ford Leonard Wood as REIT qualifying incomeCORR subsequently converted Omega into a REIT subsidiary from a taxable REIT subsidiaryAs the energy infrastructure real estate world continues to take shape, this PLR helps to solidify CorEnergy's position as a pioneer in this front. The MoGas Pipeline System is an approximately 263-mile interstate natural gas pipeline system which originates in northeast Missouri and extends into Western Illinois and Central MissouriThe pipeline maintains receipt points with Mississippi River Transmission Corporation in Eastern StLouis and with Panhandle Eastern Pipe Line Company and Rockies Express Pipeline on the northern end of the systemWith regard to the MoGas Pipeline, CORR continues to look at options available to offset the impact of the upcoming decline in rates and the new Spire contract, which is the effective in November of this yearCORR anticipates filing a rate case in the second quarter of 2018Despite the upcoming decrease in rates charged to Spire for usage of CORR’s MoGas pipeline, CORR expects the decreased revenues to be adequately mitigated by the accretion from the increased ownership interest in the Pinedale LGS, the results of deferred rate case for MoGas, and growth from existing contracts through CPI based escalators as well as participating rentsHere is a snapshot of CorEnergy’s “value chain”: CorEnergy can acquire what upstream companies might consider to be non-core, but which are essential to their overall operations such as what the company did for Energy XXI and UPLThe sale of an asset (to CORR) provides an alternative to issuing new equity or increasing debt for companies where capital project opportunities exceed internally generated cash flow, particularly at these commodity price levels. The Balance Sheet At the end of 2017, CorEnergy had $156.3 million of total liquidity which compares to $60 million at the end of 2016The company’s total debt to total capitalization ratio stands at approximately 25%, which is at the very low end of the targeted range of 25% to 50%Following the preferred offer during the year, the preferred to total equity ratio now stands at 28.2%, which is closer to the target of 33% In April, CORR took advantage of the preferred market conditions and initiated over $70 million of accumulative, redeemable Series A Preferred Stock, utilizing a portion of the proceeds to pay down the $44 million balance outstanding on the revolverThen in July CORR amended its credit facility upsizing to $160 million in commitments and extended the term for an additional five yearsIn connection with entering into the amended facility, the company paid off the outstanding balance on the term loan under the prior facilityCORR’s goal of strengthening its financial position is to be able to transact quickly on opportunities that arise without being subject to market conditionsThat goal was achieved in 2017 and CORR is now positioned to efficiently and quickly act on an acquisition opportunity when the presents itself CORR is continuing to see assets that are similar to those already in the portfolio, primarily pipeline near the well head as well as storage terminalsOn the recent earnings call, CORR’s CEO, Dave Schulte, explained: “Given today's environment, we're not only seen counterparties looking to strengthen their balance sheets, but also interest from large global companies, where we've adopted policies of spending within their cash flowCorEnergy offers each of our counterparties regardless of their financial profile and opportunity to monetize low return in assets, enabling those companies to put that capital towards higher return in production activitiesNow even after 5 years, as an energy infrastructure REIT, we still find ourselves educating potential counterparties on our value proposition, an exercise we think is worthwhile due to the large addressable market opportunity that we faceIn 2018, we're targeting completing one to two acquisitions each in a $50 million to $250 million range, with larger size is actionable with asset level partners such as Prudential Capital's original role and our Pinedale LGS.” The Risk/Return Scenario As the chart below illustrates, CORR positions the asset mix based upon how the market has responded after a significant test over the last few yearsIn the upper left-hand corner, you see a classic efficient frontier curve measuring the long-term relationship between investment risk and returnGenerally, asset classes can be part of the longest curve, and on the one end, you may have a treasury bond or bank debt investment, which is viewed as low risk, but also relatively low returnAt the other end of the spectrum exists investments such as venture capital, generally higher risk, but with commensurate potential rewards CorEnergy’s REIT model for owning infrastructure assets was intended to enable the portfolio of assets to achieve solid returns with lower risk for each unit of returnTo execute this strategy, CORR targets asset level returns of 10% to 12% by creating long duration lease contracts with predictable cash flowsThe leases have participating features which can increase those returns with higher asset utilizationCORR’s quarterly financial metrics are viewed below, and as you can see, AFFO, which adjust non-cash tax impact, has remained steady and in Q4-17, CORR declared its 10th consecutive common dividend at $0.75 per share demonstrating the consistency of the revenue model and asset base CORR targets a conservative AFFO ratio to dividends of 1.5x for the current portfolio in order to provide the company with ample reserves for debt repayment, ARO funding as well as necessary capital reinvestment activities to allow the company to sustain its business model and dividend paying capacity over the long termCORR’s coverage ratio for Q4-17 was 1.44x, which continues to be pressured by the additional preferred dividend requirements from the offering earlier in 2017This short-term pressure on the coverage ratio was expectedTake a look at my AFFO per share FORECASTERKeep in mind, these data are just ESTIMATES and there are just FOUR analysts who weighed in However, the estimate suggests that CORR’s AFFO per share will decline by 18% in 2018This is a very subjective forecast since CORR could hit the high-end of acquisition guidance in 2018 ($250 million)I would not read too much into this estimate, as I am more focused on the overall dividend safety. Score With CORR In regard to CORR’s dividend payout, the company’s CEO remarked on the recent earnings call: “we believe that we will be able to maintain our $3 dividend… and additional upside could result for many acquisitions we complete during the yearAnd we will reassess our dividend paying capacity and our dividend levels, should we complete a deal, but we will retain an appropriate amount of cash flow in order to sustain our dividend in the futureIt is at the core of our strategy to make prudent acquisitions and set dividends at responsible levels, so our investors can expect consistent performance in cash flow, the hallmark of the infrastructure asset class.” As you can see, CORR is now yielding 8.1%, and while that is decent, you must remember that CORR’s cash flows are not nearly as diversified as Realty Income (NYSE:O), STORE Capital (STOR), or W.PCarey (WPC) My biggest fear as it relates to CORR is the company’s limited diversificationObviously owning “critical mission” assets is a terrific risk mitigatory, but as we know, there is also distraction risk that can create overhang and market volatilityI was happy to jump in at the right time when CORR was yielding double digits, but I am less enthusiastic given the sound value of the shares todayIn other words, I don’t believe that by owning CORR shares I am being adequately compensated for the risk… simply put, a riskier investment should provide me with the potential for larger returns to warrant the risks of the investment… or risk premium. What to do? I am maintaining a BUY, but I believe NIBBLE is the best strategyAlthough we only have FOUR analysts reporting (via FAST Graphs), that’s better than none, and it appears that CORR is not going to see eye-popping growth in 2018Given the selloff within the Net Lease REIT sector, I believe there are better Total Returns to be had with O, STOR, and WPC Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendationsThat also applies to his grammarPlease excuse any typos, and be assured that he will do his best to correct any errors if they are overlookedFinally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinkingIf you have not followed him, please take five seconds and click his name above (top of the page)Source: (AMT), (CCI), (HIFR), (HASI), (UNIT), and (LMRK)Recent article on HASI Recent article on LMRK The Intelligent REIT Investor is the #1 REIT Research site on Seeking AlphaBrad Thomas and Rubicon Associates have a combined 40 years of investing experienceWe publish exclusive research content on over 100 REITs, and our Durable Income Portfolio has returned over 12% YTDWe recently announced that the Small Cap REIT Portfolio has returned over 20% YTD. Marketplace subscribers have access to a wide range of services including weekly property sector updates and weekly Buy/Sell picksWe provide most all research to marketplace subscribers and we also provide a “weekender” report and a “motivational Monday” reportWe stream relevant real-time REIT news so that you can stay informed. All of our portfolios are updated daily and subscribers have access to all of the tools via google sheetsREITs should be part of your daily diet and we would like to help you construct an Intelligent REIT portfolio, utilizing our portfolio modeling strategies. Also, our subscribers will soon have access to REIT.BRACKETOLOGY.....Subscribe here. Disclosure: I am/we are long ACC, AHP, APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DDR, DEA, DLR, DOC, EPR, EXR, FPI, FRT, GEO, GMRE, GPT, HASI, HTA, INN, IRET, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, QTS, REG, RHP, ROIC, SBRA, SKT, SPG, STAG, STOR, TCO, UBA, UMH, UNIT, VER, VTR, WPC I wrote this article myself, and it expresses my own opinionsI am not receiving compensation for it (other than from Seeking Alpha)I have no business relationship with any company whose stock is mentioned in this article.Follow Brad Thomas and get email alertsLive Chat+Live Chat-We apologize for the inconvenience.The chat platform is currently undergoing maintenance.To see the chat, try to refresh in about 5-10 minutes.Chat is not supported in your browser version.Please upgrade your browser or use a different browser, such as Google Chrome.You do not have permissions for this room..st0{stroke:#FFFFFF;stroke-width:2;stroke-miterlimit:10;} .st1{fill:#FFFFFF;} .st2{clip-path:url(#XMLID_2_);} .st3{fill:url(#XMLID_3_);} .st4{fill:url(#XMLID_4_);} .st5{fill:url(#XMLID_5_);} .st6{fill:url(#XMLID_6_);} .st7{fill:#FFFFFF;fill-opacity:0.2;} .st8{fill:#3E2723;fill-opacity:0.1;} .st9{fill:url(#XMLID_7_);} .st10{fill:none;}Top Authors|RSS Feeds|Sitemap|About Us|Contact UsTerms of Use|Privacy|Xignite quote data|

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