In January I wrote an article on CorEnergy (NYSE:CORR) and I described the company as my "2015 REIT Underdog". Earlier this week the company announced its first-quarter results, so I decided that I would provide an update on the Energy Infrastructure REIT.
Before beginning, I will remind you that CORR generates revenue by leasing infrastructure assets, or offering loans secured by infrastructure assets, to energy companies. The leases and loans are long-term and are structured to include a large fixed payment that is payable irrespective of the use of the asset and are not impacted by commodity price movements.
Although CORR looks like an MLP (Master Limited Partnership) or BDC (Business Development Company), the company opted to modify its capital structure to a REIT.
As a REIT, CORR is by nature a passive, long-term partner. By customizing long-term leases and structured financings (to meet the control and economic requirements of the lessees) CORR partners with certain exploration and production companies to monetize the assets and free up internal capital for higher return projects. As a result, the universe of assets that may be owned by a REIT has expanded significantly.
In CORR's 2015 Annual Report the company explains:
The Internal Revenue Service has, through a series of private letter rulings, as well as proposed regulations, described new types of assets in the energy sector which are eligible to be owned by a REIT, including electric transmission and distribution systems, pipeline systems, and storage and terminaling systems.
Energy infrastructure provides essential services, and the demand for energy resources is expected to grow in the future. As CORR explains in the Annual Report:
We believe energy infrastructure is the backbone of the U.S. economy.
The energy infrastructure sector includes the pipes, wires and storage facilities that connect and deliver some of our most critical resources: oil, natural gas, and electricity.
CORR's business objective is to invest principally in the energy infrastructure sector. The energy infrastructure sector broadly includes midstream, downstream and upstream assets. CORR focuses primarily on midstream and downstream assets as described below. Source: CORR Filing
• Midstream - the gathering, processing, storing, terminaling and transporting of energy resources and their byproducts in a form that is usable by wholesale power generation, utility, petrochemical, industrial and refined products customers, including pipelines, natural gas processing plants, liquefied natural gas facilities and other energy infrastructure companies.
• Downstream - the refining of energy sources, and the marketing and distribution of products, such as natural gas, propane and gasoline, to end-user customers; and the transmission and distribution of electricity from coal, nuclear, natural gas, agricultural, thermal, solar, wind and biomass power generation facilities.
A Hybrid REIT Model
CorEnergy is hybrid REIT model of sorts - the Kansas City-based REIT is the first Infrastructure REIT so there is somewhat of an acceptance risk. In other words, many investors don't really understand what CorEnergy does and there are no true peers.
However, there's also an opportunity: CorEnergy can build a foothold - as the premier partner of choice in energy infrastructure sale/leaseback transactions. Instead of competing for deals in the open market, CorEnergy can source off-market deals and essentially be the "go to" landlord of choice.
As we review CORR's portfolio (below), we can see that the infrastructure assets are critical to the customers' operations and because of their "utility-like" characteristics, the revenue stream is stable and predictable. In addition, the demand for energy is largely unaffected by price changes. The first quarter showed little change in CORR's assets, and here is a quick update on the individual properties.
The Pinedale Liquids Gathering System is the largest asset (48% concentration) and had a small rental increase starting in the first quarter of based on the CPI escalator. Ultra Petroleum (the guarantor) has publicly disclosed operating cost reductions which are mitigating the impact of lower gas prices, they've lowered both drilling and completion costs, and operating costs and they are profitable.
Like a pipeline capacity payment, CORR's minimum rent is not based on usage or commodity prices. The Pinedale property was generating around 80% of CORR's revenue and over the last few quarters the exposure has decreased considerably.
CORR's newest asset MoGas Pipeline (acquired November 2014), produced its first full quarter of revenue. MoGas has annual contracts with LDCs or utilities, which contract for capacity on the pipeline, so CORR received base payments regardless of usage.
The MoGas Pipeline System is an interstate pipeline that is a critical supplier of natural gas to customers in the St. Louis region and central Missouri. CORR paid $125 million in cash for the MoGas Pipeline, which is now CORR's second largest asset.
The transaction was funded through net proceeds of $96 million from a common stock and borrowings under the credit facility. The accretive transaction enabled CORR to announce its intention to raise the dividend by 4% beginning in the first quarter of 2015.
The 263-mile MoGas Pipeline System originates in northeast Missouri and extends into western Illinois and central Missouri. The pipeline system, which is regulated by the Federal Energy Regulatory Commission, delivers natural gas to investor-owned and municipal local distribution systems. The MoGas Pipeline receives natural gas from major supply lines at three receipt points and delivers that gas at 22 delivery points.
Primary customers include Laclede Gas Company and Ameren Missouri, both serving the St. Louis metropolitan area; municipal utilities in central Missouri; and Omega Pipeline, serving Fort Leonard Wood in central Missouri. Acquiring the MoGas interstate pipeline further diversified CORR's portfolio of energy infrastructure assets used by utilities, storage terminal operators, and oil and gas producers.
CORR's Omega Pipeline is a non-regulated LDC utility, which has a fixed charge to the U.S. Department of Defense for access to the pipeline.
I did see that in the first quarter due to reduced drilling activity in Black Bison's area of operations, CORR granted a waiver of certain financial covenants, including a scheduled amortization payment on March 31. CORR's CEO, David Schulte, explained this on the earnings call:
I would say it's evidence of how - what we believe to be our flexible financing structure around those kinds of assets is working, you're looking until things go alright whether or not your structure has a way of accommodating that.
So I am going to start by saying our dividend level is set with reference to our base interest only, not participating interest and not amortization, so there is no implication to our coverage ratio and we do believe that the reduced drilling activity referred to that when it comes back will have the full ability to collect our principal amounts on that loan.
The company has implemented relevant cost cutting measures in the field and we've been monitoring the situation on a very close basis to confirm that the interest expense we receive will still be collectible and they are current in their interest.
As far as the principal, back to the amortization, with two measures of ways to be repaid, one was the scheduled amortization payments and the other was the sweep provision of excess volume sweeps to repay our loan. So we didn't have a defined term of expectation around when that loan will be repaid.
The amortization only got us a tender of approximately 10 years with sweeps able to pay that down to closer to seven. So in this period of lower activity, deferring that principal to us doesn't mean we had to defer the ultimate collectability or even tenure of the loan, we'll just have to see when activity levels return to more normal levels, which they were leading up to the end of last year. We are in fine shape at that point of the company was to make all scheduled payments. So we'd hope and expect this is temporary.
Not that CORR continues to make interest payments in a timely way and there's no reason to believe that the loan will not be fully collectible.
First-Quarter Results
First remember that because CORR is a REIT and a majority of the assets are REIT-qualifying, the company believes that non-GAAP performance measures utilized by REIT, including funds from operations (or FFO) and adjusted funds from operations (or AFFO) as the most useful tool to measure operational performance. The chart below shows FFO as calculated by NAREIT, FFO adjusted (to take out the effects of legacy assets from CORR's BDC days) and AFFO.
CORR's first quarter AFFO of $0.15 per share was consistent with the 2014 pro forma AFFO of $0.61 per share for the full year. You may recall that CORR's AFFO in Q4-14 was $.16 per share and $.14 per share in Q3-14. The company previously said that the 2015 run rate would support annualized dividend payments of no less than $.52 per share. Based on the Q1-15 results, CORR's AFFO per share run rate is $.60 per share.
CORR's strategy is to grow dividends grounded in long-term contracted revenues supported by diversification of asset and revenue sources. The company's contracted revenues support dividend stability, and long-term growth has come from acquisitions originated on the platform of assets. These graph below show the progress.
Continue reading this article here.
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