Energy REITs Yielding 8 Percent Are No Joke by Jason Knapp, Activist Stocks
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This Unusual REIT’s New Acquisition is a Game Changer by TMFDeeJ aka Jason Knapp.
Today I want to talk about an oldie but a goodie. This is an unusual situation that Mr. Market has left for dead, but one that might be back after what I believe is an extremely significant acquisition that it announced after yesterday’s market close.
The stock that I present you today, CorEnergy Infrastructure Trust ($CORR) is a strange company that I have been writing about since January 2013 (And the new mystery stock is…). Here’s some background information on how this unusual company came to fruition and what makes it a special situation from my initial post:
“For a week or two now I have been alluding to a mystery stock that I have established an initial position in. Some have tried to guess it, but to be honest with you, it’s so obscure that I’m not surprised that no one got it. It’s actually pretty funny, I haven’t established a massive position in this one yet because I’m still researching it, but so far it seems like it was almost like it was tailor-made for me. I’m not saying that it’s the perfect stock, but it has all of the attributes that I personally love, a special situation REIT conversion with catalysts and a big dividend that seems to be out of favor at the moment because of a temporary situation…I laughed, I cried, it was better than Cats.
This new stock is actually everything that another company that I sniffed around for a while, Power REIT (PW) should be, but isn’t (that’s another interesting one, but for another day).
This new company that I have been buying is…CorEnergy Infrastructure Trust.
CORR was formerly a closed-end fund (I’ve also seen it called a BDC, it doesn’t really matter much at this point because it is not one any longer) called Tortoise Capital Resources ($TTO). I actually remember when the company initially went public several years ago. As a yield hound, it popped up on my radar, but I decided to pass at the time.
A little while ago it decided to shift gears away from owning securities in things like MLPs and REITs to actually providing funding to companies in the sector through sale / leaseback agreements. It is attempting to become a brand-new type of REIT (pending) that is being created to own energy infrastructure. Heck, if casinos and prisons can become REITs then companies in energy infrastructure should be allowed to. Anyhow, Mr. Market absolutely hammered CORR when it announced a secondary stock offering to fund its first major acquisition in the sector.
Normally I might be a little skeptical of relatively small a company that I had never really heard much about that claims to be transforming into something brand new like this, but it really is…it bought a liquid gathering system from our a company that I know well, Ultra Petroleum( UPL). That’s a legitimate purchase. It then leased back the system to UPL for fifteen years. This isn’t my favorite type of infrastructure asset because there can be some volatility with its revenue, but CORR was able to iron out a lot of that volatility by negotiating a guaranteed minimum of a $20 million annual payment for its use. Alas, the high-end is capped as well at $27.5mm. There is an adjustment for inflation in the cause as well. This translates to a cap rate of 8.89% to 12.22%, which is pretty darn good in the current low rate environment.
Once cash begins flowing in from this investment, CORR plans to raise its dividend to $0.50/share, which would result in a yield of over 8% at today’s share price. Also, after the acquisition of UPL’s assets is complete, it appears as though CORR will be trading for over a dollar less than the sum of the value of its assets, including the Ultra collection system and its legacy assets. I suspect that this discount will shrink significantly once REIT status is approved and the lease-back cash flow begins to come in.
One concern about this investment is that CORR has external management. One always likes to see ownership of a company that has a lot of skin in the game so to speak. However, to me this concern is eased somewhat by the fact that Corridor InfraTrust Management, the new entity that was formed to manage CORR, is incentivised to increase the stock’s dividend. I have done some research on the operators of Corridor InfraTrust Management and they seem to have a decent amount of experience in the energy infrastructure sector.
Another risk is that CORR is technically not a REIT yet, but it is in the process of converting into one. Should this conversion not be approved for some reason, that would obviously be a bad thing, but to me it seems reasonably likely that it will succeed. The company that is managing CORR is taking all of the necessary steps to qualify as a REIT. Furthermore, if private prisons and casinos are converting into REITs, I personally don’t see why something that’s as important as energy infrastructure wouldn’t be allowed to.
I view this is an interesting opportunity to get in at the beginning of a REIT that is undervalued today and has the potential to grow significantly in the future.
A big kudos to the REIT expert Dane Bowler whose Seeking Alpha article initially brought this situation to my attention.”
Since this initial post several years ago, $CORR has gone on to make several impressive acquisitions. Here’s what the company’s assets look like today:
My main problem with $CORR during its first two years as a new REIT was that the company had been fairly stagnant. Yes, the yield of nearly 8% was nice, but I wanted to see how good its management was at actually implementing the growth plans that they have been talking about since the REIT was created.
Last November the company made an acquisition that I believe the market didn’t give it enough credit for, for a reason that the company may have brought upon itself. It paid $125 million for “MoGas Pipeline, LLC and United Property Systems, LLC, which own and operate an approximately 263-mile interstate natural gas pipeline system which originates in northeast Missouri and extends into western Illinois and central Missouri (the “Pipeline System”), and certain related property.”
At the time, $125 million was a sizeable chunk of change for a company with a market cap of only around $300 million. Here’s where they entered into a Material Definitive Agreement.
The reason I believe Mr. Market didn’t give $CORR enough credit for this solid acquisition is its official release announcing the deal was a little light on details. To me, the most important piece of information was missing…what rate of return did the company get on its new investment? I decided to investigate. After e-mailing CORR investor relations literally 5 times I finally heard back from them. Here’s their response in regard to my question about the Cap Rate for the MoGas purchase:
Thank you for reaching out. The pro forma cap rate (plus