CorEnergy Infrastructure Trust, Inc. (CORR) Q3 2013 Earnings Call Transcript
Published at 2013-11-13 17:22:04
Katheryn Mueller - IR Rick Green - Chairman David Schulte - CEO and President Becky Sandring - Treasurer and CAO
Selman Akyol - Stifel, Nicolaus
Greetings and welcome to the CorEnergy Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katheryn Mueller, Investor Relations for CorEnergy. Thank you, Ms. Mueller. You may begin.
Thank you and welcome to the CorEnergy Infrastructure Trust Third Quarter 2013 Earnings Call. I'm joined today by CorEnergy Chairman Rick Green; CEO and President, David Schulte; and Treasurer and Chief Accounting Officer, Becky Sandring. An audio replay of our conference call and information included in our press release issued Tuesday, as well as the presentation materials for this call, are available at corenergy.corridortrust.com We would like to remind you that statements made during the course of this presentation that are not purely historical may be forward-looking statements regarding CorEnergy's or management's intentions, estimates, projections, assumptions, beliefs, expectations and strategies for the future. All such forward-looking statements are intended to be subject to the Safe Harbor protection available under applicable securities law. Because such statements deal with future events, they are subject to various risks and uncertainties and actual outcomes and results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our filings with the SEC. These documents can be accessed through the Investor Relations section of our website. We do not update our forward-looking statements. At this time, I will turn the call over to CorEnergy President and CEO, Dave Schulte.
Thank you and welcome to our CorEnergy's Third Quarter Earnings Call. We think we delivered another solid quarter of consistent performance across our business with stable revenues, sustained dividends and strong operating fundamentals. At CorEnergy we're providing efficient way for investors to access the desirable characteristics of energy infrastructure without the administrative burden of K-1 filings. Our investments in pipelines and electric transmission lines provide us with stable, contracted revenue supporting our distribution with the potential for modest long term distribution growth. We're continuing to educate asset operators and other potential partners and how CorEnergy's REIT structure can be used to serve their capital needs while leaving them in control of their operations. On Slide three we intend to own assets that have long useful lives are critical to economic activity with high bearers to entry that provide recurring revenues via contracted rents for triple-net and this is important participating leases. Participation allows our revenue to have growth potential based on the activities of our partner operator, while mitigating our risk due to the economic necessity of those assets. CorEnergy seeks to provide our investors with a high cash flow component of their total return, low correlation with other investments that they might make in their portfolio and attractive risk adjusted total return with some inflation protection of the distribution through potential growth of the cash flows. Looking ahead we continued to track along with our annualized dividend targets of not less than $0.50 per share for the year 2013 and maintain our long term growth target of 1% to 3% annually from existing operations without the necessity of any further asset acquisitions to support that growth. Turning to Slide four, let's reveal what we have achieved year-to-date. In 2013 we have increased our annualized dividend guidance from $0.44 per share in 2012 to $0.50 in 2013, the year-over-year increase of 14%. We significantly reduced the volatility of distribution expectations by maintaining that dividend payment consistently every quarter during the year. We established a $20 million dollar line of credit of which we have 7 million immediately available to provide short term acquisition financing if need to be. We met the REIT asset test each quarter of this year so far and remained on track to meet the annual REIT income and distribution test in the fourth quarter and expect to be REIT this year and for almost through the end of the year and have very good visibility on that test. We have also increased equity research coverage to six analysts, including a combination of analyst from both the energy and REIT sectors. Now, I will turn to the portfolio asset and discussion their performance on the Slide five. At this time, the assets statistic look familiar as anticipated these assets provided with us consistent and stable revenues during the third quarter. The Pinedale LGS which acquired last December from Ultra Petroleum is a prime example of the type of partnerships we try to create with high quality operating companies and represent the type of transaction we aim to replicate. As of September 30, 2013, approximately 89% of total lease revenue was derived from Ultra Petroleum. On lease with Ultra provides minimum annual rents of $20 million with growth potential beginning next year in 2014 from either participation in volume growth or an escalator based on inflation. And during its recent third quarter earnings call Ultra disclosed the potential to operate between 2.5 and 4 rigs in Pinedale next year. The Eastern Interconnect project is a corridor of electric transmission assets in Eastern New Mexico. The property is leased to a public service company in Mexico and represents approximately 11% of our total lease revenue for the quarter. Our wholly owned subsidiary Mowood is a holding company of Omega Pipeline. The year-to-date sales revenues increased over prior year is attributable to the increase in sales volume which is due mainly to cooler temperatures in the first half of 2013 compared to the first half of 2012. Due to the seasonal nature of gas sales, operating results for interim periods are not necessarily indicative of the results that we would achieved in the full year. Then on private portfolio as a fair value of VantaCore increased approximately 8% compared to the prior quarter. The increase is attributable to debt repayment and changes in VantaCore’s EBITDA and increasing multiples in the comparable group used to value VantaCore. Another achievement for the year that we’re very proud of is the Lightfoot’s Arc Logistics Partners successful completion of its IPO. As a fair value of Lightfoot decreased slightly in the third quarter primarily due to changes in market, value of comparables; however, post end of the quarter, the Company did achieve an IPO. And we believe the ability to enable and support our legacy private equity investments is an absolute critical part of our strategy. I am continued to be pleased with Lightfoot’s progress. This strategy of investing in energy related assets was stable and contracting cash flow is consistent with the risk profile and asset we seek to finance at CorEnergy. We will maintain our pro rata share of ownership in Lightfoot and its indirect ownership of Arc Logistics primarily in the form of subordinated common units. Along the IPO occurred subsequent to the quarter end, we expect our valuation to be in line with that quarter essentially confirming our fair value mark. That concludes our update on the current investment portfolio and with that I will turnover to presentation to our Chief Accounting Officer, Becky Sandring, for an overview of our financial results.
On Tuesday, we filed our 10-Q and issued a press release highlighting our financial results for the third quarter. The financial information presented in the 10-Q should be considered in its entirety. For purposes of this call, we have provided you with a few key financial metrics that we think will be helpful to you in evaluating CorEnergy's performance going forward. Because the majority of the company's assets are now REIT qualified, management believes that non-GAAP performance measures utilized by REIT, including funds from operations, FFO, and adjusted funds from operations, AFFO, also provides useful insights in the CorEnergy’s operational performance. FFO for the three months ended September 30, 2013 totaled approximately $3 million. AFFO for the quarter ended totaled approximately $3.3 million. These measures are after payments made to our non-controlling interest so are applicable to our common shareholders. A third quarter dividend of $0.125 was paid on October 4, 2013. The graph on slide seven showing total revenue, dividend distributions and total assets are detections of CorEnergy’s recurring sustain performance quarter-over-quarter. With privately held investment securities now presenting less than 10% of our asset portfolio, we believe that in 2013 sequential comparisons rather than prior year comparisons are more relevant to assessing dividend payment. The third quarter dividend was again supported by steady and recurring revenue streams from our asset portfolio. We continue to maintain a conservative leverage ratio of 25% to 50% of total assets, which we expect to help fund our target 8% to 10% hurdle rate on invested capital. As we take a look at our balance sheet slide eight illustrates the composition of our asset portfolio delineated into requalifying assets show in blue and non-requalifying assets shown in bold. Over 75% of our assets are requalifying allowing us to pass the retest in every quarter for 2013. The majority of our portfolio contains assets from the Pinedale LGS and Eastern Interconnect Project. The remaining private securities and Mowood are held in wholly owned taxable re-subsidiary. In terms of liquidity, at September 30, 2013, CorEnergy had $19 million in cash on our balance sheet. After adjusting to reflect recent dividend payment in October and other near term expenses, investible cash is approximately $13 million. We expect to reinvest this cash in our next transaction. As previously mentioned we also have a $20 million revolving line of credit that could be used for future acquisitions. With the self registration statement in place we maintain the ability to access the capital market for additional funding as needed. We believe that we are well positioned to fund the continued diversification of our portfolio of infrastructure assets. As you look at slide nine, you can see our enterprise value is now approximately $249 million. The dividend yield of CorEnergy as of October 31st was approximately 7.3%, significantly higher than the 3.6% yield on NAREIT Equity REIT Index, the 3.9% yield on the Dow Jones Utilities Average Index and the 4.1% yield on the S&P Global Infrastructure Index. These benchmark dividend yields growth expectations. Given the risk characteristics of contracted cash flows from energy infrastructure, we think our stock represents an attractive risk adjusted return. And with that overview, I will turn back to Dave to conclude the presentation and lead us into the Q&A.
Thanks Becky. To conclude the presentation, I want to point you to our slide entitled Overheard in the Corridor on slide 10. I hope to use this opportunity on a quarterly basis to share with our managements mind and how it’s impacting the strategic direction of the company. With the business strategy historically incurred and the investment principles of yield, growth and quality CorEnergy evaluates any and all strategic opportunities that will support our mandate to provide high quality distribution based total returns to shareholders. During the course of the third quarter, we experienced a very high level of deal related activity as evidenced by the increase in asset acquisition and professional fee expenses in the income statement. While none of these opportunities resulted in a consummated transaction during the quarter, usually that was because of diligence reasons a broad range of strategic opportunities were evaluated. Some of which remain on the table for us to continue to work on through the fourth quarter. Given the amount of time and operating partner education required by these projects. We believe several opportunities are within our capability to execute before the first quarter of next. Our deal pipeline is very robust as we entered the fourth quarter. And one potential strategic prospect that we believe is the direction that have unveiled itself during the quarter. It’s the opportunity to place assets in our Taxable REIT Subsidiary also known as the TRS in the REIT sector. Our current investment in Mowood is an example of this kind of investment. The pipeline assets Mowood holds our REIT qualified property but its operations are not REIT qualifying. They are however consistent with risk profile of the infrastructure asset class. Our intercompany loan from CorEnergy down to Mowood represents a REIT qualifying loan for CorEnergy and is the case study for how we can provide financing to other utility type assets. We continue to explore opportunities similar in nature to that of Mowood with types of asset to consider in this subsidiary would include water disposal assets, storage terminals such as the business operated with Arc Logistics and other contracted power utility assets. Our size and scope makes us very nimble allowing us to consider broad range of strategic opportunities. We think this flexibility allows us to be opportunistic and make acquisitions that offer most attractive risk adjusted returns. Now, on slide 11, our final thoughts. We’re addressing a very large energy infrastructure market. It creates multiple opportunities for us to place long term investment capital. That will provide our shareholders with an attractive stable distribution with characteristics designed overcome inflation and long run. We believe operating a REIT structure is a competitive advantage. We have transparent access to high quality assets and cash flow visible in this structure. Our management team is capable in origination and has exhibited it very discipline diligence around potential transactions. We think our team is in line with our shareholders to the potential for participation in distribution growth. Finally we’re committed to that distribution growth potential. We’re very excited about the opportunities we’ve looked at, they’re multidimensional, we’ll take full advantage of the vehicle that we have in place to manage. With that operator, I’d like to open up for questions.
(Operator Instructions). Our first question comes from the line of Selman Akyol with Stifel, Nicolaus. Please proceed with your question. Selman Akyol - Stifel, Nicolaus: In terms of your last comments you’re talking about distribution growth in conjunction with the potential acquisitions that you’re looking at. Can you talk about maybe the potentials you’re seeing in terms of being able to drive distribution or dividend growth if you were successful in completing acquisition.
Well, it would depend on sizing of course, we’re very deliberate about including our current cost of capital in valuing acquisition prospects and would stick with the discipline we’ve articulated consistently which is we won’t undertake an acquisition that we don’t believe is accretive to the distribution both in the short run and growth prospects in the long run. Now, the growth prospects we’ve articulated, we think are available to us through the existing assets we have in place and we are pleased we will start receiving a distribution from our Arc units starting in January and Selman I think that the potential for additional acquisitions to drive growth is part of the discipline we exercise when we are evaluating projects so we aren’t going to project what that might be. Selman Akyol - Stifel, Nicolaus: And then when you talk about your pool out there and I believe it was 20 million to 200 million each can you talk about in terms of how many of those are still being evaluated from last quarter and they are mile post to trading in terms of the devaluation would this be a whole new opportunity set compared to last quarter can you give any color on that?
The cycle of education and evaluation and then documentation and closing has looked to us to be a 6 to 9 month cycle and so there is a lot of consistency in our pipeline from quarter to quarter as a few things drop out more new ones have been added so we have actually accelerated the velocity of opportunities we are reviewing right now and as I suggest that we are very full with opportunities here in the fourth quarter I think we are fairly mature. Selman Akyol - Stifel, Nicolaus: My last question on, in the structure that where you have Mowood place and I believe you said it was TRAS is that a well established structure out there that is typically used among REITs or is it something a little bit more new?
It is not new TRS stands for the acronym Taxable REIT Subsidiary and it is commonly employed in real estate investment trusts for activities that they undertake that are not qualifying for either REIT assets or REIT revenue and it applies the tax of that subsidiary level on those activities the REIT can own up to 25% of its total assets in such a subsidiary so when we are doing on asset test for requalification purposes for the company there is a relatively significant allowance for us to make investments that might for one reason or another not qualify as a REIT but nonetheless our of the right risk return profile even after tax that we think could be advantageous to our shareholders to complete the transaction. And we are not unique by any means in that regard with the use of a TRS.
(Operator Instructions) There are no further questions at this time. I would like to turn the floor back over to management for closing comments.
Thank you everyone I just wanted to close by saying how pleased we are with our management team that like for capital and to minimum the year we enable them to not pay dividends and retain that capital inside the company we expected and so throughout the year that there was going to be and our own expectation was that a very successful strategic the reason why they retain that capital and we are very pleased with the outcome and look forward to continued growth from that particular investment as they have now access to public equity markets. So with that thank you all for tuning in and we will speak again next quarter. Thank you operator.
Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.