CorEnergy Infrastructure Trust (NYSE: CORR) is a premier real estate investment trust (REIT) that acquires energy infrastructure assets typically used for midstream and downstream processes. The company’s portfolio consists of approximately $690 million in assets including power utilities, storage terminal operators and oil & gas producers. CorEnergy originally started out as a business development company (BDC) that essentially operated as a master limited partnership (MLP) but management restructured the company as a REIT to capitalize on favorable taxation and bring more value to shareholders. The company has a market capitalization of about $300 million and currently trades at a Price/Book ratio of 0.80x. Shares offer a 12% dividend yield and management plans to grow dividends at 3% to 5% annually over the long term.
Unlike MLPs, CorEnergy does not operate any of its assets. Instead, the company signs tenants to triple net operating lease agreements for long-term and stable cash flows which are distributed to shareholders as dividends. CorEnergy’s largest asset is the Grand Isle Gathering System (GIGS) which the company acquired in June 2015 for $245 million. GIGS comprises of 153 miles of undersea pipelines and storage in the Gulf of Mexico, accounts for 37% of the total value of CorEnergy’s asset portfolio and generates approximately $41 million in annual rent payments. The company’s next largest asset is the Pinedale Liquids Gathering System (LGS) which accounts for 30% of total portfolio value and generates $20 million in annual rent payments. CorEnergy is one of only a few energy REITs – a relatively new sector.
On 11/9/2015, CorEnergy reported 3Q15 financial results for the three months ended September 30, 2015. In the quarter, the company had total revenue of $22.1 million, up 137% from $9.3 million in Q3 2014. The more than doubling of revenue was tied to a 136% increase in lease revenue and the addition of $3.6 million in transportation revenue which was not present in 2014. CorEnergy beat consensus estimates of $21.5 million in revenue by 3%. The company reported operating income of $4 million, up from $2.8 million in 3Q14. For the quarter, CorEnergy recorded a net loss of $609,890, or $0.01 per share. GAAP income was down on a $1.4 mllion charge for losses on equity investments, a non-operating measure. On a more relevant non-GAAP measure for REITs, the company reported Adjusted Funds from Operations (AFFO) of $13.2 million, or $0.20 per diluted share, and FFO of $5.6 million, or $0.09 per share. Earnings were in-line with consensus estimates.
CorEnergy also announced key additions to its leadership team that are expected to strengthen finance and governance team to better handle the company’s growing portfolio of energy assets. Jeff Teeven was named VP – Finance, Lesley Robertshaw was named Manager of Investor Relations and Natalie Hill was named Assistant Corporate Secretary.
On October 29, 2015, CorEnergy’s Board approved a third quarter dividend of $0.15 per share, to be paid on November 30, 2015, to shareholders of record November 13, 2015. The dividend is up 11% over the previous quarter and up 15% year-over-year. On an annualized basis, CorEnergy has a dividend of $0.60 which is 44% higher than 2013 and 5% higher than 2014, and offers a robust and reliable dividend yield of 12.1% given the company’s long-term contracts.
As of market close on November 13, 2015, CorEnergy shares were trading at $4.94, down about 24% year-to-date with a majority of the fall in price occurring since early May 2015 when shares were trading at close to the $7 level. Shares are now 15% above the low-end of the company’s 52-week range of $4.29 – $7.40. Financial services company Stifel Nicolaus maintained CorEnergy with a Buy rating but lowered its price target from $8 to $7 on weaker energy industry fundamentals, but the $7 price still offers 63% upside potential. CorEnergy has an average consensus analyst price target of $8.25 (which offers 92% upside) and a high price target of $11.50 (168% upside). Shares currently trade at an attractive 11.6x cash flow.
On November 9, 2015, CorEnergy’s Board approved a 1-for-5 reverse stock split which will go into effect at 5 pm on December 1, 2015. For every 5 shares held, shareholders will receive 1 share. In lieu of fractional shares, shareholders will receive cash based on the company’s share price as of market close on December 1, 2015. Shares will trade on a split-adjusted basis as of market open on 12/2/15 under a new CUSIP number but the same ‘CORR’ ticker symbol. The reverse stock split is expected to increase CorEnergy’s per share stock price by reducing outstanding shares from 59.6 million to 11.9 million which management hopes will attract a more diversified investor base. After completion of the reverse stock split, CorEnergy’s new quarterly dividend rate will be $0.75 per share, or $3.00 annualized.
CorEnergy shares offer solid capital appreciation upside and dividend income, and appear overly beaten down due to its tenant risk profile which mostly comprises of energy companies. While interest rate risk and a sharp drop in crude oil prices have crippled the energy sector, CorEnergy’s status as a REIT offers some protection from tenant defaults because the company owns valuable assets and can find other tenants. For example, if Energy XXI USA Inc. were to declare bankruptcy, GIGS still has $1.45 billion of proven reserves making it an extremely valuable property that CorEnergy could easily find a replacement tenant for. Additionally, CorEnergy’s locked in delivery contract rates protect it from the price volatility of commodities such as oil. And unlike MLPs that derive revenue from volume, CorEnergy’s lease agreements are set regardless of usage for its properties.
With its most recent quarter being the best on record, CorEnergy has managed to grow both revenue and earnings despite the significant dip in oil prices over the past year. Some investors are still hesitant to take a position in CorEnergy due to continual GAAP losses and are overlooking the company’s solid 12% dividend yield and fundamental business stability.
Management’s increasing the annual dividend from $0.54 to $0.60 reflects confidence in future AFFO growth. Based on existing tenant contracts, the long-term dividend growth rate target is 1% – 3% with the possibility of 3% – 5% growth after considering potential acquisitions. A high dividend yield combined with share repurchases allows CorEnergy to truly return value to shareholders and makes it a smart long-term investment.