CorEnergy Infrastructure Trust Inc (CORR) 2012 Q3 法說會逐字稿

Greetings and welcome to the Tortoise Capital Resources Corporation in the third quarter 2012 results conference 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, Rachel Stroer, Tortoise Capital Advisors. Thank you. You may begin.

Thank you and welcome to the 2012 third-quarter earnings call for Tortoise Capital Resources Corporation. I'm joined today by David Schulte, CEO and President, and Becky Sandring, Treasurer and Chief Accounting Officer. An audio replay of our conference call and information included in our press release issued today are available at www.tortoiseadvisers.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 TTO'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 including the annual report on Form 10-K. These documents can be accessed through the investor relations section of our website. We do not update our forward-looking statements.

I'll now turn the call over to David Schulte, who has been Chief Executive Officer of TTO since its inception. He is also a Managing Director of Corridor InfraTrust Management and a founder, Managing Director and Investment Committee Member for Tortoise Capital Advisors.

Thanks for joining our call today. Tortoise Capital Resources Corp. as we refer to it by its NYSE ticker, TTO, continues to execute on its strategy to become a real estate investment trust or REIT, investing primarily in energy infrastructure assets. As a reminder, TTO is presently externally managed by Corridor InfraTrust for whom Rachel works, who has been given a mandate to originate REIT-qualifying energy infrastructure investments for TTO

As an asset management Company, Corridor is owned by its management team, Montage Investments, and Tortoise Capital Advisors, our affiliates. TCA supports our efforts with market research, investment screening, and by monitoring current public and private securities, including serving as observers or board members for our private company holdings.

I focus on that because the sale of High Sierra to publicly traded NGL Energy Partners for cash and units has had a major impact on our performance in the last quarter. Thanks goes to the TCA team and our coinvestors in High Sierra for their perseverance through the private equity cycle with the company to a successful exit.

Although TTO still holds NGL units, we believe this sale will ultimately provide us with a return well within the target range of our initial expectations for the High Sierra investment and we are very pleased with the results. We hope to see our other private holdings matriculate to provide similar benefit to our shareholders in coming years.

The High Sierra sale also creates additional liquidity in our portfolio, with now less than 20% of our total invested assets held in private securities, VantaCore and Lightfoot. The public MLP securities provide us a source of funds for future real property asset acquisitions, while maintaining a stable distribution for our shareholders.

As a postscript to the High Sierra investment, we first met the team in 2005 before they completed their first acquisition. At that time due to TCA's lack of a suitable funding source, we referred them to their initial private equity investors. Subsequently High Sierra became the largest single investment in TTO, our private investment vehicle.

Now as a publicly traded business development company, TTO used distributions from High Sierra as well as our other private investments to satisfy public market investor requirements for current yield for a portion of their returns. In recent years many of our investments including High Sierra were unable to provide us with distribution certainty, creating challenges for TTO to pay a predictable distribution to its shareholders. This in turn has led investors to look to NAV as the best indicator of value potential for TTO.

Since our year-end 2011, thanks to be successful exit from High Sierra and other improved performance, our stockholders' equity has increased approximately 10%, plus we've paid out a distribution of approximately 4%. This has been a very solid year of performance for TTO, while positioning us to execute on our lower volatility strategy.

Our current strategy is to target acquisitions of new assets on terms that enhance our distribution stability and provide visibility of modest distribution growth. We believe that in today's market the ability of a company such as TTO to provide reliable distributions will ultimately be rewarded by investors.

We believe the return profile is consistent with expectations of infrastructure investments generally and competitive with other REITs and utilities broadly as well. If we are successful, we believe that our distribution will be rated as lower risk and therefore our investors will have a better opportunity for capital appreciation than if we had stayed the course in private equity.

Ultimately we believe that the REIT structure will offer investors transparency to the cash flow of underlying assets, tax efficiency and will be suitable for investors who desire the stability of energy income equities, but which prefer to avoid the character of income and other compliance challenges posed by K-1s that come along with owning partnerships. The structure is also suitable for those investors who prefer not to invest in closed-end funds, such as institutions with mandates that do not permit such structures.

I want to mention the recent trend of companies that have converted to the REIT structure as background information. A number of companies have recently announced their expected conversions including Iron Mountain and Macroplastique Inc. Equinix Inc. Some have already successfully made the transition including Warehouser and American Tower. Although none of the companies are focused on energy infrastructure, there are some key considerations worth mentioning that drove their decisions.

Generally these companies have decided to convert to a REIT because of limited investment opportunities under their existing structures, because the cash flow generation capability of their business was fairly predictable, and because the tax efficiencies available to REITs, and because the IRS has continued to broaden the type of assets that qualify for inclusion in a REIT. These are all consistent with TTO's decision to make the REIT strategy transition.

The trend of new companies converting to a REIT is providing increased investor attention on specialty REITs where we believe TTO will be well-positioned in the emerging category of infrastructure assets, as opposed to traditional commercial or residential real estate from a comparative standpoint.

TTO's transition in strategy, although similar, is not in us exactly comparable to the recently announced REIT conversions. Most of those companies own assets that are already REIT qualifying and are converting their legal and tax structures to attain tax efficiency. TTO on the other hand is seeking to acquire REIT qualifying energy assets. Compared to the lengthy timeline of conversion companies, we believe we are on track to meet our REIT goals with a current pipeline of potential projects.

We are at various stages of diligence and discussions with owners of quality energy assets. We also have significant initial inquiries from asset owners that can add depth to our pipeline in the future. The assets we are reviewing include traditional energy production support assets, such as pipelines and storage facilities; electric distribution to and from energy production regions and end-users; and renewable assets where portions of the infrastructure satisfy REIT criteria.

Our ability to fund these projects is based upon the liquid assets on our balance sheet, potential leverage on the projects themselves and access to equity capital markets. We will endeavor to only issue equity when the proceeds are used to grow the long-term distribution for all of our shareholders. This is the model that we have successfully executed across the Tortoise platform of investment companies, and the model used by the most successful Master Limited partnerships and REITs.

I would like next to turn to an update of our private holdings.

The fair value of VantaCore Partners LP increased $1.5 million or approximately 16%, as compared to the fair value at May 31. The increase is attributable to their continued improved performance, mostly driven by a incremental results of Laurel Aggregates, as well as the success of their cost-cutting initiatives and price increases that have gone into effect.

Consistent with its quarter ended March 31, 2012 however, VantaCore was unable to meet its minimum quarterly distribution in cash for the quarter ended June 30. Therefore the common and preferred unitholders of which we are one, elected to receive their distributions as a combination of $0.30 per unit in cash and the remainder in preferred units. TTO received approximately $338,000 in cash and 12,600 additional preferred units during the three-month period ended August 31, 2012.

The fair value of Lightfoot Capital Partners or Lightfoot at the end of our quarter increased by $60,000 compared to the previous quarter driven by improved performance. For the second-quarter of 2012, Arc Terminals, their primary subsidiary, paid a full distribution to Lightfoot.

Lightfoot in turn declared and paid a quarterly distribution of $0.12 per unit in September of 2012, approximately 64% of the amount it received from Arc. The remainder was retained by Lightfoot for outstanding due diligence costs should a potential acquisition not close. If the transaction does close, Lightfoot is expected to distribute the previously retained amount.

TTO's wholly owned subsidiary, Mowood, is the holding company of Omega Pipeline or Omega. Omega's results for the first nine months were moderately higher than originally expected as the base business realized higher margins. In addition, revenues from several construction projects were recognized in the third quarter which made a significant contribution to overall year-to-date results. Omega anticipates that full-year results may be higher than planned, as the base business is expected to achieve stability while additional revenues from construction projects are expected to be recognized before year-end.

I'll now turn the call over to Becky Sandring, Treasurer and Chief Accounting Officer of TTO, for a discussion of our financial results. Becky?

Thanks, Dave. Friday evening we filed our 10-Q and issued a press release highlighting important financial information. The 10-Q reports TTO's third-quarter 2004 financial results. Comparable prior-year financial statements presented in the 10-Q, should be read in conjunction with the management's discussion and analysis where supplemental information is provided on Mowood's performance.

Items on the consolidated statement of income for the period ended August 31, 2011 have been reclassified and aggregated to conform to the presentation of results of operations for the period ended August 31, 2012. There was no impact to net income or earnings per share.

Due to our change in strategy, income from investments securities is now reported in other income. Components of cash flows for the period ended August 31, 2011 have also been reclassified and aggregated to conform to the presentation of cash flows for the period ended August 31, 2012.

The shareholders equity per share was $10.91 as of August 31, 2012, compared to last quarter's $10.47 per share. The increase was due in part to the sale of High Sierra Energy and increased valuations for the remaining private securities, net of increased deferred tax liability for the quarter.

The legacy public and private securities portfolio is still subject to fair value measurement on a quarterly basis and makes up the majority of our total shareholders' equity per share. As a reminder, we, along with our independent valuation firm, review all of our private company financial statements as well as other meaningful information in arriving at fair value.

The fair value of the investment securities portfolio at August 31, 2012 was $76.8 million, with $19.5 million of private securities and $57.3 million of publicly traded securities. TTO's total cash was approximately $11.8 million as compared with $3 million last quarter. During the quarter, the composition of the portfolio changed, with publicly traded securities now accounting for 59% of invested assets, excluding short-term investments as of August 31, 2012.

Until we adopt other REIT cash flow metrics, we believe the following amounts, which are provided in the 10-Q financials and management's discussion and analysis, are helpful in evaluating and predicting whether TTO is capable of earning its distribution. For this quarter, we reported investment securities distributions received of $940,000 net of an operating loss of $213,000 plus depreciation of $247,000 totaling $974,000.

As new owners of NGL, we were entitled to one-third of the NGL distributions for NGL's fiscal quarter ending June 30, 2012 and expect to receive the full NGL distribution in the next quarter.

We paid a third-quarter distribution of $0.11 per share to shareholders of record on August 24, 2012 totaling approximately $1 million. We are confirming our guidance that we expect to pay not less than $0.44 annualized from economic earnings. We expect that receipt of the full NGL distribution next quarter will sufficiently cover our annualized distributions to shareholders.

With that, I will now turn the call back to Dave Schulte for final comments.

Thanks, Becky. Last week TTO filed an 8-K announcing that David Haley, our co-Founder at Corridor and our partner, was resigning from his role as Senior Vice President due to personal reasons, effective last Friday, October 5. David has also resigned from his role as Director at Corridor.

On behalf of Tortoise and the Corridor team, I want to thank David for his service as both a member of the management team and as an officer of TTO and wish him the best in his future endeavors.

With that, we will close the formal presentations. Operator, could you now open for questions?

(Operator Instructions). Cathleen King, Bank of America.

Thanks, good afternoon. First question just around Lightfoot, wondering if you guys can comment on the outlook for M&A there? I know you kind of mentioned something in that regard in your initial comments.

Lightfoot has their primary owner and management team a group of individuals that we have had a tremendous amount of success with in the past investing and if you remember, IRP was one of our investments that we have done very well with. They have executed our terminals as a platform to buy and build a business in oil refined products and chemical storage and terminalling and they continue to have a tremendous amount of deal flow, I think are being very selective about where they place their next asset acquisition dollars.

They are well funded by private equity sources as well as lenders and we have been following their progress as an observer on the Board but I can't comment specifically on any particular timeline for an acquisition other than to say the team is very busy and full up and we are confident they will continue to be successful in their acquisition strategy.

Okay, thanks. And then can you just remind us the process for selling those NGL units at some point, what you need to do before you can start doing that?

We have available to us Rule 144, which after a six-month holding period results in all units being freely tradable. We have a decent block, 1.2 million units as you can appreciate is not an easy thing to sell and we would never imprudently liquidate those. We don't need to.

Instead we think we would look for an opportunity where there might be a liquidity event at the company using -- including our shares might be helpful to them in achieving an offering scale. Or alternatively there are other institutions looking for blocks and once these are tradable, there might be an opportunity there.

So we will be very judicious about it but look for things that would not adversely affect the market of the underlying securities.

Okay, got it. Thanks, Dave. Last question as far as the dollar amount of assets that need to REIT qualifying for you to qualify as an REIT, is like $150 million still a good number there or has that changed?

It has changed a little because now that we have liquidity on High Sierra, we have the ability in a reasonable timeframe to possibly use more of our balance sheet securities for the conversion. But I think it is reasonable to think of $150 million still as a number we are looking for that would enable us to preserve the existing assets on our balance sheet and use those for the next possible acquisitions down the road.

So $150 million is a good size for us. We could technically achieve it on a lower number if we were able to gain liquidity inside of our portfolio. So we frankly have a little more flexibility to smaller size and still get there but we are targeting the $150 million or above.

Okay. Thanks a lot.

(Operator Instructions). There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Thank you all for dialing in and our next call will be around the end of the year depending on our acquisition status. We will have our normal year-end call, but there may be another call at the beginning of the year just to outline our strategy for 2013. In the meantime, thanks for your attention and we will keep trying to execute our strategy. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.