CorEnergy Infrastructure Trust Inc (CORR) 2014 Q1 法說會逐字稿

Greetings and welcome to the CorEnergy Infrastructure Trust first-quarter 2014 earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Katheryn Mueller, investor relations for CorEnergy. Thank you, you may begin.

Thank you and welcome to CorEnergy Infrastructure Trust's first-quarter 2014 earnings call. I'm joined today by CorEnergy Executive Chairman Rick Green, CEO and President Dave Schulte, and Treasurer and Chief Accounting Officer Becky Sandring.

An audio replay of our conference call and information included in our press release issued on Monday, 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 laws. 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 CorEnergy's first-quarter 2014 earnings call.

I'm pleased to discuss the results of another successful quarter. Our first-quarter financial results demonstrate our commitment to investing accretively, growing our FFO and AFFO per share, while prudently managing our balance sheet. Our investments continue to provide us with stable contracted revenues, allowing us to increase our full-year outlook to no less than $0.52 per share of dividends.

CorEnergy announced a first-quarter dividend increase and remains focused on providing reliable cash dividends at a growing rate through the following means -- internal contracted revenue growth through CPI adjustments and potential revenue participations; capital funding for projects that we own today, such as the Portland Terminal; and, finally, capital funding for new projects, which we can acquire or build for our tenants' use, but which will only be done if accretive to our long-term growth.

We believe we are positioned to experience all of these, internal growth and project growth, while continually evaluating acquisitions to augment our diversification and our long-term growth prospects.

Let me address some of the highlights on slide 3 of our quarter, along with our expectations for the balance of 2014. Our first-quarter accomplishments include increasing net annualized dividend guidance, and by the way, we went from $0.44 a share of dividends in 2012 to $0.50 in 2013, our first year we believe we qualify as a REIT. And we've increased the dividend at a run rate to $0.52 for 2014. That's a 4% increase over the prior quarter, that new baseline we created in 2013, and an 18% increase over our dividend as a BDC, which is what we promised investors we'd do in connection with the proxy statement to transition our Company.

We made a formal election to be treated as a REIT for the 2013 tax year. Our REIT election, assuming continued compliance with applicable tests, will continue in effect for subsequent taxable years. And as a result of our REIT election, we are now included in the FTSE NAREIT all REITs index. We also will be joining other REITs presenting at the industry association or NAREIT's REIT Week investor forum held in New York as a presenting company in early June.

As a publicly-listed REIT, we believe we provide institutional-friendly access to US energy infrastructure assets. The REIT structure is used by us because it's transparent to the underlying cash flows of the assets on a tax-efficient basis. It also provides an investor-friendly Form 1099 and can be owned in any account individually or institutionally.

Last, we were active on the investment side, expanding our asset portfolio with two new transactions. We funded the acquisition and upgrading of a petroleum products terminal facility on the west coast and provided acquisition and construction funding for saltwater disposal properties in Wyoming, extending our footprint in that state, which were discussed on our last earnings call.

Turning to our portfolio of assets for a first-quarter update on slide 4, the REIT-qualifying assets currently in our portfolio continue to meet our investment criteria, listed on this chart. They are fixed-asset intensive businesses with stable cash flows and limited direct commodity price sensitivity, potential growth opportunities, experienced management teams, and limited technological risk. Each of these assets provides what we believe to be long-duration visible cash flows capable of mitigating inflation risk through their CPI escalator and participation features.

There were no surprises in the first quarter with respect to our asset portfolio. Our low-volatility assets, such as the Pinedale LGS, EIP, and Millwood, all performed as expected. Our outlook for Pinedale was positively impacted by Ultra's announcement of increased drilling activity, where they've doubled their operated rig count from two to four. Ultra expects to run a four-rig program for the remainder of 2014 and this level of activity should result in the drilling of 107 operated wells, an 81% increase from the prior year.

Increased production and investment in the Pinedale offers potential upside in our participating rents. And we consider participating revenue to be additive to our coverage and will only be paid out if it's deemed sustainable. Now on CPI rent escalations alone, our rents have the potential to increase significantly over the next 13 years in the Pinedale asset.

During the first quarter, we were also very pleased to complete two transactions, the closing of the Portland Terminal facility and the Black Bison transaction in Wyoming. The Portland Terminal facility is our fourth energy infrastructure asset. Our lessee, Arc Terminals, has a track record of successful value creation in the terminaling business and you can read more about their history in their SEC filings or in their earnings release, which was issued yesterday. Beginning in August 2014, we become eligible for participating rents, depending on the volume of growth of hydrocarbons flowing through that facility.

In March, we closed a transaction to finance saltwater disposal properties and related capital improvement projects. This transaction type, if you look along the bottom of the chart, a secure financing, represents another method of refinancing, in addition to the participating operating leases and our taxable REIT subsidiary.

With that, I'll turn the presentation over to our Chief Accounting Officer, Becky Sandring, for a review of our financial results.

Thank you, Dave. On Monday, we filed our 10-Q and issued a press release highlighting our financial results for the quarter ended March 31, 2014. 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 Company now operates as a REIT, management believes that non-GAAP performance measures utilized by REITs, including funds from operations, FFO, and adjusted funds from operations, AFFO, also provide useful insights into CorEnergy's operational performance. This calculation is also detailed in our 10-Q filing.

FFO for the quarter ended March 31, 2014, totaled approximately $4.5 million, or $0.15 per share. AFFO for the quarter ended totaled approximately $4.2 million, or $0.14 per share. These measures are after payments made to our noncontrolling interests, so are applicable to our common shareholders.

As Dave previously mentioned, we announced the first-quarter dividend increase from $0.125 to $0.13, which is payable to CorEnergy stockholders on May 22, 2014. This distribution was prorated to $0.129 for the partial quarter following the completion of the Portland Terminal facility acquisition, which closed on January 21, 2014. We believe our run rate of FFO and AFFO will allow us to deliver annualized distributions of no less than $0.52 per share.

In 2013, CorEnergy changed its fiscal year as part of its transition from a business development company to a REIT. As a result of this change, the dividend payment schedule for calendar 2014 will vary from prior years. Going forward, the Company intends to maintain a quarterly February, May, August, November dividend payment cycle to reflect the earnings of the quarter just ended. Dividend payouts may be affected by cash flow requirements and remain subject to other risks and uncertainties.

Turning to slide 6, CorEnergy's total revenues and dividend distributions are shown quarter over quarter. We believe that sequential comparisons, rather than prior-year comparisons, is more representative of where the business is and thus more relevant to assessing dividend payments.

The growth of our portfolio is evidenced by the graph on the far right, which depicts our total assets. In December 2012, the major increase in total assets is attributable to the Pinedale LGS acquisition. The next major increase occurs in the first quarter of this year and is the result of the Portland Terminal facility acquisition.

We maintain a conservative leverage target of 25% to 50% of total assets. Currently, we have a $20 million revolving credit facility in place. As of March 31, 2014, there were no outstanding borrowings against the facility. We would expect to utilize balance-sheet resources, including prudent leverage when available, supplemented with accretive equity issuance, as needed, for future acquisitions.

With that overview, I will turn it back to Dave to conclude the presentation and lead us into Q&A.

Thanks, Becky. Let's turn to the slide entitled overheard in the corridor, which is page 7.

I hope to use this opportunity during these calls to provide some insight into what's on our mind as a management team as we near the half-year mark for 2014. With two transactions completed in the first couple of months of the year, formally electing our REIT status, building out our business development efforts, and delivering what we promised our shareholders for this both a stable and growing dividend, we believe we've turned a significant corner. We've made headway with investors, with energy companies that our REIT structure serves, and we've used this chart to provide an interesting perspective for how we believe our partners, mainly energy companies, view CorEnergy, and that is as a viable financing option.

Turning to the Venn diagram, there are three different sources of capital presented on the chart. Traditional sources, which would be capital markets, and M&A -- by that, think of selling an asset to an MLP -- provide fresh capital to an energy company to fund its operations. In the center of the three diagrams are what all these have in common; that is, providing capital to the energy company. Outside of the common areas are features or attributes unique to each of those. For example, in selling an asset to an MLP, you do obtain capital, but you also tend to relinquish operating control.

The CorEnergy solution offers access to capital without sacrificing losing operating control as part of the constraint of the transaction. We find that there is a large number of energy companies for which maintenance of control of their assets is an important attribute. As a REIT, we provide funding for that infrastructure through long-term triple net participating leases, leaving the asset available to the operator for their exclusive use.

Now like other sources of capital, we allow the operator to focus their remaining investment on high-returning core businesses which we believe will help the return on invested equity capital for these energy companies.

I hope that's helpful in illustrating how we are similar, but also different, from other sources of capital.

Turning to slide 8, to wrap up our presentation -- excuse me, 9 slide, the chart. Our enterprise value currently stands at approximately $291 million. This gives effect to the equity transaction we completed in January. The dividend yield of CorEnergy of approximately 7.6% is more than double the average yield seen across NAREIT equity REITs Index and the other indexes shown.

Now the benchmark yields are only part of the total return potential of these widely-held asset classes from institutional investors. Expected dividend growth rates would need to be added to each in order to obtain a total return estimate.

We feel that delivering a 4% return in a year, plus our 1% to 3% long-term growth rate, provides investors with the beginnings of reasonable expectations for long-term growth against which to balance our dividend yield.

With that, I'd like to thank you for your time this afternoon and open it up to questions.

(Operator Instructions). Craig Melman, KeyBanc Capital Markets.

Good afternoon, guys. Apologies if I missed this, but did you guys talk about at all any variable income from the Pinedale from more usage?

We suggested that there's likely to be more usage in 2014 because of the increased production activity. We haven't measured that, and if we do exceed it, we did indicate that we would likely retain it as coverage for our current dividend or excess coverage and only pay it out if it was sustainable.

Can you remind me -- do you guys measure it every quarter? How is that measured for you?

It's measured monthly in arrears. So we've -- so far this year, we are aware of January and it has not reached the participating threshold yet.

All right, that's helpful. And then just, Dave, the comment you had in the press release about broadening set of opportunities and $50 million to $200 million per project type, could you just maybe talk about what your guys are seeing on the opportunity side and kind of that per project, how many project types are we talking about?

I'd like to refer you to that slide 4 that has the pictures of our existing assets and their attributes. I think that's a good place to use to talk about what we are looking at today.

We are still with the long-term perspective that we've articulated, that our investment pipeline should generate opportunities, while they may start smaller, to be between $50 million and $200 million upon realization of the full potential of the projects. For example, I'd refer you to Portland where we started at $40 million, but we have a $10 million construction project, so we believe that fits within the range we've articulated.

Now looking across those charts, we are seeing some potential asset acquisitions that include assets of the type of Pinedale, which would be pipeline systems. We're actually looking at isolated transmission opportunities. We have a utility-like asset we are looking at, like Omega, and we have other terminaling assets that we are reviewing. So every one of those asset types has presented itself in the last quarter, not to mention we've got a growing list of potential SWD projects we're reviewing because we'd made the one transaction and announced any type of financing that we could use for those assets.

So, we are seeing activity in every single asset type on this chart that would aggregate us in the range of $50 million to $200 million. We are as busy as we've been since we started the Company in terms of reviewing potential opportunities and expect to be able to announce others between now and the end of the year.

Do you attribute the uptick in kind of opportunities you're seeing in just you guys getting more familiar with the players out there? Are people getting more familiar with you? Or is there a growing acceptance of kind of this financing vehicle?

I think it's the latter in that most of our transactions today are originated by us. They are not auctions and we are working on -- really if you look at the Venn diagram, where are we best suited, but we are not the same as other financing options, and that drives us towards companies that want to retain operating control that perhaps don't want to raise additional common equity in their current environment to fund their CapEx programs, but which also don't want debt on their balance sheet.

Well, that is our bull's eye. That is an operating lease for an upstream energy company which we believe can increase the return on invested capital for that company. We also believe that can work for virtually any company, any MLP or utility, if they want to provide -- use an operating lease.

But our focus right now has been on upstream companies or companies that have otherwise constraints around their ability to raise equity.

Great. Thank you, guys.

(Operator Instructions). Michael Blum, Wells Fargo.

Question, I imagine you've seen the latest proposed regulations out of the IRS clarifying what, quote, unquote, real property is going to mean for REITs. I guess the question is really kind of how you think that impacts you. What percentage of your assets would be considered real property under that regulation, assuming it passes?

Michael, for once I get to answer this with a very fulsome and wholehearted we're good under those regulations. Thank you for asking.

We have reviewed those regulations with our tax counsel and our accountants. They believe that the regulations are helpful to us in that they just affirm the positions we've taken, and the definitions of asset type don't -- are not based on useful life expectancy. They are more affirming of previous guidance that related to functionality of an asset and its type, and we are safely within the guidelines in those regulations.

Great. That's all I had. Thank you very much.

Thank you. We have no further questions in queue at this time. I would like to turn the call back over to management for closing remarks.

Thank you all for your attention. I know it's been a busy quarter. We look forward to talking to you again in a few months. Thank you.

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