CorEnergy Infrastructure Trust Inc (CORR) 2015 Q3 法說會逐字稿

Greetings and welcome to the CorEnergy third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lesley Robertshaw. These go ahead.

Thank you and welcome to CorEnergy Infrastructure Trust's third quarter 2015 earnings call. I'm joined today by Rick Green, CorEnergy's Executive Chairman; David Schulte, CEO and President; and Becky Sandring, Treasurer, Secretary, and Chief Accounting Officer. The presentation materials for this call as well as information included in our press release issued Monday, and an audio replay of this conference call will be available on CorEnergy's website.

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 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 the 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 would like to turn the call over to President and CEO, Dave Schulte.

Thank you for joining our call today.

We closed on our acquisition of the Grand Isle Gathering System on June 30, so the third quarter represents a full run rate for all of our assets. The cash flows allowed us to increase our quarterly dividend to $0.15 per share or $0.60 annualized as expected. This is our fifth dividend increase since beginning our transition to a REIT in 2011, and we believe our stable contracted revenue from our tenants and customers will allow us to maintain our dividend even in this time of volatility of the energy markets.

In the quarter, we also established a reserve for a potential loss on our financing notes for the Black Bison saltwater disposal as well as earnings on those notes. We do continue to assess various investment opportunities as energy companies are open to exploring financing solutions such as ours. As of September 30, we had just over $100 million available for future investments, allowing us flexibility in the timing and financing of those acquisitions.

Finally, we announced that our Board approved a one for five reverse stock split, which will begin trading on December 2. We believe this action will help CORR attract a higher level investor interest due purely to technical factors while lessening our stock price volatility.

Moving to slide 4, you've seen this slide before, so I won't go through it. The main point is to reiterate that we are delivering on the fundamentals of our strategy. By direct ownership of assets with reliable in contracted revenues, the base of our strategy is an assessment of both the economic viability of the asset and tenant dependence on that asset. We have conviction that our payments will continue even if the ownership of the tenant changes during the term of our lease. That is because our assets are essential to accessing revenues and produce cash flows for the tenants. We own assets that will be expensive and difficult for an operator to duplicate.

Moving to slide 5, our revenue results from reservation charges and leases for the use of our assets. They are predictable because base rents from reservation charges mitigate commodity price risk, and volume risk while our participating rent allow for potential upside. A point we believe is integral to our identity as a REIT, but often misunderstood, is that the payments our tenants make to us are operating expenses.

These rents need to be paid in order for companies to access their revenue-producing assets, such as oil and gas reserves. This expense is paid before debt or equity investors receive their payments, so it's an important priority for our companies.

We complete a thorough due diligence process of the value of our assets over the useful lives and set contract turns to allow both the return on and return of our capital. That return of capital might come from the rents received or from the terminal value of the asset we own or both. Let's look at how we do this on slide 6.

Across the top you will see each asset that we acquired since we became a REIT, and the material customers or tenants of those assets. The range of cost of those assets to us is between $50 million and $250 million. That's consistent with the backlog of opportunities we have and have had since we started this effort.

The percentage of each of those assets for us is meaningful. For example, 30% of our assets are represented by the Pinedale LGS, but the percentage that those assets represent to our counterparties is not significant. We believe the enterprise value of our counterparty is the best measure of their economic dependency on our asset as well as their other assets. In an Ultra Petroleum example, that is $4.2 billion.

That enterprise value would result in only approximately 5% of their total value in that liquids gathering system. Similarly, that $257 million value of the Grand Isle Gathering System represents only 6% of the enterprise value of Energy XXI. Similarly, the annual cost of these assets in rent to those counterparties is not meaningful as a piece of their total expenses. The $20 million we received for Pinedale represents only about 3% of the operating costs of Ultra Petroleum, and that's about the same percentage for Energy XXI represented by the Grand Isle Gathering lease.

On the bottom of the chart, we consider whether we need to receive or return of capital during the term of our lease. For assets with finite lives, such as energy production back pipelines, we have scheduled return of capital as an expectation inside the rents we receive, as well as the potential additional terminal value at the end of the first lease term.

On the other hand, with Portland and MoGas. We expect terminal values to be consistent with our purchase price and so our leases there do not need to incorporate additional returns on capital in the rental stream. Sorting all of that out, we intend to only pay out the level of cash in dividends we believe to be sustainable after providing for our return of capital for those leases for which it is appropriate. Our Chief Accounting Officer, Becky Sandring, will next provide enough overview of our results for the second quarter.

Becky?

Thank you, Dave.

This week we filed our 10-Q for the quarter ended September 30, 2015. For the purposes of this call we have provided a few key financial metrics that we think will be helpful to you in evaluating CorEnergy's performance and expectations.

On slide 7, we show FFO as calculated by NAREIT, FFO adjusted to take out the effect of private equity, and adjusted FFO. A reconciliation of these measures to net income is provided in slide 14 of these materials. The third quarter AFFO is $0.20 per share on a fully diluted basis. The provision for loan loses associated with Black Bison increased expenses by approximately $7 million net of taxes, or $0.09 per share. To calculate AFFO, we add back the expense as it is nonrecurring in nature. The AFFO as presented is also after the reserve for interest income on the Black Bison financing.

Turning to slide 8, as we look at the slide, total assets have grown substantially since year end 2014 due to the GIGS acquisition. Quarter over quarter, assets remain stable at $690 million net of a minor negative impact from the saltwater disposal investments and depreciation.

Contribution margin is a measure of the earnings from our assets and operations, and the results have grown along with our assets. The large increase is attributed to higher lease revenues from the addition of GIGS to our portfolio, slightly offset by lower financing revenues. We believe the $20.9 million acts as a good quarterly run rate for the contribution margin from our assets. Annualized, we expect $85 million in contribution margin. This supports an estimated 12% return on our assets, which has increased from roughly 7% last quarter.

On the right, we present how our dividends per share have grown. Our Board declared a $0.15 per share of dividend for the quarter, or $0.60 annualized. This is net of our reserve for uncollectible interest.

Turning to slide 9, we have an overview of our capital structure and liquidity. As previously disclosed, we strengthened our financial structure in early July and our capitalization as of September 30 is summarized in the top half of the slide. Once again, the two ratios that we pay attention to remained within our targeted ranges. Our total debt to total capitalization ratio of 34% remained within our target of 25% to 50%. The second ratio is deferred to total rake you at 13% which is well below our target level of 33%.

Our liquidity in excess of $106 million at the end of the third quarter and again demonstrates our ample availability to act on investment opportunities without the need to raise additional capital through the markets. We have developed and maintained relationships with potential co-investors. Therefore, we are comfortable with our ability to pursue acquisition targets with financing that is most beneficial and accretive to our stakeholders.

And, with that, I will turn it back to Dave.

Thanks, Becky.

In our overheard in the quarter discussion on slide 10 we want to compare CorEnergy dividends with the dividend stability of other real estate investment trusts. We have been having many conversations with our investors about differences we might have from other REITs. As we pointed out on this call, some of our assets do have finite lives, unlike the typical office building our complex in REIT.

So, as we discussed, our rental stream and renewal expectations need to accommodate the potential for lower terminal value more appropriate at the end of the lease. If you think of our revenue stream as the top end of the funnel, and we would take out, not only our operating expenses, but the amounts of those rents necessary to protect our capital, return capital during the term of the lease. What then comes out the bottom of the funnel would be the amount we believe is a sustainable distribution, like every other real estate investment trust that pays a distribution today.

We do have, like other REITs, some level of inflation protection. We believe that an increase in inflation would have an upward bias on our contracts due to our CPI tied rent escalation and participating features in asset utilization or value, if any. So we believe that the distribution you receive is just as reliable as any other real estate investment trust.

Finally, on slide 11, CorEnergy's contracted rents on critical tenant assets underpin our dividend. Our contracts with our tenants and customers limit our risk to a volatile energy markets because rent is considered an operating expense, and will be paid and is necessary to receive, in order to get assets that generate revenue for our customers. As a critical expense, similar to utility costs, we believe we have a higher priority of payment due to our direct ownership of the underlying asset.

We set our rents to allow for return on and return of our capital where appropriate. The resulting dividends we believe our sustainable even after providing for return of capital for reinvestment in our asset portfolio. Finally, we've committed to not acquiring additional assets unless our shareholders receive benefits from that acquisition, and in the third quarter we delivered on that promise again.

I would like to open the call for questions. Operator?

(Operator Instructions)

Selman Akyol from Stifel.

Hi. This is [Corey Pratt] on for Selman. I had a question about the accounting treatment on the GIGS revenues. I saw that you are straight lining the revenue recognition over the life of the lease and so that incremental piece between the first year contracted payments and the straight-line amount, is that backed out in the FFO calculations at all?

No, it is not. The FFO calculations show it as a run rate. That's to help folks kind of understand what the coverage is on things. So we are not adjusting for that.

Okay. Got it. Thank you very much.

(Operator Instructions)

[Nick Brown] from [Zaslow and Associates].

Hi. I appreciate your comments about the criticalness of your assets to your tenants. I was just curious though, given Energy XXI's widespread news of their distress and sort of how you view the GIG System and the continued importance to them?

Sure. Energy XXI had their earnings announcement earlier this week and I think had a call where they described a process that is underway to exchange their debt and they have retired $900 million of face value of their unsecured debt at around $0.20 on the dollar resulting in material savings and interest expense which further reduces their cost per barrel of production and we believe enhances the long-term viability of that enterprise. The have done a fine job with their cost structure and that is one of the things we are most concerned about is are they bringing down breakeven operating costs to a level whereby we expect and they expect to continue producing?

And even at these oil and gas prices, it's still economic for them to continue production and so we are content with that asset today. And I think the illustration we gave of enterprise value is really important. All of their debt is dependent upon continued access to these reserves just like their equity holders. Now, the enterprise value of that company certainly includes reserves beyond the GIGs System, but the parent company as a guarantor on the lease and so we look at the entire enterprise value as relevant to the ability of the company to make our payments.

Okay. Thank you. That's helpful.

Thank you.

(Operator Instructions)

There are no further questions at this time. I will turn the call back over to management for any further or closing comments.

In closing, I guess I want to reiterate three key points. Our contracted lease payments are considered operating expenses for our tenants. I know we have talked about that before, but that means in our view they're senior to other financing costs and are necessary to access their cash flows. They are high up on the cash flow waterfall. These payments are small compared to the overall expenses. Our assets are essential and not expensive for our customers and tenants to operate, again we think reiterating the likelihood that we would continue to receive payments in any event. And, finally, after we replace our capital and provide for reinvestment we then deliver our dividends, so we believe they are very stable and have indicated an expectation and delivered on that expectation of growth over the long run. Thanks for your continued support of CorEnergy, and we will talk to you again next quarter.

Thank you. That does conclude today's teleconference. You may discontent your lines and at this time and have a wonderful day. We thank you for your participation today.