CorEnergy Infrastructure Trust Inc (CORR) 2018 Q2 法說會逐字稿

Greetings, and welcome to the CorEnergy Infrastructure Second Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Lesley Schorgl, Manager, Investor Relations. Thank you. Please begin.

Thank you for joining CorEnergy Infrastructure Trust's Second Quarter 2018 Earnings Call. I'm joined today by David Schulte, CEO and President; and Rick Green, Executive Chairman. As a reminder, the presentation materials for this call as well as information included in our press release issued Wednesday and an audio replay of this conference call will be available on CorEnergy's website.

The statements made during the course of this presentation that are not purely historical may be forward-looking statements and are subject to the safe harbor protection available under the applicable securities laws. 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 are available on the Investor Relations section of our website. We do not update our forward-looking statements. Reconciliations between GAAP and the non-GAAP results, which we discuss on this call, can be found in our related earnings release and 10-Q filing.

President and CEO, Dave Schulte, will now speak to you about CorEnergy's second quarter and recent events.

Thank you, Lesley, and thanks to everyone for joining us on the call today. Last week, CorEnergy declared its 12th consecutive $0.75 quarterly dividend. As previously announced, a tenant of our largest asset, the Grand Isle Gathering System, is being acquired by another Gulf of Mexico operator, Cox Oil. The transaction is subject to Energy Gulf Coast shareholder approval, and the proxy indicates an expectation that the transaction will close in the third quarter of this year. The MoGas Pipeline filed its general rate case with the FERC at the end of May, and that process is progressing as expected.

Finally, our Board of Directors authorized a repurchase program for up to $10 million of preferred stock at opportunistic buying points. Now we would expect to use excess cash flows such as the $1.1 million of participating rents received from the Pinedale LGS for this program. Any stock repurchases of this type would be subject to the covenants under our credit facility.

On Slide 4, we lay in our quarterly financial results. Our diluted net income and NAREIT FFO were consistent sequentially, with FFO and AFFO up from last quarter. Our AFFO coverage ratio to dividends for the quarter was at 1.38, again, lower than our long-term target of 1.5:1 due to the straight line accounting adjustment, which will continue for the next 2 quarters, related to the new accounting policy implemented on January 1, 2018.

Now I want to pause on the excess coverage because some investors believe it is a source of potential dividend growth, and it is over a certain threshold, which is the target we've described. However, as we've discussed in the past, a portion of rents received from the use of our field-level pipeline assets represents capital recovery. And thus, CorEnergy retains that cash flow for a debt repayment and reinvestment in income-generating assets rather than paying it out in dividends. We have also previously said we intend to utilize participating rents largely for the same purpose. These rents reached $1.1 million in the second quarter. And with little excess debt to pay down, CorEnergy could benefit from opportunistically using these excess cash flows to repurchase certain securities. And the annualized GAAP between our current AFFO to dividend coverage ratio in our stated target was used as our measure to determine the amount of repurchases our board authorized us to undertake.

Turning to Slide 5. You'll see that CorEnergy's capital structure remains largely unchanged from year-end and the first quarter of 2018. Our total debt to total capitalization ratio is at the low end of our target range at 25%. And our preferred shares to total equity is currently under our target of 33%. Now our credit facility is borrowing base driven and we had $146 million of availability at quarter-end, which we intend to prudently manage considering the status of our borrowing base assets. To be clear, it is our intention to utilize balance sheet cash, not the revolver, as a source of funds to repurchase preferred shares in the open market. And even with the repurchase program we're announcing today, we believe we have ample liquidity to act on potential transactions that we're seeing in our pipeline without a financing contingency.

On Slide 6, we'd like to draw your attention to recent trends in the REIT market. Over the last several years, investors have continued to gain awareness of nontraditional REITs, which focus on assets that differ from traditional retail office, residential and so on. And following the real estate's classification as a separate GICS sector and the 2016 IRS regulations defining real property qualifications, investors have used REITs to diversify their portfolios and more companies are forming as or converting to the REIT structure. The specialty REITs have outperformed the broader REIT markets, and indices are now including a wider range of REITs within them. Currently, CorEnergy's market cap disqualifies it from a number of these large indices, which may act as a benchmark for other REIT funds. But as we continue to gain scale, we believe we could see additional demand for our stock due to future inclusion in indices and the related fund flows.

We'll finish with a recap of our 28 initiatives on Slide 7. We anticipate receiving notification from Zenith Energy on their future expected use of the Portland Terminal in the coming weeks, and we'll update the market accordingly. Our 10-year Utility Energy Service Contract at Fort Leonard Wood was executed in June. We have since held kickoff meetings with the Department of Defense and began the evaluation of many projects that would provide for comprehensive energy and water efficiency improvements. We expect to implement these projects by the beginning of next year with incremental income beginning to be realized by the end of 2019. And we'll continue to monitor the progress of MoGas' rate case with the FERC, and we maintain our expectation to complete 1 or 2 acquisitions within our target range of $50 million to $250 million by year-end.

I'd now like to open up our line to questions.

(Operator Instructions) Our first question comes from the line of Barry Oxford with D.A. Davidson.

When you guys are looking at the share buyback versus doing a major acquisition, how should I be thinking about that? Or how do I reconcile those 2 things?

Thanks for the question, Barry. And it's one that we -- it's been quite a bit of time with our Board of Directors and internally thinking about as well. It's clear to us that when we receive excess cash flows based on rents over and above our dividend level, that a portion of that is return of capital. And it comes in a little bit a quarter, not all at once. So what the share repurchase program permits us to do is have flexibility around using those proceeds to reduce our risk on our balance sheet. Now we don't have any debt to repay early. We've got scheduled debt maturities. The preferred offer is the most flexibility in that regard. And really, these are very modest amounts. As we tried to emphasize on the call, we're maintaining a significant amount of availability in our revolver. And these modest quarterly changes in cash flows are just an exercise in prudence on our part to manage the extra cash that -- coming back our direction.

Right, okay. So it'll be more mild in nature. It wouldn't be substituting for an acquisition.

No, we don't believe so. We -- that's a fair question. We're not trying to signal that to anybody. We're just trying to prudently manage the cash that is in excess of return on investment that is recognized in our rents.

Right. And that should be an accretive activity, I would imagine.

We believe that it is, yes. Not materially accretive but it certainly is accretive.

Right. Sure, sure. When you look at, let's just call it, January 1 of this year and you look kind of at the number of projects for acquisition that you're looking at, how does that compare with what you're looking at today?

We ended the year, and we mentioned this on our call, with several deep dives last year and a few that we're carrying over into this year. Those projects that carried over for one reason or another have not proceeded through either diligence reasons or otherwise. And the -- but what I would say is that our activity level is much higher today than it was at year-end. And just for reference, we've reviewed a number of transactions that resulted in 7 indications of interest just this year. Four of those are still being actively worked and 3 were dropped by either us, or on pricing purposes, not of interest to the counterparties. So we are -- our level of activity today is as high as it's been in the last 12 months.

Have you sent anything out for proposal? Not necessarily LOI, but proposal.

Yes. The 7 that I mentioned were proposals. We -- and 4 of those are still being actively worked.

Right. So you're working -- so with those 4, you're working towards an LOI with, hopefully, at least one of them, theoretically?

That would be our process. Typically, an indication of interest scopes out the acceptability of the assets based on the information that we have, our thoughts around pricing and scale, and then the counterparty's assessment of that option versus other things they might be thinking about. At some point, we would expect a letter of intent to provide exclusivity, at which time we then start spending money and dedicated effort towards getting to closing.

Got you. I think that's -- I think it sounds like you're in a better spot when it comes to acquisitions than you were, let's just say, at the beginning of the year.

Barry, the -- and thank you. The process has been one of building. We raised new equity, of course, a little over a year ago. And there's fairly long lead times on a lot of our projects, which is consistent with our history. But our activity level today is higher than it was 12 months ago and it's been a relatively steady build.

(Operator Instructions) Our next question comes from the line of Selman Akyol with Stifel.

How long do you anticipate that it would take you to execute on the buyback if you fulfilled that whole $10 million?

I'll probably be very circumspect about it, Selman, and it's a 1-year authorization. So periodically, over the next 12 months, we would expect to execute that. And of course, if in the meantime something came up that we had a different use of the cash, we could deploy it in income-generating assets. That's part of what we mentioned at the outset, is that purpose can be either husbanding back for debt repayment or deleveraging or redeployment. So we're not in a hurry to go spend it.

I got you. I guess what I was trying to reconcile in my mind is you talked about sort of the return of the capital and this is the way you would deploy it. And is the return of capital that much of $10 million a year?

It is. Yes, our coverage ratio is about $1 a share with 11 million shares outstanding. It's about $11 million a year.

So that's what you're looking at, okay. I got it.

That's what we're looking at, yes.

Okay. And then can you just remind me on the outcomes of Zenith? They're currently leasing from you. They have the option to buy the asset or just continue leasing or can they just turn it all the way back as well?

All of the above. And it is -- and base lease was 15 years with an option in their favor to purchase the asset at a predetermined price. But they also had 5-year windows where they could terminate the lease, and we're in that -- one of those 5-year windows today. If they do terminate, there's a termination payment as well as a 12-month runway of continued rents. So that would give us time to try to assess options if that was terminated.

Got you. And then when do you expect to have this notice, before the end of the third quarter?

September 1 is the date that we have extended it to. And we would -- so would expect this to be resolved in the third quarter.

Our next question comes from the line of [David Adams], private investor.

Dave, I had a question about the Cox taking over of Energy Gulf Coast? Is there -- are there any provisions for material changes in that lease occurring through the transaction of the change of ownership?

We have not spoken to Cox directly. They're not yet an owner of the business. And so we wouldn't expect to have direct contact with them until after closing. In the meantime though, we have access to public information that they filed in the proxy -- that Energy Gulf Coast filed in their proxy, excuse me. There's no contingencies in the purchase price or the transaction closing that would have -- that have any implications for us. So -- and our lease is assumable as is, so they don't need our permission to proceed either. So we don't expect any changes.

And do you foresee -- I don't know, do they control other assets in that area? Is there a chance of other relationships building through them?

Well, they do control other production assets in the shallow Gulf of Mexico, which is one of the reasons that they are an attractive party and a qualified party for Energy Gulf Coast to deal with. At this time though, we've had no direct contact with them. And so we don't anticipate any -- we don't -- we're not aware of any potential additional relationship opportunities there. It'd be speculative at this time.

Okay. And can you fill me in on the rate case? What are the -- if the rate is not approved, what is the impact here for CORR?

This is Rick Green. On the MoGas rate case, the way that works is that we filed for a $20 million increase and that would go into effect December 1, and we'll continue to work through the process. That could go to a spring/summer of 2019. But ultimately, there'll be a decision by the FERC Commission that will give us our $20 million or something else. It -- you really can't speculate what that is. And we'll simply -- if it is different than $20 million, we'll make an adjustment off the rates that were put into effect and that will be the amount going forward.

And would you see any outcome of that decision affecting the ability to pay the dividend going forward?

No.

Thank you. We have no further questions in queue at this time. Allow me to hand the floor back over to management for closing remarks.

Thank you, everyone, for tuning in today, and we appreciate that we've had a relatively uneventful quarter, but we're busy working on growing the portfolio and look forward to reporting more about that throughout the rest of the year. Thanks, again.

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