CorEnergy Infrastructure Trust's (CORR) CEO Dave Schulte on Q1 2014 Results - Earnings Call Transcript

CorEnergy Infrastructure Trust Inc. (NYSE:CORR)

Q1 2014 Earnings Conference Call

May 13, 2014 2:00 PM ET

Executives

Katheryn Mueller – IR

Dave Schulte – CEO and President

Becky Sandring – Chief Accounting Officer, Treasurer and Secretary

Rick Green – Chairman

Analysts

Craig Mailman – KeyBanc Capital Markets

Michael Blum – Wells Fargo

Operator

Greetings, and welcome to the CorEnergy Infrastructure Trust First Quarter 2014 Earnings 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.

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

Katheryn Mueller

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 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.

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 a 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 that remains focused on providing reliable cash dividends at a growing rate to 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 tenants’ use, but it’s only done if accretive to our long-term growth.

We believe our position 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 all with our expectations for the balance of 2014.

Our first quarter accomplishments including, increasing that annualized dividend guidance, by the way we went from $0.44 a share dividends in 2012 to $0.50 2013. Our first year, we believe we qualify as a REIT. And we’ve increased the dividend at a run rate of $0.52 for 2014. That’s a 4% increase over the prior quarter, the new baseline we created in 2013 and an 18% increase over our dividend as a BDC, which is what we promised investors we 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 the applicable tax will continue an effect for subsequent taxable years. And as a result of our REIT election we now included in the FTSE, NAREIT, all REITs index and also will be joining other REITs presenting at the industry association or NAREIT, REIT week investor forum held in New York as a presenting company in early June.

As a publicly lifted REIT, we believe we provide institutional friendly access to U.S. 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 industrial friendly 1099 and can be owned in any account individually or institutionally.

Last, we’re active on the investment side, expanding our asset portfolio with two new transactions. We funded the acquisition and upgrading of the petroleum products terminal facility on the West Coast and provided acquisition at construction funding to solve our disposal properties in Wyoming extending our footprint in that state, which we discussed on our last earnings call.

Turning to our portfolio of assets for the first quarter update on slide 4. The REIT qualifying assets currently our portfolio continue to meet our investment criteria listed on this chart. There are fixed assets 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 Mowood all performed as expected.

Our outlook for Pinedale is positively impacted by Ultra’s announcement of increased drilling activity, well 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 a drilling of a 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 added to our coverage and we’ll only be paid out if it’s being 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’re also very pleased to complete two transactions, with the closing of Portland Terminal facility and the Black Bison transaction in Wyoming. The Portland Terminal facility is our fourth energy infrastructure asset, let’s see Arc Terminals has a track record of successful value creation in the term link 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 of 2014, we become eligible for participating rents, depending on the volume of growth of hydrocarbons going to that facility. In March, we closed a transaction of high-end saltwater disposal properties and related capital improvement projects.

This transaction type if you look along the bottom of the chart, a secured financing represents another method of refinancing, in addition to the participating operating leases and our taxable to the year.

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

Becky Sandring

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 our 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 of 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 year 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 non-controlling interests, so are applicable to our common shareholders. As Dave previously mentioned, we announced the first quarter dividend increased from $0. 125 to $0.13 which is payable to CorEnergy’s stockholders on May 22, 2014.

This distribution was prorated to $0.129 to the partial quarter following the confusion of the Portland Terminal facility acquisition which closed on January 21, 2014. We believe our run rate of the 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 REIT.

As a result of this change, the dividend payment scheduled 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 their earnings of the quarter just ended. Dividend payouts maybe 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 comparison is more representative with where the business is and that’s more relevant to assessing dividend payments.

The growth of our portfolio is evidenced by the graph on the follow right, which depicts our total asset. 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 as a result of the Portland Terminal facility acquisitions. 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 volumes against the facility. We would expect to utilize the balance sheet resources including prudent leverage when available supplemented with accretive equity issuance as needed for future acquisitions.

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

Dave Schulte

Thanks Becky. Let’s turn to the slide untitled overheard in the corridor, page 7. I hope to use this opportunity during these calls to provide some insight into what’s on our mind has managed the team. As we nearly 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 the 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 vim diagram there are three different sources of capital presented on the chart. Traditional sources which will be capital markets and M&A by that I 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, what all these have in common that is providing capital to the energy company. Outside of the common areas, our features will attribute 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, control of their assets is an important attribute. As a REIT, we provide funding for that infrastructure to long-term triple that participating leases, leaving the asset available to the operator for their exclusive views.

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 their return on invested equity capital for these energy companies. I hope that’s helpful in illustrating how we’re similar, but also different of other sources of capital.

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

And on the benchmark yield our 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 beginning of reasonable expectations for a 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 up to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your questions.

Craig Mailman – KeyBanc Capital Markets

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

Dave Schulte

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

Craig Mailman – KeyBanc Capital Markets

Can you remind me, do you guys measure every quarter or how is that measured?

Rick Green

It’s measured monthly and over years, so we – so far this year were aware of January and it has not reached the participating threshold yet.

Craig Mailman – KeyBanc Capital Markets

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

Dave Schulte

I like to refer you to that slide 4 that has pictures of our existing assets and their attributes and I guess it’s a good place to use to talk about what we’re looking at today. We’re still with the long term perspective that our – that we’ve articulated that our investment pipeline should generate opportunities while we make start smaller to be between $50 million and $200 million upon realization of the full potential of the projects. For example how to free the Portland where we started at $40 million, but we have a $10 million construction project, so we believe that’s 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 the Pinedale which would be pipeline systems. We’re actually looking at isolated transmission opportunities, we have a utility like assets that we’re looking at like Omega and we other terminal-only assets that we’re reviewing. So every one of those asset types, as presented itself in the last quarter and we have to mentioned that we’ve got a drawing list of potential SWD projects we’re reviewing, because we did one transaction and announced a new 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 where 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 at the end of the year.

Craig Mailman – KeyBanc Capital Markets

Do you attribute the uptick and kind of opportunities you’re seeing just you guys getting more familiar with the players out there, people getting more familiar with you or is there growing acceptance of kind of this financing vehicle?

Dave Schulte

I think it’s the latter, and that most of our transactions today are originated by us, they are not auctions. And we are working on, really to look at the vim diagram where are we best suited, but we’re not the same as other financing options. And that drives us towards companies who want to retain operating control that perhaps don’t want additional, throw additional common equity in their current environment to fund their CapEx programs by which also don’t want that in the balance sheet. Well that is our bulls eye that is an operating lease for an upstream energy company, which we believe can increase the return on invested capital for their company.

We also believe that can work for virtually any company, MLP or utility if you want to provide using operating lease. But our focus right now is gone on upstream companies or companies that have otherwise constraints on their ability to raise equity.

Craig Mailman – KeyBanc Capital Markets

Great. Thank you, guys.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Michael Blum with Wells Fargo. Please proceed with your question.

Michael Blum – Wells Fargo

Hi, good afternoon, everybody. Question, I imagine you’ve seen the latest proposed regulations out of the IFRS sort of clarifying what could real properties 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 consider a real property under that regulation assuming that passes?

Dave Schulte

Michael, once I did answer this for the very fulsome and wholehearted, we’re good under those regulations. Thank you for asking. We have reviewed those regulations with our TACT council and our accountants. They believe that the regulations are helpful to us and that they just affirm the positions we’ve taken and the definitions of asset type don’t based – 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’re safely within the guidelines in those regulations.

Michael Blum – Wells Fargo

Great. That’s all I have. Thank you very much.

Dave Schulte

You bet.

Operator

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.

Dave Schulte

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.

Operator

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

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