CORR CorEnergy Infrastructure Trust (6.49)

CorEnergy is the first publicly listed REIT that focuses on energy infrastructure. The REIT invests in midstream and downstream energy assets that perform utility like functions. Examples are pipelines, storage terminals, transmission etc.

Recent presentation:

In a nutshell, the company is applying a carry trade, if return on assets > cost of capital then it should provide fairly steady returns. It is currently trading with ~8.5% dividend yield and ~10x FFO/Sh.

I found this idea through twitter by @TMFDeej and subsequently he tweeted this article from Seeking Alpha which does a very good job of summing up the position:

My summary is as follows:

1) Market valuation is depressed because it’s assuming volatility of the underlying tenants due to lower energy prices. The latest acquisition (GIGS) is owned by EXXI which has been struggling as of late.

Counter argument is that the assets are vital to the tenants and energy prices would have to be dramatically lower for tenants to cease operations. The author believes that number is around $20/bbl.

2) The author also assumes that the GIGS acquisition would be accretive and raise FFO to ~0.90/sh and therefore it is trading 7x FFO.

3) A risk the author does not go into is interest rate risk. This is a similar risk as my previous idea in IRT (which incidentally went down significantly after posting and I continue to like.) I did some looking around about performance of REITs in rising interest rate environments and found some interesting results:



Of further interest is in the comment section:

If you look at the trailing ten year total returns of the NAREIT All Equity REIT index since it’s inception in 1972, there has never been a period when the annualized total return has dropped below +5%, and it was only for a few months during the credit crisis. If i could communicate anything through our monthly write-ups, it would be that it is very difficult to lose money on high quality commercial real estate over a full cycle. The beauty of REITs is that they own increasing streams of cash flow with properties that tend to appreciate over the long term. Short term movements may create trading opportunities, but the long term thesis has worked historically, and i don’t see that changing anytime soon.

So in conclusion, this company is offering a very attractive dividend on assets that should provide stable to rising cash flow dependent upon the stability of the tenants. To be honest, I’m not sure how to validate the authors’ claim on EXXI and oil prices, but will be an interesting learning opportunity.

CORR CorEnergy Infrastructure Trust (6.49)