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And the new mystery stock is...

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January 07, 2013 – Comments (9) | RELATED TICKERS: CORR

For a week or two now I have been alluding to a mystery stock that I have established an initial position in.  Some have tried to guess it, but to be honest with you it's so obscure that I'm not surprised that no one got it.  It's actually pretty finny, I haven't established a massive position in this one yet because I'm still researching it, but so far it seems like it was almost like it was tailor-made for me.  I'm not saying that it's the perfect stock, but it has all of the attributes that I personally love, a special situation REIT conversion with catalysts and a big dividend that seems to be out of favor at the moment because of a temporary situation...I laughed, I cried, it was better than Cats.

This new stock is actually everything that another company that I sniffed around for a while, Power REIT (PW) should be, but isn't (that's another interesting one, but for another day).

The new company that I have been buying is... CorEnergy Infrastructure Trust (CORR). 

 

 

 

CORR was formerly a closed-end fund (I've also seen it called a BDC, it doesn't really matter much at this point because it is not one any longer) called Tortoise Capital Resources (TTO).  I actually remember when the company initially went public several years ago.  As a yield hound, it popped up on my radar, but I decided to pass at the time.  

A little while ago it decided to shift gears away from owning securities in things like MLPs and REITs to actually providing funding to companies in the sector through sale / leaseback agreements.  It is attempting to become a brand-new type of REIT (pending) that is being created to own energy infrastructure.  Heck, if casinos and prisons can become REITs then companies in energy infrastructure should be allowed to.  Anyhow, Mr. Market absolutely hammered CORR when it announced a secondary stock offering to fund its first major acquisition in the sector. 

Normally I might be a little skeptical of relatively small a company that I had never really heard much about that claims to be transforming into something brand new like this, but it really is...it bought a liquid gathering system from our a company that I know well, Ultra Petroleum (UPL). That's a legitimate purchase.  It then leased back the system to UPL for fifteen years.  This isn't my favorite type of infrastructure asset because there can be some volatility with its revenue, but CORR was able to iron out a lot of that volatility by negotiating a guaranteed minimum of a $20 million annual payment for its use.  Alas, the high-end is capped as well at $27.5mm.  There is an adjustment for inflation in the cause as well. This translates to a cap-rate of 8.89% to 12.22%, which is pretty darn good in the current low rate environment.

Once cash begins flowing in from this investment, CORR plans to raise its dividend to $0.50/share, which would result in a yield of over 8% at today's share price.  Also, after the acquisition of UPL's assets is complete, it appears as though CORR will be trading for over a dollar less than the sum of the value of its assets, including the Ultra collection system and its legacy assets.  I suspect that this discount will shrink significantly once REIT status is approved and the lease-back cash flow begins to come in.

One concern about this investment is that CORR has external management.  One always likes to see ownership of a company that has a lot of skin in the game so to speak.  However, to me this concern is eased somewhat by the fact that Corridor InfraTrust Management, the new entity that was formed to manage CORR, is incentivised to increase the stock's dividend.  I have done some research on the operators of Corridor InfraTrust Management and they seem to have a decent amount of experience in the energy infrastructure sector.

Another risk is that CORR is technically not a REIT yet, but it is in the process of converting into one.  Should this conversion not be approved for some reason, that would obviously be a bad thing, but to me it seems reasonably likely that it will succeed.  The company that is managing CORR is taking all of the necessary steps to qualify as a REIT.  Furthermore, if private prisons and casinos are converting into REITs, I personally don't see why something that's as important as energy infrastructure wouldn't be allowed to.

I view this is an interesting opportunity to get in at the beginning of a REIT that is undervalued today and has the potential to grow significantly in the future. 

A big kudos to the REIT expert Dane Bowler whose Seeking Alpha article initially brought this situation to my attention.

CorEnergy: An Undervalued Play On Energy Infrastructure

http://seekingalpha.com/article/1083051-corenergy-an-undervalued-play-on-energy-infrastructure

CorEnergy Infrastructure Trust Announces Major Steps Toward Energy Infrastructure REIT Qualification

http://www.businesswire.com/news/home/20121210005462/en/CorEnergy-Infrastructure-Trust-Announces-Major-Steps-Energy

I have already purchased an initial position in CORR that I am considering adding to in the future.  I'd love to hear others' thoughts on this company.  Please chime in, the more the merrier.

Thanks for reading everyone.  Have a fantastic evening!

Deej

9 Comments – Post Your Own

#1) On January 07, 2013 at 7:12 PM, Mega (99.97) wrote:

You know I'm a skeptic (especially when it comes to investment ideas I didn't generate myself) but this sounds pretty great. I'll research further. Thanks Deej.

I actually scrolled past TTO yesterday when trying to guess your mystery pick. If my data source had updated the ticker and name, I might have had a fighting chance.

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#2) On January 07, 2013 at 7:18 PM, Mega (99.97) wrote:

Wait, was it on your scorecard since 12/31? Ha, I'm an idiot.

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#3) On January 07, 2013 at 7:30 PM, Mega (99.97) wrote:

So I was wondering why UPL is doing this transaction with a pretty high cap rate. I see that they reported gigantic non-cash losses the past two quarters and continue to be FCF negative. UPL's capital position is a potential problem for CORR I guess - need to look at the terms of their debt to be sure they are built to last 15 years.

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#4) On January 08, 2013 at 11:44 AM, Option1307 (29.96) wrote:

Wow another really interesting stock here, will dig deeper this week.

Deej you have been on fire lately, keep up the good work!

+1

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#5) On January 08, 2013 at 5:03 PM, TMFDeej (99.29) wrote:

Thanks Option.  I love this stuff.  The only question is finding the time to do it when it's not my day job.  I feel like Dr. Michael Burry posting at night.  I'd gladly take his returns ;).

I found a few more cool ones last night.

I'm off to go pick up the kids from school.  I love hanging out with them even more than talking about investing.

Deej

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#6) On January 08, 2013 at 5:05 PM, TMFDeej (99.29) wrote:

Hey Mega.  HA.  I threw it on the scorecard without writing anything about it until I was allowed.  I think that still abides by the trading rules.

Under the radar stocks like this are where some serious returns can be made, but they're also more work to research.  If either of you do end up doing additional research on this one, please let me know what you find out.  The more the merrier with an obscure stock like this one. 

Deej

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#7) On January 09, 2013 at 4:04 PM, TMFDanDzombak (82.64) wrote:

Hey Deej,

 Who else do you follow on SeekingAlpha that you think is good?

 Best

 Dan

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#8) On January 09, 2013 at 4:46 PM, TMFDeej (99.29) wrote:

Hey Dan.  My favorite right now is someone who's relatively new to posting there, Chris Demouth Jr.  I believe that's how it's spelled.  He's a special situation machine.  He acctually blogs quite a bit up there.  It's fascinating stuff.  Other than that, I usually just look at the headlines that are e-mailed to me and click on the ones that I find interesting...when I have the time.

Deej

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#9) On January 10, 2013 at 8:15 AM, Option1307 (29.96) wrote:

Thoughts on COOR

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