For Deej: Thoughts on CorEnergy Infrastructure Trust
I would recommend reviewing Deejs post prior to reading this one for background. It can be found here. Here are some initial thoughts and observations about CORR after digging through the latest 10-Q in no particular order of importance.
1) 1) Total assets listed as ~$111 million, of those almost $80 million are “trading securities and other securities at fair value”.
-This brings up a few issues for me. First off the old management company (Tortoise Capital Advisors, L.L.C) is still in charge of handling/selling these assets off. I question the motivation they have in receiving the most bang for your buck when they are no longer running the company, just simply handling the liquidation of these assets. Yes they are compensated but I’m not sure what that is exactly.
-Second, what in the world does “fair value” mean? Are the assets of CORR really valued at ~$110 million as stated? If we break down the $80 million in trading securities we see there are three levels of securities (my summary of their levels):
--> Level 1 = “Market prices are available for identical investments”
--> Level 2 = “Similar investments have been worth this much”
--> Level 3 = “We have NO FREAKING clue what these are worth”
- At end of quarter the breakdown was $30 million, $30 million, and $20 million for each level. Thus $20 million (~18%) of all assets we do NOT have a good indication of what they are actually worth. And another ~27% that MAY be worth what they are stated. This seems somewhat sketchy to me. Normally I would care less, but it’s difficult to tell with these small companies that are not followed well how much truth is in their valuations. I will note they have decreased level 3 crappy assets from $42 million down to $20 million this last year so that is encouraging.
-I also bring all this up because even with the acquisition from UPL the company will still not meet requirements to become a REIT e.g. 75% of assets defined as “real” and 75% of income from these “real” properties. Therefore CORR will need to continue altering its portfolio and/or continue acquisitions. They will need cash for this, which makes me hope those level 3 assets are real and not garbage!
2) 2) CORR will need to diversify as the practically all of its revenue and “real” assets that make it compatible with the REIT status will be from one property. This is risky business! However this begs the question, how will they acquire more properties? Where will they get the cash?
-Their balance sheet is fairly clean and not super levered so this may be one avenue. But we need to remember that they just had a massive equity offering bringing their share count from 9,000,000 to 24,000,000. That’s a massive dilution! So I guess I’m wondering, will they be doing this again in the near future and killing current shareholders? I’m all for growth and share offerings are often necessary but man that kind of dilution hurts. I hope that management considered this destruction of shareholder value a onetime deal, but there is really no way to tell.
3) They basically will only have one asset after the completion of the acquisition which should make anyone nervous.
-One little hiccup with UPL and that’s it for CORR. I know UPL seems to be in a solid position financially and I certainly can’t see them missing a payment but still the idea of one single asset makes me nervous nonetheless.
-It should be noted the lease does appear to be a pretty sweet deal. $20 – 27 million guaranteed yearly revenue with built in inflation adjustment. Also, this is a triple net lease which basically means UPL has to pay rent, taxes, and maintenance costs. This is important because CORR will not be responsible for fixing broken equipment etc which can be awfully expensive in the energy field.
4) 4) External management, what is this?
-As noted Corridor InfraTrust Management is in charge of running the show at CORR. It is a little odd to have external management in any situation; however I am actually fairly confident in the management team. The team consists of two people mainly, Richard Green jr. and David Schulte.
-Schulte: CFA of Tortoise Capital Advisors. Not much to note about him, just various experience with the Tortoise Capital energy funds etc.
-Green: This guy has a stellar track record in the energy business. He took over UtiliCorp United Inc. in 1982 from his father and proceeded to expand it a national energy powerhouse over a 20 year span. This company eventually was renamed Aquila Inc. in the early 2000’s and made it to the Fortune 500 top 50 list in 2002. Basically this tells us that this guy knows what he is doing. He took a small Midwest company and expanded it to be one of the largest in the country with international exposure. Eventually he negotiated the sale of its assets to another company in 2007 winding down the Aquila Corporation. The only red flag is that Aquila was sued in the post Enron scandal era for supposedly tricking employees to invest in the company with their retirement funds. Sort of a non-issue in my opinion but they settled for ~10 million.
-There certainly are some questionable areas in regards to CORR and some issues that we do not have much insight into. Investing in CORR is somewhat a leap of faith in management. You would be betting that management can unwind their current trading securities, meet all the requirements for becoming a REIT, and continuing to expand and diversify their business. There is substantial risk associated with this because we do not have much a track record to go off of. Yes, Corridor InfraTrust Management does have some quality players involved, but they are still new to this REIT game and that is certainly a risk. I’m also very concerned over their recent ridiculously large equity offering and shareholder dilution. I understand that it was the best option available for them to complete their transaction, but it scares me that they will continue to expand via share offerings and thus destroy shareholders. This should be a very real concern for any investor.
-With all that negative mumbo jumbo being said, I strongly believe there is significant upside associated with CORR. It appears undervalued from its recent beating in share price post share offering, lots of growth opportunity, and REIT conversion will all provide capital appreciation. This doesn’t even take into account the dividend that is supposedly going to be $0.50/share in 2013. I also like the fact that it has low volume and relatively small following right now, all the more to push up the share price when it becomes noticed.
-I don’t really need to make the Bull case for CORR as there are plenty of bullish pieces on SA linked on Deej’s post. I just wanted to poke around in CORR a bit more and see if there were any giant red flags that needed to be discussed. I don’t really see any. The more I read about the company the more I’m intrigued and genuinely a believer in them. I do expect this to take some time for things to turn around and for the catalyst to become unlocked and relevant. This will not be a quick overnight return and patient is likely going to be needed. This is the type of stock that I will likely be buying in tranches/bunches and may need to double down on if things don’t turn up right away.
-I’m alright with all of that though, and this just seems like a really compelling buy. I will be likely be buying a starter position in the next few weeks. Anywhere under $6.50 seems like a solid buy but I may be picky.