corenergy infrastructure trust initial investment analysis
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Some terms to remember1. Triple Net Lease : a contract where the tenant pays for
insurance, building maintenance costs, and real estate taxes associated with the property being leased out. In a Triple Net lease
contract, the rent paid by tenant is normally lower than average.
Property
TenantPays rent, insurance, real estate taxes, maintenance costs
Tenant rents property
2. REIT: Real Estate Investment Trusta)An entity that allows small and large investors to invest in real estate without large outlays of cashb) By law REITS have to distribute 90% of their profits back to investors as dividends
REIT
Cash from regular investors to REIT
Commercial Property
Office buildings
Mortgages
Invests in properties
Gets rent from properties
Invests in mortgages
Gets interest from mortgages
Dividends paid to regular investors
Capital Appreciation
What is CorEnergy Infrastructure Trust?
• It is a REIT that provides both income and capital appreciation. Current Dividend Yield is 8%.
• It holds assets primarily in the Energy sector in the midstream and downstream categories. These assets generate cash flows.
• The public can purchase this REIT in the form of shares from an exchange
What are some of the assets owned by CorEnergy Infrastructure Trust?
• Pipelines : used to transport hydrocarbons• Storage facilities: to store crude oil and refined
petroleum products• Electricity Transmission assets including
transmission lines• Energy infrastructure financing investments• LNG storage and regasification terminal
Specific examples of asset ownership
• Pinedale Liquid Gathering System(pipelines) – triple leased to Ultra Petroleum corporation. Ultra Petroleum pays approximately 20 million/year in rent to CorEnergy to use Pinedale LGS
• Portland Terminal Facility – Storage facility with 84 tanks with a total capacity of 1.5 million barrels. Currently, triple leased to Arc Terminals. Base rent approximately 471 Thousand a month.
How can CorEnergy afford to buy assets?
• Primary method: Issue stock to raise cash• Revolving line of credit: Credit facility of 90 million
with Regions Bank• Cash from stock issued : a) Jan 2014 Common
Stock offering of 7475000 common shares , received 49 million in Gross proceeds b) Nov 2014 Common stock offering of 14950000 shares of stock, raising 102 million in gross proceeds. c) Jan 2015 Preferred stock offering, raised 54.5 million $
Does CorEnergy have substantial debt?
Notional Value Less than 1 year 1-3 years 3-5 years >5 years 67060000 Long Term Debt 3528000 63532000 Interest Payment on Long Term Debt 2268834 2152498 Totals 5796834 65684498
Additional Debt
Company’s revolving credit -> no fixed repayment schedule
Mowood Notes Payable -> no fixed repayment schedule
Pinedale LP has a 70million$ credit facility with KeyBank to finance the acquisition of the Pinedale LGS. Term of credit facility is three years. Pinedale LP is obligated to make MONTHLY principal payments, which begin in the second year of the term, equal to 0.42% of the 70 million $ loan outstanding. Interest is LIBOR + 3.25% (shown as Long Term Debt above)
Can CorEnergy pay back it’s debt?CorEnergy
Pinedale GPSubsidiary of CorEnergy
partly owns Pinedale LGS (co-owner is Prudential
which has a 18.95% stake)
Long Term Debt of 67 million
(used to finance acquisition of Pinedale LGS)
Paid 205.7 million US $
which includes debt of 67 million $ to purchase Pinedale
LGS(Liquid Gathering System)
Needs payment of 3.5 mill in principal in one year(2015) + 2.26 mill in interest in one year(2015) +
payment of 63 million in principal in 2-3 years + 2 million interest in 2-3
years
Has cash on hand of 30 million as of end of Jan 2015
How to measure CorEnergy’s performance?
Use a measure called Fund from Operations (FFO).FFO = Net Income + Depreciation – Gains on sales of depreciable property
Why add back depreciation? Depreciation is a non cash charge that allocates the cost of an investment made in a prior period. Real Estate is different from most fixed plant
or equipment investments, property rarely loses value and appreciates
Perhaps a more accurate measure is AFFO (Adjusted Fund from operations)AFFO= Net Income + Depreciation – Gains on sales – Capex
Advantage of AFFO: 1) A better base number for estimating value(e.g. using a collection of AFFOs and discounting them) 2) It is a true residual cash flow value – it is
a better predictor of a REIT’s capacity to pay dividends.