Amid an energy price nightmare, an interesting development occurred during CorEnergy Infrastructure Trust fourth quarter earnings call last week. An analyst from EverStream Capital told the company’s management team that they were acting irresponsibly in favor of themselves, and their actions were detrimental towards the interests of shareholders and bondholders alike.
The analyst was referring to the management team’s controversial strategy to allocate capital. Even though CorEnergy’s funding has been at a higher cost, the company plans to continue making new investments at lower returns. The company grows its total assets under management and consequently increases fees to its external manager Corridor.
This an excerpt of the call:
Analyst, “Looking at the press release you guys say that you are evaluating a broad set of acquisition opportunities in the $50 million to $250 million range. In the presentation you say CorEnergy historically targets acquisitions with returns of 8% to 10%. Right now you have got stockholders who are getting a 20% yield on their shares. You got bondholders who are at a 17% yield to maturity on your senior unsecured debt. So how could you justify a new investment that’s going to be at a higher cost and a lower return than either buying back your stock or buying back your debt?”
Management, “These are transitory times in the market for our capital instruments in our view and we don’t have a significant amount of liquidity available to us. So to shrink the company now rather than deploy the capital in accordance to our plans might be a short-term somewhat anti-dilutive event for the remaining shareholders. It also doesn’t help us diversify our asset base which the short we think is an important consideration in the long run.”
Investors that follow our weekly updates are well aware of the fact that their stock has been on a gigantic roller coaster since share prices plummeted in early December of 2015. The company’s AFFO multiple has gotten even worse. It is currently hovering in the high 4’s. At this time last year, the exact same multiple was at 11x. In addition, CorEnergy’s dividend yield, of 18%, has been amongst the highest in the equity REITs sector. This is by far one of the most distressed stocks in our entire REIT roster.
Although CorEnergy has continued to make dividend payments on a regular basis, the company is certainly in a world of trouble. The company’s two main tenants Ultra Petroleum and Energy XXI have struggled to stay in business due to lower energy prices. Both tenants have even publicly entertained the distinct possibility of seeking bankruptcy protection under Chapter 11.
CorEnergy’s management has argued multiple times that the potential bankruptcy of their tenants will not necessarily lead to an interruption of their leases.
They go on:
Management, “I think diversification that reduces risk across our portfolio is constructive. Small-cap stocks have trouble developing long-term shareholder followings and so to reduce our base of equity outstanding would be potentially detrimental in the long run and we only have availability under our stock repurchase program for $10 million in any event”
Analyst, “what you are laying out to the market is we don’t care, when we have 17% or 20% available to us, we would rather extend more leverage for the possibility of an 8% to 10% return. And we feel that that is irresponsible and we just don’t think it’s justified at all”
If the number of analyst on the Q4 earnings call is indicative of the company’s institutional investor support, then the company should be justifiably concerned about making new investments and getting bigger to attract more investors. There were a total of two analysts on that call. You also need to take in account that CorEnergy is a small cap REIT, a market cap south of $200 million.
We most definitely see this stock’s performance as a tossup that mostly relies on how the energy industry will fare in the future. Major industry forces have driven down CorEnergy’s performance. It is now the responsibility of the company to find a method of enduring these ups and downs for as long as they can.
Regarding management’s asset expansion in order to diversify their tenant base, diversification has been a solid strategy in the world of REITs. However, when shares are under stress, this may prove to be an enormous mistake.
Source: CorEnergy Infrastructure Trust(NYSE:CORR), Seeking Alpha, Fast Graphs.
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