Best Performing REIT: 90% of Revenues Depend on Chapter 11

chart01The best performing equity REIT stock of 2016 is a company whose major tenants are somehow under Chapter 11. In spite of this, the stock returns have exceeded those of data center and net lease retail. While the stock has been under immense pressure, tenants have, so far, remained current on lease payments. Consequently, the company is still paying regular dividends. That company is CorEnergy Infrastructure Trust, a small cap energy REIT where high risks have yielded high returns.

Since 90% of rental revenues depend on the outcome of the Chapter 11 proceedings, CorEnergy has been submerged in a sea of uncertainty. Falling gas and oil prices threw the tenants’ parent companies, Ultra Petroleum and Energy XXL, in disarray. In April, both companies had no choice but to file for bankruptcy. There’s only one difference. In Energy XXL’s case, the tenant hasn’t filed for relief, while in Ultra Petroleum’s case, it has.

A potential rejection of Ultra Petroleum’s lease by its tenant could lead CorEnergy to cut its dividend. Ultra Petroleum’s lease accounted for 40% of the total lease revenues in Q1. Not even its dividend payout rate of 70% could absorb this revenue loss. However, management’s position is that the bankruptcy has been expected by the market and the leases will be preserved due to low lease expense and the importance of the assets to the tenants.

Meanwhile, investors seem to be confident that the company will be able to sail through the bankruptcy. Obviously, the share price is significantly down from its 52-week, but the interest in the stock has been high, given its performance this year. With a dividend yield of 14%, the 2016 total return has been north of 60%. Investors are, obviously, hoping that management is right and the bankruptcy proceedings will be nothing more than a bureaucratic milestone.

Source: CorEnergy Infrastructure Trust(NYSE:CORR), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Energy REIT Scare

chart01.pngLast week, Energy XXI filed for relief under Chapter 11, further weakening CorEnergy Infrastructure Trust’s ability to receive lease payments from its major tenant Energy XXI GIGS Services. Energy XXI is the guarantor of the lease and Energy XXI GIGS Services is an affiliate of Energy XXI.

In mid-2015, CorEnergy was involved in an acquisition and leaseback transaction with Energy XXI. CorEnergy purchased Grand Isle Gathering System, a subsea pipeline system located in the Gulf of Mexico, from Energy XXI and then leased back the property. This particular transaction was part of Energy XXI’s company strategy to increase liquidity and improve their leverage metrics while the oil prices were in steep decline.

Energy XXI shareholders have suffered from a major blow. According to the company’s restructuring support agreement, both the preferred and common shareholders will receive no recovery at the end of the restructuring process. All preferred stock will be cancelled. As a matter of fact, once the bankruptcy-filling announcement was made, the common shares traded on NASDAQ plummeted to less than $0.20.

We certainly cannot say that this news comes as a total surprise. Energy XXI’s share prices had already started to freefall when oil prices started to drop. Later, the company confirmed that they could file bankruptcy protection and restructure their balance sheet. The actual surprise is the fact that equity holders have been forsaken. Brand new equity will be issued to senior secured noteholders, with equity management incentives being initiated. Investors that figured they could make some easy money investing in a financially stressed company made the wrong bet and probably lost all of their capital. If you would like more information regarding the details of Energy XXI’s current situation, please review Dallas Salazar’s article (click here).

Energy XXI GIGS Services hasn’t filed for bankruptcy and is not subject to the restructuring agreement. CorEnergy most definitely acted fast reminding investors of this fact on the day that Energy XXI’s bankruptcy was announced. Having said that, multiple investors were fearful that the company would be negatively affected and CorEnergy’s share price dropped by 9%.

Due to the fact that the bankruptcy filing represents a default event in the current lease agreement, CorEnergy didn’t have much of a choice but to continue the lease and waive the rights to terminate it. However, the waiver does contain conditions regarding particular terms such as the failure of an approved restructuring, or liquidation of the company.

CorEnergy takes the position that Energy XXI will need those assets in order to survive the restructuring. They don’t believe it will interrupt any of the lease payments. In the same manner, Energy XXI did attempt to put both suppliers and vendors at ease by stating that they are not planning to interrupt any payments.

Of course CorEnergy is now being held hostage based on Energy XXI’s performance, which is certainly not a great place to reside. The stock rallied during the weeks prior to the bankruptcy announcement.

In conclusion, I have yet to see any catalyst in order to take advantage of the REIT’s depressed price. Energy XXI management expects to emerge from the restructuring in September 2016; so, for the meantime, I will sit safely on the sidelines.

Source: CorEnergy Infrastructure Trust(NYSE:CORR),Energy XXI Ltd.(NasdaqGS:EXXI)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Energy REIT Accused of Self Interest

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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.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Our Highest Yielding REIT Stock Not An Investor’s Dream

 

chart01Following the recent dividend reduction by NorthStar Realty Finance, CorEnergy Infrastructure Trust (CORR) has become our highest yielding stock among equity REITs, with a whopping rate of 20%. This could be a dividend investor’s dream–except for the fact that CORR is also one of the most volatile REITs. CorEnergy may have had a good dividend record over the past six years for distributing similar or increasing dividends; but right now, the truth is that they have been highly speculative.

CEO David Schulte has been trying hard to dissociate CORR’s stock from the energy markets’ volatility. He has focused on the importance of the company’s assets in order to help the tenants run their operations. He mentioned that the company’s properties are part of the tenants’ essential operations and rent payments are not an expensive portion of their operating expenses. Also, although the company has participating rents in the tenants’ operations, he emphasized that CORR receives the rent payments before debt and equity service. That is, from the tenants’ standpoint, a priority for them to keep paying CorEnergy.

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The company went further and disclosed this early March, that major tenants have been compliant with their lease contracts, despite their liquidity concerns. Their three major tenants: Ultra Petroleum Corp (UPL), Energy XXI Ltd (EXXI), and Arc Logistics Partners LP have all paid on time. In a recent presentation, the company provided precise examples of where the rents stand on both UPL’s and EXXI’s income statements. See Below.

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Although I have no doubt that Pinedale lease agreement should be important for UPL’s operations, the concerns about UPL go deeper. The company is in a vulnerable position and is struggling to be a going concern. It has to either be able to comply with financials covenants or renegotiate them. Since oil and natural gas prices have not shown material improvement, it has been trying the latter. If UPL doesn’t successfully meet payments, it may file for Chapter 11 or a creditor may file for Chapter 11 for it. This does not exclude the possibility of renegotiating lease rates.

EXXI has been in the same boat as UPL and has already mentioned that filing under Chapter 11 may be unavoidable. EXXI revenues have significantly diminished quarter after quarter. Last month, the company decided not to pay $8.8 million in interest payments and entered into a 30-day grace period. They made the payment eventually, but entered into a new 30-day grace period for another payment due on March 15, 2016, which may lead it to a default.

The stock performance for both UPL and EXXI have been dire. Today they are a small percentage of their 52-week high, putting them into the category of deeply distressed stocks. Last month, the EXXI share price was so low (below $1.00 for 30 days in a row) that NASDAQ informed EXXI that they have to regain minimum bid price or delist the company. As Richard Zeits mentioned in his Seeking Alpha article, investing in EXXI resembles one of a lottery situation. The difference is that in the lottery you know the amount and the timing; in this near-default stock’s case, you don’t.

chart05In summary, aware of the tenants’ severe distress situation, it is hard to buy or hold CorEnergy, except for speculative purposes. Despite their dividend record, to say they have not been an ideal stock for dividend investors is a euphemism.

Source: CorEnergy Infrastructure Trust(NYSE:CORR), Ultra Petroleum Corp.(NYSE:UPL), Energy XXI Ltd.(NasdaqGS:EXXI)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

CorEnergy’s Top Tenant Downgraded Again

chart01.pngCorEnergy Infrastructure Trust has drawn much attention lately because it has seen sharp ups and downs in the financial markets. It would go from worst performing stock a week to best performing the next. Over the past six months the stock has fallen by almost 50%, leading to an AFFO multiple of 4.4x and a dividend yield of 19%. The truth is that it is never comforting when investors start discussing the repercussions of a potential bankruptcy of its main tenants.

The risks of CorEnergy are in the same bracket as NorthStar Realty Finance and the Ashfords REITs, which have been target of activists. The risks are high, but the rewards are potentially very lucrative. But, since CorEnergy’s assets appear shaky, the chances of activists coming to give their share price a boost looks low.

Concentration is one thing that turns a lot of potential investors off, and it also contributes to share price discounts. CorEnergy has three leases, but half of its 2015 lease revenues came from one tenant, Ultra Petroleum Corp. Ultra Petroleum operates in Pinedale, Wyoming and is in the natural gas industry. It’s traded on the New York Stock Exchange under the ticker UPL and its share price has declined by almost 90% in the past twelve months.

chart02When a stock like CorEnergy is volatile, I always look for signs of safety in the rental payments. Unfortunately, this rule may not apply here. CorEnergy claims that rental payments make up a tiny percentage of Ultra Petroleum’s operating expenses; however, it’s possible that the issue here runs much deeper.

Ultra Petroleum Has Been Downgraded to CCC-

This Monday (Feb 01), Standard and Poor’s downgraded Ultra Petroleum’s corporate credit rating to CCC- from B+, with negative outlook. Ultra was also downgraded last October.

This is what S&P said in their press release:

“Our ratings on Ultra reflect our view of the company’s fair business risk, highly leveraged financial risk, and weak liquidity. The negative outlook primarily reflects our view that Ultra Petroleum will breach its leverage covenant at the end of the first quarter, and could restructure its debt or announce a distressed exchange within the next six months.”

It is clear that Ultra is vulnerable, especially considering the current energy price trends. Ultra has the option to assign its lease agreement to a third party. Given the present situation, it’s unlikely that the potential new tenant will hold a worse credit rating, so this possibility can actually work in CorEnergy’s favor. CorEnergy’s other top tenant, Energy XXI Ltd, which contributed to a third of 2015 lease revenues, holds the same S&P rating as Ultra Petroleum.

Although the tenants’ creditworthiness has been CorEnergy’s biggest headache, the company had been struggling with 2014 loans of $15 million to Black Bison Water Services, a provider of services for the disposal of flow back and produced water generated from oil and gas-producing wells. Due to reduced drilling activity in its area of operations, Black Bison has not repaid the loans. CorEnergy has agreed to forbearance twice and set aside half of the loan as bad debt.

Source: CorEnergy Infrastructure Trust(NYSE:CORR), Ultra Petroleum Corp. (NYSE:UPL), Standard and Poor’s, Fast Graphs.

 

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.