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.

Are There Safe Dividends in Hotel REITs?

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Sometimes, people are more interested in receiving regular dividends from their investments than the other potential benefits of their investments. Unfortunately, if they are interested in receiving regular dividends from their investments, hotel REITs are probably not the best choices, as opposed to retail, healthcare or residence, though it should be mentioned that Hersha Hospitality Trust is an exception to this rule.

In short, hotel REITs don’t include many long dividend paying companies. Maybe because the short leases of hotel tenants (also known as ‘daily rates’) make hotels one of the most volatile REIT sectors. For example, hotel REITs such as FelCor Lodging Trust and Pebblebrook Hotel Trust tend to have betas that are higher than 1.0, meaning that their prices move more than the S&P500. This is particularly notable because REITs, especially the ones with safest dividends, tend to have betas lower than 1, meaning that their prices move less than the broad stock indexes.

chart02Furthermore, it should be mentioned that a lot of hotel REITs fall in extremely competitive segments, which include but are not limited to upper-upscale, upscale, and even midscale because new competitors are entering said segments all the time. Upper-upscale and upscale are particularly competitive as far as these segments go, as shown by how STR’s February stats revealed that two-thirds of the rooms under construction belonged to one of the two rather than the rest.

chart06.pngIn spite of these challenges, Hersha has managed to provide regular dividends for 16 years, which is particularly impressive because the majority managed a period of no longer than 7 years. Moreover, with a beta of 1.3, Hersha has managed to do this investing in a portfolio based in upper-upscale and upscale hotels, thus making its accomplishment that much more impressive.

Can Hersha Hospitality Trust’s Dividends Be Considered Safe Dividends?

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With that said, Hersha has suffered the same hammer blow as the other hotel REITs when it comes to its share price. For example, it has lost more than 40 percent of its share value in February compared to its 52-week peak. This is not a particularly unusual situation since investors currently believe that the peak in hotel REITs is in the past, which has caused sustained selling that has in turn, fueled further selling for fear of further losses.

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However, it is important to note that there are persuasive reasons to believe that Hersha will be able to maintain its record when it comes to its dividends. First, it is established in cities such as Boston, New York City, Philadelphia, San Diego, and Washington DC, which have high barriers to businesses that might be interested in entering the market. In fact, its holdings in Boston, New York City, and the West Coast represent more than half of its portfolio.

Second, Hersha’s occupancy rate, the average daily rate, and the revenue per available room have all increased in Q4 of 2015, which should come as welcoming news, particularly considering that its EBITDA margin has increased as well. Third, while Hersha has been paying a respectable average dividend yield of 5.3 percent, its dividend payout is at a low 42 percent, meaning that it has a sizable cushion in case something goes wrong with its revenue-earning operations.

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Finally, it should be mentioned that Hersha’s management has taken a very proactive approach to dealing with their falling share price. For example, they have reduced the number of outstanding shares via buybacks as well as a recent reverse split at a 1:4 ratio for issued and common shares. Similarly, they have been selling mature hotels and buying new hotels in new markets with better potential growth. Summed up, while there is no guarantee that Hersha will continue paying similar or increasing dividends, all signs suggest that it will have no problems doing so for the current year.

Source: Hersha Hospitality Trust(NYSE:HT)

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.

Diversify your REIT Portfolio with this Long Paying Dividend Stock

chart03When a REIT stock pays dividends for 18 consecutive years, it certainly deserves the attention of dividend investors. If it happens to be a REIT that is focused on movies and entertainment, then it is even more eye catching. EPR Properties operates in an industry where consumer spending is far more discretionary. Although movie theater attendance has historically trended downwards, the company’s management team has been able to successfully build a dividend record based on their strong portfolio. If you are an investor that prefers to diversify your REIT portfolio, from an industry-based perspective, then this stock is certainly worth considering.

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Movie Industry

EPR has never once interrupted their dividend payments. This fact is quite impressive especially when their funds from operations fell significantly during the last recession. As a matter of fact, the company has raised dividends every year except in 2009/10. At that time, the decreased their dividend payout by 23 percent, and kept the rate flat in 2010. On average, EPR has increased dividends by approximately 16 percent, and distributed them every quarter from 1997 to 2013. Then, they shifted into a monthly payment program.

Traditional REIT investors certainly have a plethora of concerns when it comes to specialty stocks like EPR. Movie theater operators, in particular, must deal with multiple other idiosyncrasies. One does not need to patronize their local movie theater in order to figure out that the success of their operations is based on several factors such as the popularity of the movie selections, the window in which the movies are exhibited, and the eagerness of consumers to spend their hard earned money outside of their homes.

chart01That being said, box office revenues actually grew last year, achieving record revenues of $11 billion in 2015. In addition, the more sophisticated theaters grew in revenues due to a higher participation in food and beverage sales. EPR controls 272 properties, of which 147 are megaplex theaters and entertainment centers.

Even Standard & Poor’s acknowledged that EPR’s strength lies in their portfolio, which holds long-term, triple-net leases. The company has one hundred percent of their theaters leased across the country. In addition, their tenants have stronger rent coverage than the market average. However, a major concern is their tenant concentration with a significant amount of revenues tied to a movie theater operator (AMC).

chart02Based on the perils of the movie theater industry, and their tenant concentration, the management team has wisely decided to diversify and seek new revenue streams from other industries. Since 2007, EPR have been increasing their investment in both recreation and education, which now accounts for 40 percent of their investments. The company’s recreational properties include ski parks, water parks, and golf entertainment complexes. Education investments include public charter schools, private schools, and early childhood education centers.

However, the recent diversification of their portfolio has not been enough for the S&P to assign them a corporate investment grade rating. That being stated, EPR’s senior notes have been assigned investment grades by three main credit agencies including S&P, Fitch’s, and Moody’s. The debt to adjusted EBITDA, a main debt metric, has remained below 6x, which is a positive sign of strength.

chart04Regarding the company’s valuation there are no direct peers in which to compare it to. Looking back though, the AFFO multiple of 14x has been slightly higher than the historic average.

In summary, EPR Properties is certainly not perfect; however, having a higher than average dividend yield of 6 percent makes the stock far more attractive. The company’s dividend payout ratio of 82 percent, and AFFO per share is expected to increase by seven percent in 2016. There is not much to worry about EPR’s ability to uphold its dividend payment record.

Source: EPR Properties(NYSE:EPR),the-numbers.com/market/

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.

U.S. REITs – Longest Paying Dividends – Urstadt Biddle Properties Inc. Class A

If the U.S. real estate cycle lasts an average of 18 years, we can say that Urstadt Biddle Properties is about to complete an entire cycle distributing increasing dividends. Originally founded in 1969, the shopping center REIT was reorganized in 1997. The following year it became a publicly traded company. Since then, the company has increased their dividends every year, even during the Great Recession. Only 10% of our equity REIT roster boasts a record that is equivalent to or better than this one, so it is definitely worth putting this company on your radar.

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A Few Quirks

Urstadt Biddle is a small cap REIT with a few interesting quirks worth mentioning. First of all, the company has been structured so that the senior executives have majority control of the company. They created a second type of stock (class A common stocks) for investors in general. Although they are the majority of the shares, Class A shares only have 1/20th of the voting power of regular common stocks. However, class A shares have rights equal to common stocks when it comes to distributions. In the end, chairman Charles J. Urstadt and CEO Willing L. Biddle retain approximately two-thirds of the voting power, which protects against activist attacks.

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Second, the company has a completely different financial calendar from other companies. Their fiscal year ends on October 31. Although this shouldn’t affect their performance, it does mean their financial data is not in sync with almost all of the remaining equity REITs, who end their fiscal year on December 31.

A third peculiarity is the company’s concentration in the New York tristate area, outside New York City. The company has 73 properties anchored by supermarkets, wholesale clubs, and other local retailers. They are in infill markets, which are harder to penetrate, but, once they did, they have maintained high rates of occupancy. They have recently suffered a drop in occupancy due to vacancy of some properties.chart01

Shopping Center REITs are Doing Better than Mall REITs

When compared to malls, shopping center REITs are enjoying a much smoother ride. Investors have competed to buy shopping center REITs. Their dividend yields have been below the average REIT.

Regional malls have been declared dead by many due to e-commerce, which doesn’t seem to be happening with grocery anchored shopping centers. While Amazon has always presented itself as a threat to retail, I haven’t bumped into anyone saying grocery stores are doomed. At least, not yet.

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But even if that is the case, Urstadt has one of the highest average rents among shopping center REITs, which serves as a buffer for potential shakeouts. The company has really managed to position itself in robust lease markets.

In summary, Urstadt has yielded slightly above average, perhaps because of its lower market cap and quirks. AFFO multiple has been at 18x, so this definitely isn’t a bargain, but it can be a fair entry point to the sector.

Source: Urstadt Biddle Properties Inc.(NYSE:UBA), Fast Graphs, Yahoo!Finance

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.

U.S. Equity REITs Return 7%

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Click here to download exclusive dividend yield report for free.

U.S. equity REITs continue to excel and, on average, have returned an average of 7% so far this month. This should not change. This Wednesday, the Federal Reserve laid out a more conservative scenario for interest rate hikes in 2016 (two rather than four rate increases). Although the Fed has been optimistic about the US economy, they will slow the pace of rising interest rates due to concerns over weaker global growth. Because interest rate hikes have been the source of several REIT selloffs in 2015, we expect a smooth field for REITs to run for the coming months.

Highlights of the Week

This has been another consecutive positive week. We continue to see high interest in net lease retail, which continues to be going well. Seritage Growth Properties, a spinoff of Sears stores, have surprised investors and returned by almost 9% last week. Other stocks such as Realty Income and National Realty Properties have seen valuation multiples get higher over the last weeks and now they seem overvalued. Their dividend yield has been below equity REIT average.

UMH Properties, a small cap in the manufactured home industry, fell by more than 6% this Friday. There was no visible reason for such a sharp drop, which occurred after 2 pm. However, we know that, despite their good dividend history, UMH has not covered their dividends and they seem far from covering them. We believe that the company should have cut their dividends to a reasonable level rather than finance it with debt and equity.

Pebblebrook Hotel Trust

Pebblebrook Hotel Trust surprised many investors and increased its dividend by 23%. Last year we elected Pebblebrook as one of the strongest growth lodging REITs. They have grown AFFO per share more than most REITs have and rewarded shareholders with dividends growing at equivalent rates. So for us, it was not really surprising.

This is a chance for Pebblebrook to react. The Fed decision may be what investors were expecting to invest in lodging again. Without much government interference, we could finally see a robust recovery from undervalued lodging REIT stocks. We have always put the company as part of a group of REITs that enjoy ‘premium’ valuation because of strong quarterly results, experienced management, and its good size in terms of market capitalization.

When we last looked at Pebblebrook on October 23, 2015, its AFFO multiple was about 17x. This week, it was hovering around 11x. Although the stock has room for growth, we do not believe that it will achieve the same multiple of October.

The company will slow growth due to weaker financial markets. Their AFFO per share growth for 2016 is expected to be around 10%, as opposed to last year’s 28%. Moreover, they just approved share repurchase plans.

In terms of dividend yield, the dividend increase puts the company above the average among equity REITs.

In short, if you were looking for an undervalued, well-managed, high yield stock, Pebblebrook could be it.

Click here to download exclusive dividend yield report for free.

Source: Pebblebrook Hotel Trust(NYSE:PEB),UMH Properties Inc.(NYSE:UMH),Realty Income Corporation(NYSE:O),National Retail Properties, In(NYSE:NNN), Seritage Growth Properties(NYSE:SRG)

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on March 18, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of February 29, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report 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. 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.

 

Most Consistent Dividend Paying U.S. REITs: Gladstone Commercial

chart02Gladstone Commercial Corporation (GOOD), a small cap in the diversified sector, is part of a select club that has paid similar or increasing regular dividends time and time again for more than ten years. Some can argue that their last dividend was a very long time ago (eight years ago, to be precise, but you can’t deny that they managed to keep dividend rates unscathed during the great recession. Less than 20% of the stocks in our pool of equity REITs have managed to accomplish such an impressive dividend record. The purpose of this post is to clarify what you should expect from GOOD and look at the reasons why you should consider it.

First of all, you have to think of Gladstone Commercial as a disciplined stock. The first time I learned about Gladstone I found it boring and unattractive. However, as time has progressed, the stock has grown in my eyes. Perhaps these volatile times have made me think that I need more stable stocks in my REIT portfolio and, although growth is nice, a certain level of stability has become paramount. When you look at it from this perspective, GOOD fits the bill.

chart01Since Gladstone declared its first dividend on 9 December 2003, they have never interrupted the series of distributions. In 2004, they distributed quarterly dividends, but by the following year they were distributing monthly. They quickly achieved an annual dividend rate of $1.50 in 2008 and have maintained this rate ever since. In Q4, their AFFO payout dividend ratio was 97%.

Although their dividend rate has been flat, it doesn’t mean they haven’t been growing their assets. It’s actually quite the opposite. Their historical asset growth has had a CAGR of 18%. They are not market timers, so they have consistently issued equity, sometimes at a larger pace to decrease leverage. By continually doing this, they have decreased leverage from 67% to 52% over the past five years.

chart04The portfolio has been built in a peculiar way. Management mostly considers transactions between $5 and $20 million. They target secondary markets with attractive economic growth trends, growing population, and increasing employment. The portfolio has been built for durability – net lease (less operational leverage), diversified but biased towards office and industrial, and present in 24 states. There is no major area of concentration in regards to tenant industries or individual tenants (above 10%).

What I don’t like about the company is that it is externally managed by the advisor Gladstone Management Corporation and the administrator, Gladstone Administration, LLC. Some senior executives work across all three companies. In order to avoid conflict of interest, I’ve always had a preference for internally managed companies.

chart03Their fee structure has been revised to be more in line with other REITs. For the advisor, the management fee is 1.5% of the shareholders’ equity and incentive fees are contingent on the core FFO’s performance. They do not charge acquisition or disposition fees. The administrator covers overhead expenses, including rent and personnel. Both the advisor and administrator also oversee several other publicly traded funds in addition to Gladstone Commercial. They also manage four public companies listed on the NASDAQ exchange – GLAD, GOOD, GAIN and LAND, as well as privately held funds.

From a valuation standpoint, dividend yield is one of the highest among equity REITs, while their AFFO multiple has been lower than their historic normal. The stock seems undervalued. Contrary to its share price performance, the stock is up 9% this year, but those who buy GOOD aren’t interested in price appreciation. As long as they don’t interrupt or slash dividends, their shareholders will be happy.

Source: Gladstone Commercial Corp.(NasdaqGS:GOOD), Fast Graphs, Yahoo!Finance.

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.