CorEnergy Infrastructure Trust (NYSE:CORR) owns midstream energy assets, such as pipelines, that it leases out to generate income that it can pass on to shareholders. Unlike most midstream companies, it's structured as a real estate investment trust (REIT). The truth is, I didn't think the business model would hold up if it was put under significant stress. Well, it looks like I was wrong, and this unique REIT is stronger than I thought.
But don't jump aboard just yet. Here's what you need to know about this 8%-yielding midstream player before you consider buying the stock.
A look under the hood
CorEnergy is pretty small, with a roughly $470 million market cap and just four major assets, having jettisoned a terminal facility in late 2018. That terminal was sold to the tenant, which held a repurchase option on the asset. Over the roughly five years CorEnergy owned the terminal, it estimates it generated a low-double-digit return, which is hard to complain about. Proceeds from the sale are expected to be reinvested in new assets or used to buy back stock. (More on this below.)
The REIT's growth plan calls for buying one or two midstream assets per year. The number will likely depend on the size of the deals, with a goal range of between $50 million and $250 million. Having recently dealt with a maturing convertible bond, using a mixture of new stock and cash to pay it off, CorEnergy appears to be in solid condition to start adding assets to the portfolio again after a long period of little activity. And this is where the story gets interesting.
Holding the line
CorEnergy hasn't been too active in recent years for a very good reason. It bought out a minority partner in an asset in 2017, but its previous transaction was all the way back in mid-2015. That's a far cry from the goal of one to two deals a year. But the time period is important here, because the oil and natural gas sector has been under massive financial stress since oil prices began to plummet in mid-2014. And CorEnergy was kind of at the center of the storm.
How bad was it? Two of the REIT's major tenants declared bankruptcy in 2016. It was very much in question whether CorEnergy would keep getting paid.
The basic idea behind CorEnergy's strategy was that by owning assets that were indispensable to its customers, it would keep receiving rent no matter what. For oil drillers like the ones leasing CorEnergy's assets, rent payments on a pipeline are a necessary expense even in a bankruptcy situation; without those pipes, the oil wouldn't get to market. That was just a theory before 2016. But both assets hurt by lessee bankruptcies continued to produce revenue despite the troubles of their respective customers. And here in 2019, CorEnergy's plan looks like a well-tested model.
To be honest, I wasn't expecting things to work out so well. Impressively, CorEnergy was able to maintain its dividend of $0.75 per share per quarter straight through the turbulence.
Before you go rushing out to buy the shares, however, you need to be aware of a more notable threat to the dividend today.
The late-2018 asset sale noted above will reduce the rental revenue CorEnergy generates. Right now, the REIT doesn't look capable of covering the dividend in 2019. Management, however, is going to sustain the payment, with a goal of buying back stock (most likely preferred shares) and quickly finding some revenue-generating assets to add to the portfolio. If it does these things, management believes it will be able to maintain the current dividend level.
Which brings up the REIT's size again. CorEnergy is small and owns very few assets. My big fear was that a tenant in financial distress would stop paying rent. That risk proved to be overblown, showing that CorEnergy's business model was more robust than I thought it would be. Now diversification and scale are the major issues, and could potentially lead to a dividend cut because of the asset sale driven by a customer exercising its purchase option.
Not out of the woods yet
CorEnergy isn't yet on a sustainable path. Yes, it weathered a brutal storm in the energy industry. However, now that it has proven the validity of its model -- owning necessary assets -- it needs to start building scale and diversification in its portfolio.
The company is aware that time is of the essence: It starts 2019 knowing that it will have trouble covering its distribution without making some notable move on the growth front. Although it's still too soon to jump aboard here for most investors, if CorEnergy does manage to ink a deal that allows it to cover the dividend, more aggressive types should revisit the REIT as an alternative to owning a master limited partnership (and all the complications that go with the MLP structure).