At first glance it might appear that these two equity REITs don't have much in common beyond paying out a very attractive dividend yield. Based upon the usual metrics it does seem a bit like comparing a Godzilla, American Realty Capital Properties, (VER) with a much smaller lizard.
However, upon a deeper dive, CorEnergy Infrastructure Trust, (CORR) is actually more akin to the tip of an iceberg. It was spun-out from Tortoise Capital Advisors -- a sponsor with $16 billion of assets under management, or AUM, and is externally managed by Corridor InfraTrust Management.
Tale of the tape
American Realty is the largest single-tenant triple-net REIT with a market cap of over $10 billion. American Realty currently owns over 3,700 properties. The majority of are leased to commercial tenants -- with approximately 50% of them investment grade.
This is a well-vetted REIT business model. The tenant pays almost all of the expenses. The landlord receives net rent.
CorEnergy is one of the smallest publicly traded equity REITs, with a current market cap of just under $225 million. It finances energy infrastructure utilizing a similar triple-net lease strategy. CorEnergy currently has only four REIT qualified properties in its portfolio.
This is a new REIT and business model -- however the runway for potential growth appears to be massive.
Tortoise and Hare: a tale of two different CEOs
I would also suggest that these dissimilar companies share another crucial characteristic. They each have a dynamic and innovate CEO at the helm. However, consistent with their divergent business models -- they have embarked upon contrasting paths to achieve scale.
CEO Nick Schorsch epitomizes the hare
The September 2011 American Realty IPO raised $70 million. Since then Mr. Schorsch has orchestrated a veritable blitzkrieg of mergers and acquisitions.
During the span of February 2013 to January 2014, six major deals were announced totaling close to $9 billion. Then on Feb. 7, 2014 the company announced the closing of the $11.2 billion acquisition of Cole Capital Properties, This propelled American Realty to become the largest single-tenant net-lease REIT in the U.S.
However, risk factors include:
· This exponential growth requires the melding of many dissimilar corporate cultures.
· The Cole Capital primary focus is on private capital investing in non-listed REITs. This part of the puzzle is much harder to value than the single-tenant triple-net lease side of the American Realty business.
· There are a lot of moving parts and pieces, so many investors may stay on the sidelines until the dust settles.
· The enormous size of American Realty makes it harder to significantly move the future growth needle.
The eponymous tortoise
I feel that Dave Schulte wearing two hats -- both as the co-founder of $16 billion AUM Tortoise Capital Advisors and the CEO of CorEnergy Infrastructure Trust -- puts a different spin on the risk/reward equation.
Having an experienced sponsor with deep pockets makes it much easier for CorEnergy to pioneer this asset class. Tortoise Capital Advisors should also be able to assist CorEnergy with better access to capital markets for long-term accretive growth. Initially Mr. Schulte has chosen to acquire individual properties -- a conservative "slow and steady wins the race" game plan.
The latest CorEnergy REIT qualified acquisition was announced on Jan.14, 2014. It is a $40 million petroleum products terminal in Portland, Oregon net-leased for 15 years to a subsidiary of Arc Logistics Partners LP.
Some CorEnergy risk factors include:
· The Arc Logistics Partners IPO was just listed on the NYSE this past November 2013. They are a newly minted small cap company without an investment grade credit rating.
· This asset class has traditionally been dominated by master limited partnerships, or MLPs. There is a risk that the IRS could rule in the future that certain energy assets do not qualify for REIT status.
· Environmental risks. Owning the land under petroleum tank farms, or corridors for pipelines may expose the company to liability if there is an accident.
· This new asset class may have a longer sales cycle, due to the need to educate customers and pioneer the actual deal structure.
However, both of these REITs have an ace up their sleeve which could increase dividends in the near future:
· American Realty Capital has recently announced the spin-off of its multi-tenant properties into a publicly traded entity. ARCenters is slated to begin trading on the NASDAQ mid-June of this year. Company guidance is that the combined dividend will increase 7.3% for current American Realty shareholders.
· CorEnergy structured the Arc Terminals lease with rent adjustments every five years. There is also a variable rent component based upon throughput volumes. This would be similar to a percentage rent paid by retail tenants to mall landlords.
Foolish takeaway
In reality, the tortoise and the hare are each running a different race, so there can actually be two winners. Value investors looking for dividend income should take a long look at America Capital Realty. Growth investors seeking a high dividend yield should consider researching the energy-infrastructure REIT CorEnergy.
Editor's note: Errors were made regarding the management of CorEnergy Trust and the position of of Dave Schulte. The Fool regrets the errors.
