Starter Position Taken in REIT CorEnergy Infrastructure Trust

As mentioned earlier today we were looking at taking a potential position in REIT CorEnergy Infrastructure Trust (ticker:CORR).  While we view the REIT sector as currently weak and likely to get weaker as interest rates creep higher we see CorEnergy as a special situation—currently undervalued with a reasonably safe distribution (and one that is over 8%).

We have taken a ‘starter’ position (a smaller position in which a follow up purchase would be contemplated) in CORR.

CORR is a unique REIT (although there are 2 similar REITs) in that they own a stable of energy related properties–liquids gathering systems, natural gas pipelines, petroleum products terminals, salt water disposal wells as well as electric transmission lines.  The asset list is here.  CORR leases these assets to others with a triple net lease contract.  We like triple net lease contracts and in this case, being energy assets, a degree of risk is introduced into the arrangements. Surprisingly we want a little risk–without it there is no reward–and the reward in this case is a distribution that is currently over 8% which is currently fully earned.

Specifically the risk in CORR is caused by the salt water disposal business in which they have loaned money to 2 entities to the tune of $25 million. Salt water disposal at this time of reduced drilling activity is a dicey business. These loans may be at risk if the borrowers do not perform.

Additionally the company has recently sold their electricity transmission line which has reduced the diversification of CORR. Fortunately they have just announced a large acquisition of the Grand Isle Oil Gathering System in the Gulf of Mexico..  The company will spend $245 million on this acquisition and then will sign a 11 year, triple net lease with the current owner at rental rates starting at $31 million in year 1 and escalating to over $50 milllion in year 7.  This a fantastic return on investment and bodes well for future dividend increases (they have a goal of 3-5% annual increases in their dividend).

CORR has sold common stock and convertible debt to finance this acquisition which contributed to the recent price drop in the common–presenting us this special opportunity to purchase stock.

Currently the shares trade at $6.38/share which is down from a 52 week high of $8.54 and up from a 52 week low of $5.43.  There is risk in owning these shares (and our starter position reflects our thoughts that we may see better entry points ahead), but we know that there is great potential reward ahead if the company can opportunistically by energy assets while that market is soft.

We caution our readers that this is not an investment for everyone–and as always we make no recommedation that others follow our lead.

Additional reading is available on Seeking Alpha where Brad Thomas just covered this issue as well.