10 Nov “Overheard in the Corridor”: Comparing REIT Capitalization Rates
November 10, 2015
CorEnergy’s Capital Return Outperforms Other REITs
- CORR Capitalization rate is higher than most other REITs even after use of capital to replace value over the lives of our assets1
- Distributions are based on CORR’s return on, not return of capital
Analysis of assets’ are useful life through in-house and third-party due diligence
- Pinedale and GIGS have finite terminal value
- Portland and MoGas have market terminal value
- Inflation escalators in CORR leases mitigate impact of Fed normalization
Interest rate uptrend would likely come with a higher Consumer Price Index
- Participating rents provide additional buffer to rising rates
The real estate investment trust (REIT) sector spans across many industries and asset types. Because CorEnergy is one of the few energy and power REITs traded today, many investors question exactly how to assess and analyze our assets. Unlike the properties of many other REITs, such as office buildings and apartment complexes, some of CORR’s assets have finite lives, including the Pinedale LGS and Grand Isle Gathering System (GIGS). CORR uses in-house and third-party due diligence to determine each asset’s useful life and to mitigate the terminal value risk through the structure of rental streams and renewal expectations in our lease to the operator.
From the revenue stream of an asset, CORR takes out not only operating expenses, but also the amount necessary to protect its capital over the term of the lease. This leaves funds available for what CORR believes are sustainable dividend payments similar to those other REITs pay. However, even after utilizing capital to replace value, CORR’s capitalization rate is higher than most other REITs. Furthermore, the expectation of the Federal Reserve raising rates remains top of mind for many investors. CORR has additional protections in place to mitigate the impact of Fed normalization on our rate of return. Inflation escalators embedded in lease terms adjust rent levels upward as the Consumer Price Index rises (a likely companion of higher interest rates). Participating rents will also provide an additional buffer.
1 Source: Wells Fargo Securities