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Edited Transcript of CORR earnings conference call or presentation 28-Feb-19 7:00pm GMT

Q4 2018 CorEnergy Infrastructure Trust Inc Earnings Call

LEAWOOD Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of CorEnergy Infrastructure Trust Inc earnings conference call or presentation Thursday, February 28, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David John Schulte

CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman

* Lesley Schorgl

CorEnergy Infrastructure Trust, Inc. - Manager of IR

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Conference Call Participants

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* Barry Paul Oxford

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Michael Zuk

Oppenheimer & Co. Inc., Research Division - Research Analyst

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Greetings, and welcome to CorEnergy's Fiscal Year 2018 Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Lesley Schorgl. Thank you. Please go ahead.

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Lesley Schorgl, CorEnergy Infrastructure Trust, Inc. - Manager of IR [2]

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Thank you for joining CorEnergy Infrastructure Trust Fiscal Year 2018 Earnings Call. I'm joined today by David Schulte, Chairman, President and CEO.

As a reminder, the presentation materials for this call as well as information included in our press release issued Wednesday, and an audio replay of this conference call will be available on CorEnergy's website.

The statements made during the course of the presentation that are not purely historical may be forward-looking statements and are subject to the safe harbor protection available under the applicable securities laws. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in our filings with the SEC. These documents are available on the Investor Relations section of our website. We do not update our forward-looking statements. Reconciliations between GAAP and the non-GAAP results which we discuss on this call can be found in our related earnings release and 10-K filing.

Dave Schulte will now speak to you about CorEnergy's 2018 and our outlook for the year ahead.

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [3]

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Thank you, Lesley. 2018 was a year of improving fundamentals in our portfolio and strengthening of our balance sheet. We've now paid 24 consecutive quarterly dividends as a real estate investment trust, or REIT, prioritizing stability with potential for growth over the long term. We have accomplished this dividend consistency against the backdrop of energy market volatility, movement in rates by the Fed and changes in our tenant mix. We believe your management team continues to deliver on the promises of the infrastructure asset class.

On Slide 4, we'll have a brief overview of our portfolio. The tenant at our Grand Isle Gathering System in the Gulf of Mexico is under new ownership, following its acquisition by Cox Oil during the fourth quarter, with our lease remaining in place following the purchase. Cox is an experienced offshore operator and we view the acquisition favorably.

For Ultra Petroleum's use of the Pinedale Liquids Gathering System in Wyoming, we received over $4 million in participating rents in 2018. Our intention is to utilize these rents for redeployment in new assets or repayment of debt, as they are not guaranteed to continue in the future. Ultra has taken debt exchanges to strengthen its balance sheet and has stated its intention to continue drilling to maintain production.

Last May, MoGas filed a rate case with the FERC, which remains ongoing. The requested rates of approximately $20 million annually went into effect December 1. However, those rates will be subject to a potential refund upon final outcome of the case.

The Omega Pipeline continues to identify projects under its Utility Energy Service Contract at Fort Leonard Wood in South Central Missouri. A separate initiative in Omega includes rerouting of pipeline to accommodate the construction of a hospital, which could produce incremental revenues once completed.

Finally, we sold the Portland Terminal to its tenant, Zenith Energy, at the end of December. They purchased that asset in January of 2014 for $42 million and had completed $10 million in upgrades in the following years. The sale price of $61 million, which did include Cor's remaining interests in the Joliet Terminal in Illinois, provided an overall return, consistent with our expectations. We're pleased with the outcome for this asset and that we were able to be a constructive partner for Zenith Energy.

Moving on to Slide 5. CorEnergy has engaged in a number of transactions which will have an ongoing effect on our company's performance, so we wanted to pause and provide key changes you'll be seeing in our balance sheet and income statement on an annual basis going forward. The sale of the Portland Terminal will result in a roughly $6.2 million reduction in lease revenue, which is partially offset by a decline in depreciation expense of $1.2 million. Our 10-K balance sheet reflects the effects of the sale of Portland, including a decrease in lease property of $52 million, plus accumulated depreciation of $6 million; and $61 million generated from the sale, including cash and a $5 million note, which have since been paid off in January.

CorEnergy has already begun using the sale proceeds to stabilize the dividend, including using a portion for the exchange of our 7% convertible notes, which are set to mature in June of next year. In mid-January, CorEnergy exchanged approximately $43.8 million face value of these bonds for $19.8 million of cash, including interest, and 837,000 additional common shares. We anticipate this will save us approximately $3 million annually in interest expense, which would be offset by dividends declared and paid on those newly issued shares. At the current $3 annual dividend rate, this will be approximately $2.5 million of additional dividends. Our management fee may also see a decline of approximately $200,000 associated with cash used for the exchange.

Finally, we repurchased $4.5 million of par value 7.375% preferred equity using participating rents from the Pinedale LGS. And this could save Cor approximately $330,000 in annual dividend payments going forward.

And many of you are probably wondering how these transactions will affect our dividend paying capacity, which is addressed on the next slide. As you may recall, CorEnergy targets an AFFO-to-dividend ratio of 1.5x, which we believe adequately reserves for the reinvestment of new assets and debt repayment, which are necessary steps to maintain our long-term earnings and dividend paying capacity.

As shown in the chart, our 2018 AFFO per share, adjusted for the GAAP accounting treatment of MoGas revenue we discussed previously, is just below our target range. However, given the effects of the transactions we discussed on the prior slide, we will see a decline in AFFO of approximately $0.51 going forward due to the sale of Portland, offset by approximately $0.28 in saved interest from our deleveraging initiatives. All else constant, this results in an adjusted AFFO of approximately $4.14 per share or 1.4x AFFO through our $3 dividend.

So how do we plan to get closer to our target of 1.5x? We believe the remaining gap can be adequately covered by an investment in an income-generating asset or from further deleveraging of the balance sheet through continued repurchase of preferred equity or convertible debt at attractive market prices. And while you're aware that we cannot guarantee any one of these specific transactions will occur, we could take any of these actions or a combination of them in order to move closer to our AFFO-to-dividend coverage target.

On Slide 7, we've illustrated the effects of the January deleveraging transactions on our balance sheet and liquidity measures. While the Portland sale is reflected in our year-end financial statement, the actions we've taken in early 2019 moved our total debt-to-total capitalization ratio from 25% down to 18%; and our preferred equity-to-total equity ratio of 28% down to 26%. So we remain well below both of our target leverage levels.

Our borrowing-based revolver availability did decline with the sale of Portland, remained significant at $123 million. And adjusted for the convertible debt exchange where we used some cash, we have just under $55 million of cash left, providing us with an adjusted total liquidity of $177 million at year-end to pursue acquisitions.

And before discussing our outlook for 2019, we wanted to revisit the values of infrastructure investing, which has continued to grow in investor awareness and popularity over the last several years. Historically reserved for the private market, many different forms of publicly listed vehicles, including REITs, have expanded access to investors the benefits from the liquidity, low volatility of performance and downside protection of publicly listed infrastructure assets.

As you can see on the charts, diversified infrastructure companies as a group have experienced lower volatility than MLPs during a period of relatively high risk in the oil markets. The group has also generated a higher level of dividend stability and growth over the 5-year period measured than MLPs, which had actually cut distributions in the sample study by CBRE.

Cor's disciplined investment criteria, which has remained largely the same since before our transition to a REIT in 2013, reflects those attractive characteristics, which you can see on the next slide.

On Slide 9, we listed characteristics which are already demonstrated in our current portfolio and which were at the heart of our underwriting process for new business. So while we are poised for growth, and have been for some time now, our disciplined criteria will keep us from growth just for growth's sake.

In 2018, we again did multiple deep-dive reviews of assets for potential acquisitions and had many more initial asset reviews. Two of those transactions remain in our due diligence process, and the others resulted in either valuation differences or lost bids in auction processes. While we did not complete any acquisitions, we did expand our understanding of which assets best fit our business model. We also deepened the relationships with several investment banking teams as well as potential asset sellers and operators.

Our opportunities have expanded as upstream operators continue to be conservative in their capital allocation strategies. Those assets we saw in 2018 as well as those currently under review remain primarily pipelines and storage terminals, diversified across various geographies as well as commodity types.

In 2019, we're again targeting 1 to 2 deals this year in the $50 million to $250 million size range.

We've covered a lot of ground today, and I'd be happy to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Barry Oxford with D.A. Davidson.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Dave, could you talk a little more about those 2 transactions that you alluded to that you're in the process of -- if, let's say, 1 is you've just started a conversation and 10 is documents are out for signatures, where would you kind of place yourself in the process of those 2 transactions that you alluded to?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [3]

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Yes. Well, for the 2 I alluded to, we're probably at the 5 mark. But for another 10 or so, we're at the 1 and 2 stage, where we've got conversations underway, indications of interest and some preliminary review of financial information. So the front end of our funnel is very robust right now, and we've got 2 that are further along.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Right, right. And Dave, you mentioned that the upstream operators are remaining conservative, but I think one could make an argument that -- the price of oil is okay. It's not great. It's not $70, but in the $50 range, it's okay. So are we going to see more of these guys wanting to engage in activity, and therefore, they would need access to capital, of which you guys can provide them in the form of sale leasebacks?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [5]

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Well, they've all got larger drilling opportunities than what they're enabling to budget for the year, and therefore, they're constraining their CapEx activities to live within their means. And what we can do for them is enable them to take an existing embedded asset that's already in their portfolio and sell it and redeploy those so they're still within their means, but they can pursue incremental projects that they may not be describing in their annual budgets. And that's our messaging to these companies. We attend a lot of conferences where we have a chance to interact with C-Suite level oil and gas executives and describe that process to them. And we've got several interested parties at sort of that earlier stage of the -- of your 1 to 10 ladder of investigation.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Why not more of these companies are kind of putting their foot on the accelerator when it comes to kind of get going on these type of CapEx projects?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [7]

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Well, the CapEx process is a lengthy one for these companies, that requires a lot of planning and commitment of dollars forward to obtain drilling rigs, resources and water availability for fracking and hiring needs. And so what we need to be able to do is be part of their advanced planning process and not expect someone in the middle of their cycle to change direction dramatically. But it is -- so it's an awareness process, Barry, as much as anything that we can be at the right place at the right time for someone to consider how we can be helpful to their CapEx opportunity set.

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Barry Paul Oxford, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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All right. So I guess it's, "Look, Barry. We're kind of part of their process, and it might be -- it's something that might be 2 or 3 years in the making and then it kind of comes to fruition." Is that a way to think about it?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [9]

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That's a very good way to think about it. The gestation process of all of our leads is fairly lengthy for that reason. And along the way, the companies experience their own challenges with commodity price changes, lending, borrowing base redeterminations and potential acquisitions or divestitures of additional properties. So these are very dynamic businesses. And we just are trying to be prepared to respond to what we think are opportunities in the market, both affirmatively, where we're out suggesting to people that we would be a good solution as well as receiving inquiry from them.

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Operator [10]

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(Operator Instructions) Our next question comes from the line of Michael Zuk with Oppenheimer.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [11]

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Can you give us a little more color on the status of the Omega Pipeline projects? And then I have a follow-up on MoGas.

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [12]

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Well, Omega is -- the customer there is the U.S. Department of Defense, and it took quite a while for us to get selected in their revaluation process for energy efficiency projects. We've got a big partner there with us scoping out projects to present to the DoD. They then go through their review process and prioritization. And it's just not a fast process. But we're exclusive in there, and there's things to do. So I do -- we do have upbeat sense around the opportunity there. We did mention that there's rerouting of some pipeline activities. So that's unpredicted, but it does require us to go do more work with our existing pipeline and that tends to offer a margin opportunity as well. So we're very confident in the Omega relationship we have and the opportunity set.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [13]

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And then with regard to the MoGas Pipeline, would it require additional capital expenditures to extend the pipeline if we could lock in some customers? I mean, how would that work?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [14]

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Well, we're always aware and trying to be aware of industrial demand along our pipeline. Usually, those customers are working with their local LDC to get access to gas. But it is possible. And in the past, we have been contacted directly by larger individual customers, say, a manufacturing facility, that would like to tie directly into the pipeline. We don't have anything like that in front of us today, but that could result in additional capital being spent and volumes on our pipeline, yes.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [15]

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Do we have any ongoing marketing opportunities or efforts with regard to the MoGas Pipeline? Are we waiting for customers to potentially come to us?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [16]

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You may recall, we disclosed about a year ago that we had a very active process to try to mitigate the adverse impacts of the Spire Pipeline renegotiation with Laclede, which led to the rate case. And that -- before we entered the rate case, we were pretty aggressive about trying to find incremental customers. We are not able to find any. Again, most of those are tied into their local distribution company as their primary source of gas. And we -- so we aren't often out prospecting affirmatively, but we just came through a process where we did and made potential customers aware that we were -- we had extra availability, and we had no take-up on that.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [17]

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For future acquisitions, are you leaning more toward pipeline infrastructure or terminal infrastructure?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [18]

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Most of the interest that we're seeing today is pipeline-related, so it's very similar to our existing asset footprint.

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Michael Zuk, Oppenheimer & Co. Inc., Research Division - Research Analyst [19]

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Well, hopefully, you'll be able to close 1 or 2 transactions this year and get back on track. So far, though, you've done what you said you were going to do and we can't ask much more than that. Appreciate all your effort.

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [20]

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Thank you.

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Operator [21]

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Our next question comes from the line of Selman Akyol with Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [22]

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A couple of quick ones for me. Can you just talk about a little of where you are in the rate case, when you would expect settlement talks to begin and maybe when this whole thing of -- barring those settlement talks, I don't know, a successful outcome there, when the rate case would wrap up?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [23]

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Well, we're currently in the settlement phase of the rate case, which typically would come to an agreement between the parties that is under some jurisdiction or oversight by the judge. And we can't predict whether the other parties involved are going to come to agreement. And there are multiple other parties. However, we're prepared and we were prepared when we filed to enter into the next phase, which would be starting over with the proposed rates and entering into a more formal process that is beyond -- post the settlement discussions. But we're still in the middle of the phase that is designed to let parties reach agreement. And so we can't predict exactly whether that will happen or when it will happen, but there is a time limit. And some time toward the middle this year, we will have reached or passed that time limit and have had to enter into the next phase.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [24]

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Got you. And then that would just then be fully litigated case?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [25]

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That's right.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [26]

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Okay. And then in terms of just sort of the process of going out and acquiring other assets, and appreciate that you've had a number of runs, I mean, can you just talk about the competition you're seeing out there? And in particular, I guess, I'm thinking of private equities. Is that making things, I guess, just -- say, you're not getting to the goal line, is that the main issue or is it just other issues out there?

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [27]

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There was actually a private equity presentation at the last MLP conference that we attended, and we do have a chance to visit with investors at those. And generally, infrastructure assets that are being offered in auctions have been acquired by private equity funds over the last 12 to 24 months. And the presentation discussed the reasons for that. Number one is that MLPs, generally, are less acquisitive. As you're aware, Selman, they're focused more on growth projects and have become potentially net sellers of assets rather than buyers. So we're not seeing MLP competition, per se. Where the competition is coming from is private funds that have more flexibility in the total amount of leverage that they can apply, flexibility in not needing a current dividend, so unlike our structure. While we do have an expectation of an equity dividend as well as leverage, we're -- but we're more modest with leverage and do require equity. So there have been occasions we have observed in processes we've been in where, unlike past periods of time, the best fit or best bid has come from a private investment source. Whether it's private equity per se or a fund that is privately managed, they have more flexibility in terms of how they structure their financing and have largely been winning in most processes.

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Operator [28]

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This concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments.

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David John Schulte, CorEnergy Infrastructure Trust, Inc. - CEO, President & Chairman [29]

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I want to thank everybody for their continued interest. And as you can tell from the efforts we put forth, both throughout last year and at the very end of the year, we're very focused on sustaining our $3 dividend. We believe that, that is within our control. And we will endeavor not only to preserve dividend but to grow it through additional acquisitions of assets in 2019. And again, thank you for your continued support.

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Operator [30]

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This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.