2010-09-25
RNO - Rhino Resource Partners

RNO - Rhino Resource Partners plans on offering 3.7 million units (assuming over-allotments) at a range of $19-$21. Raymond James, RBC and Stifel are leading the deal. Post-ipo RNO will have 25 million total units outstanding for a market cap of $500 million on a pricing of $20. Bulk of Ipo proceeds will be used to repay debt.

Wexford Capital will own 85% of RNO including the general partnership. RNO is a collection of coal assets that have been acquired beginning in 2003. This is the 2nd attempt Wexford has made bringing Rhino public. The first was ill-timed in August/September 2008. That deal looked okay, albeit with an aggressive valuation in range. It was not structured as a Partnership however. This second attempt appears structured far better and offers value/yield to the holder.

Yield - RNO plans on distributing $0.445 quarterly to unit holders. On an annualized $1.78, RNO would yield a strong 8.9% annually.

From the prospectus:

'We produce, process and sell high quality coal of various steam and metallurgical grades.'

Steam coal for electric utilities and metallurgical coal to steel and coke producers.

Coal reserves located in Central Appalachia, Northern Appalachia, the Illinois Basin and the Western Bituminous region. As of 3/31/10, RNO controlled 273 million tons of steam coal and 12.5 million tons of metallurgical coal with an additional 122 million tons of non-reserve coal deposits.

Operates 11 mines, 6 underground and 5 surface. Mines are located in Kentucky, Ohio, Colorado and West Virginia.

Production of 4.7 million tons of coal annually with another 2 million tons purchased for reselling.

One major issue when structuring E&P operations as a partnership: It can be quite difficult to pay a sufficient yield AND also cover capital expenditures needed to replace reserves that have been turned into production. We've seen this in the recent similar ipo OXF. OXF simply will not have sufficient cash flows to cover both the distribution and reserve replacement capex. The result is OXF will be loading up the balance sheet with debt going forward to distribute cash to holders.

***RNO is forecasting sufficient cash flows to cover all distributions as well as all capital expenditures. This is a very good sign.

RNO plugs in the current selling prices for coal when making their cash flow projections for first 12 months as a public company. While they've locked in commitments on volume/price for 60% of production, a steep drop in coal prices would negatively affect cash flows. Should prices drop appreciably, RNO would need to borrow to cover both distributions and capex. Note that RNO has already committed and locked in prices on 60% of their expected coal sales the first 12 months public.

Financials

$40 million in debt. These debt levels will not impact operations or cash flows severely.

Forecast for first 12 months public (ending 9/30/11):

$348 million in revenues (equating to 5.1 million tons of coal sales) with net earnings of $2.32 per share.

Distribution coverage from cash flows projected at 107%.

There are currently four publicly traded coal partnerships- OXF, PVR, NRP and ARLP. A quick comparison:

RNO - Would yield 8.9% annually at $20. They are forecasting cash flows sufficient to cover entire distribution as well as all capital expenditures the first 12 months public. Very nice balance sheet with just $41 million of debt.

OXF - Yields 9.1%. $91 million in debt. OXF is forecasting cash flows to cover only 61% of distributions/capex first 12 months public. OXF will need to borrow to both pay distributions and spend on replacement capital expenditures. That 9.1% yield carries far more risk than RNO's 8.9% yield.

PVR - 7.8% yield, $650 million in debt. PVR is a classic case of continued borrowing to fund yield/capex as their debt increases annually. Note that PVR has also moved into the natural gas pipeline business.

NRP - 8% yield, $640 million in debt.

ARLP - 5.4% yield, $450 million in debt.

When included distributions, PVR/NRP and ARLP are all up quite strongly over the past 12 months.

Conclusion - Good looking coal partnership. Structure is favorable to unitholders and should allow for sufficient reserve replacement while also paying a strong yield. These sort of deals often do not do much for awhile and following OXF's lackluster debut I would not expect much in the short run. However this is a superior deal to recent comparable OXF and mid-term should provide appreciation through distributions and price. Recommend.

2010-09-21
COR - Coresite Realty Corp

COR - CoreSite Realty Corp plans on offering 19.4 million shares(assuming over-allotments) at a range of $15-$17. Citi, BofA Merrill Lynch and RBC are leading the deal, KeyBanc and Credit Suisse co-managing. Post-ipo, COR will have 48.4 total shares outstanding for a market cap of $774 million on a pricing of $16. Bulk of ipo proceeds will go to insiders, specifically Carlyle Group.

DBD Investors will own 60% of COR post-ipo. DBD is controlled by private equity firm Carlyle.

From the prospectus:

'We are an owner, developer and operator of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including Los Angeles, the San Francisco Bay and Northern Virginia areas, Chicago and New York City.'

Data center REIT. As a REIT, COR will distribute to shareholders quarterly essentially all after tax income.

11 operating data centers with one under construction and one development site. 1 million active net rentable square feet, with another one million under construction or development. Of the one million, 19% is currently available for lease as data center space.

Over 600 customers with top ten customers accounting for 37% of annualized rent. Customers include AT&T, British Telecom, Microsoft, Google, Facebook and China Unicom.

Sector - Data centers are highly specialized and secure buildings that house networking, storage and communications technology infrastructure, including servers, storage devices, switches, routers and fiber optic transmission equipment. The shift has been to outsource data center needs to operators such as COR.

CEO Thomas Ray has 22 years of experience with 11 years of data center experience including 5 with REIT's.

75% renewal rate in 2009.

68% of data center space location in California.

Growth plans - Continue to convert available space into data center space. Increase rates on expiring rental contracts. Pursue acquisitions.

Financials

Pretty good looking balance sheet here with $125 million in debt and $75 million in cash. Most of the cash will be used to expand data center space, so the $125 million in debt here will remain on the books.

Distributions - COR plans to initially pay a quarterly dividend of $0.13. At an annualized $0.52, COR would yield 3.25% on a pricing of $16. COR is set-up well to expand the dividend over time as new data center space comes online. Once concern here however is that currently only approximately 81% of current available data center space is occupied.

Competition - COR's closest comparables are DLR and DFT. DLR currently yields 3.4%, while DFT yields 1.8% annually.

Conclusion - Pretty solid looking REIT here. Good balance sheet which should allow for growth and dividend appreciation. Appears to be coming fairly valued with competition. I would expect COR to end up yielding a bit more than forecasts.