IPO Report: InfraREIT (HIFR)

Francis Gaskins  |

InfraREIT (HIFR) is an externally-managed REIT that owns transmission and distribution. T&D assets in Texas. It is based in Dallas, Texas.

Eleven other companies are scheduled to IPO for the week of Jan. 26, 2015. The full IPO calendar is available at IPOpremium.

Manager, Joint-managers: BofA Merrill Lynch and Citigroup.

Co-managers: RBC Capital Markets, Morgan Stanley, UBS Investment Bank, Wells Fargo Securities, Scotiabank, and SOCIÉTÉ GÉNÉRALE.

HIFR scheduled a $400 million IPO with a market capitalization of $1.2 billion at a price range midpoint of $20 for Friday, Jan. 30, 2015 on NYSE.  SEC Documents

InfraREIT IPO Overview

HIFR is an externally-managed REIT that owns transmission and distribution) T&D assets in Texas.

HIFR owns rate-regulated electric transmission and distribution (T&D) assets in Texas as part of a dividend growth oriented real estate investment trust (REIT).

InfraREIT IPO Valuation


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InfraREIT IPO: Conclusion

Neutral plus

4.5% expected payout at $20

Payout expected to grow 10-15% per year for 3 years

Hunt Consolidated owns 23.4% pre-IPO & a division is the external manager

Price-to-book of 1.4, price-to-tangible book of 2

InfraREIT Business

HIFR is an externally-managed REIT that owns transmission and distribution) T&D assets in Texas.

HIFR owns rate-regulated electric transmission and distribution (T&D) assets in Texas as part of a dividend growth oriented real estate investment trust (REIT).

HIFR currently owns T&D assets throughout Texas, including the Texas Panhandle near Amarillo, the Permian Basin in and around Stanton, Central Texas around Brady, Northeast Texas in and around Celeste and South Texas near McAllen.

HIFR is externally managed by Hunt Utility Services..

InfraREIT Revenue Model

HIFR leases its T&D assets to its tenant, Sharyland, a Texas-based utility regulated by the Public Utility Commission of Texas (PUCT).

To support its lease payments, Sharyland delivers electric service and collects revenues directly from distribution service providers and retail electric providers, which pay PUCT-approved rates.

Under the terms of the leases, Sharyland is responsible for the operation of HIFR's assets, all property related expenses associated with assets, including repairs, maintenance, insurance and taxes (other than income and REIT excise taxes), construction management and regulatory oversight and compliance.

HIFR's development agreement with Hunt Transmission Services, L.L.C., and HIFR's leases provide that HIFR will own and fund the development and construction of T&D assets that are in HIFR's distribution service territory or that are added to one of HIFR's transmission substations or that hang from one of HIFR's existing transmission lines..

InfraREIT Growth

HIFR has grown rapidly over the last several years, with its rate base increasing from approximately $60 million as of December 31, 2009 to approximately $1.1 billion as of September 30, 2014 and a projected $1.4 billion as of December 31, 2015.

HIFR expects to grow its rate base in the future through organic growth, as well as through acquisitions of T&D assets, including ROFO*Projects, from Hunt Consolidated, Inc. (Hunt) and Sharyland, who originated and founded HIFR’s business, and from third parties.

* identified projects that are being developed by Hunt Consolidated, Inc. and its affiliates with respect to which HIFR will have a right of first offer.  Hunt owns 23.4% per-IPO.

Hunt Consolidated is a holding company for the oil, real estate, and other businesses of Ray Hunt, son of legendary Texas wildcatter and company founder H.L. Hunt.

InfraREIT Dividend Expectations

HIFR intends to distribute substantially all of its cash available for distribution, less prudent reserves, through regular quarterly cash dividends.

HIFR expects its initial quarterly dividend rate to be $0.225 per share, or $0.90 per share on an annualized basis.

IFR believes that as it grows its rate base it will also be able to increase its cash available for distribution and, as a result, increase its distribution per share.

InfraREIT Dividend Growth Range

HIFR intends to target a three year cumulative annual growth rate of its cash available for distribution per share of 10 to 15% through December 31, 2018.

HIFR intends to achieve the lower half of the range based solely on the expansion of T&D assets that are in the geographic footprint of its existing distribution assets or that are added to its existing transmission assets (Footprint Projects), with the ability to achieve the top half of the range coming from Hunt’s obligation under its development agreement to offer HIFR identified T&D projects (ROFO Projects).

Perhaps exceed growth range mid-point

HIFR believes acquisitions of the Cross Valley transmission line and Golden Spread Electric Coop (GSEC) interconnection, two ROFO Projects currently under construction, could allow HIFR to exceed the midpoint of the range.

The additional successful development and acquisition of the Southline transmission project, other significant third party acquisitions, or capital expenditures in excess of HIFR’s current estimates to fund Footprint Projects could position HIFR to meet the high end of the range.

InfraREIT Competition

The market for acquiring and developing energy infrastructure assets is highly competitive.

Within the State of Texas, namely ERCOT, Sharyland competes with other TDSPs such as AEP, CenterPoint Energy, Oncor Electric and Texas New Mexico Power (PNM Resources), with municipally-owned electric utilities such as Austin Energy and CPS Energy and with electric cooperatives like South Texas Electric Cooperative to develop transmission projects.

Given the robust growth and business-friendly environment in Texas, there are several private developers who are seeking transmission development opportunities as well.

However, HIFR is not aware of any other utility that is structured as a REIT.

In addition, Sharyland is subject to customer conservation and energy efficiency activities and research and development activities are ongoing to improve existing and alternative technologies to produce electricity, including advancements related to self-generation and distributed energy technologies such as gas turbines, fuel cells, microturbines, photovoltaic (solar) cells and concentrated solar thermal devices.

It is possible that advances in these or other technologies could result in a reduction of demand for Sharyland’s T&D services, but these have not been a significant factor to date.

Furthermore, in small portions of HIFR’s service territories, existing and potential customers have a choice between Sharyland and other utilities and may choose the other utility over Sharyland.

InfraREIT 5% shareholders pre-IPO

Hunt Consolidated, Inc.             23.4%

John Hancock Life Insurance Company (U.S.A.)             24.8%

Teachers Insurance and Annuity Association of America 24.8%

OpTrust N.A. Holdings Trust      22.1%

Marubeni Corporation    9.8%

Westwood Trust            17.8%  

InfraREIT Dividend Policy

HIFR intends to distribute substantially all of its cash available for distribution, less prudent reserves, through regular quarterly cash dividends. To qualify as a REIT, HIFR must distribute annually to its stockholders an amount equal to at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain.

HIFR will be liable for income tax on its taxable income that is not distributed and for an excise tax to the extent that certain percentages of its taxable income are not distributed by specified dates.

HIFR expects its cash available for distribution to be significantly more than taxable income for the foreseeable future.

Therefore, HIFR expects to distribute an amount in excess of its REIT taxable income.

Furthermore, HIFR anticipates that, at least during its initial taxable years, its distributions will exceed its then current and then accumulated earnings and profits, as determined for U.S. federal income tax purposes, due to non-cash expenses, primarily depreciation and amortization charges that HIFR expects to incur.

Therefore, all or a portion of these distributions may represent a non-taxable return of capital for U.S. federal income tax purposes.

InfraREIT Use of Proceeds

HIFR expects to receive $375 million from its IPO and use it for the following:

(i) to repay an aggregate of $1.0 million of indebtedness to Hunt Consolidated, Inc. pursuant to a promissory note,

(ii) to repay indebtedness outstanding under its Operating Partnership’s revolving credit facility and under SDTS’s revolving credit facility, which, as of January 20, 2015, was approximately $72.0 million and $132.0 million, respectively,

(iii) to pay offering expenses (other than the underwriting discounts and commissions and the underwriter structuring fee), estimated to be $5.6 million and (iv) for general corporate purposes.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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