2 Tickets To Paradise: Hoegh LNG Partners LP Yields 10% And 8%

Summary

• HMLP has two well-covered high-yield vehicles.
• Its common yields over 10%, with 1.17X coverage, and its preferred yields over 8%, with strong 5.88X coverage.
• Since it's a C-Corp, HMLP issues a 1099 at tax time - no K-1.
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If you're looking for multiple income choices, Hoegh LNG Partners LP (NYSE:HMLP) may be just the "ticket." It offers a common payout which yields 10.35% and a preferred payout with an 8.7% yield.

HMLP is the only publicly traded pure play on FSRUs. FSRU stands for "Floating Storage & Regasification Unit" and it's a rapidly growing presence in the LNG shipping industry. HMLP's parent/sponsor, Höegh LNG Holdings Ltd., is the largest provider of FSRUs in the market. FSRU leasing/chartering solves many problems for charterer companies and countries. It's slow and expensive to build an LNG import terminal, so FSRUs are being increasingly used to give countries access to LNG.

HMLP operates on long-term contracts with a current average remaining length of 11 years:

(Source: HMLP site)

Common Distributions:

HMLP pays in a Feb-May-Aug-Nov. cycle, and should go ex-dividend again in late January/early February 2019. At $17, it yields 10.35%.

HMLP had good 1.16X coverage in Q3 '18 and has averaged 1.17X over the past four quarters:

HMLP's distributions have averaged 9.33% annual growth since 2015, but most of that came in 2016. Since 2017, the distribution has only grown from $.4125 to the current $.44/quarter:

(Source: HMLP site)

Taxes:

Since it's a C-Corp, HMLP issues a 1099 at tax time: "The Partnership has elected to be treated as a C-Corporation for tax purposes (our investors receive the standard 1099 form and not a K-1 form)."

"Distributions we pay to U.S. unit holders will be treated as a dividend for U.S. federal income tax purposes, to the extent the distributions come from earnings and profits ("E&P") and as a non-dividend distribution or a return of capital ("ROC") to the extent the distributions exceed E&P." (Source: HMLP site)

In 2017, HMLP's ROC ranged between $.188 and $.1979 per quarterly payout. Investors get the benefit of sheltered income, but ROC does decrease your basis, so take a look at this if you're thinking of selling at some point down the road.

Preferred Distributions:

HMLP also offers a second high-yield vehicle - its 8.75% Series A Cumulative Redeemable Preferred units, (HMLP.PA), which yield 8.70%. These are cumulative preferred units which offer you the additional protection of knowing that management must pay you any skipped distributions before it pays the common units. These units also rank senior to the common units in the event of a liquidation.

These preferred units held up well in the recent energy-related selloff, falling just -2.7% since the 9/20/18 highs vs. a -6.59% decline for the S&P 500.

Unlike many of the preferred series we've seen issued in 2018, these are not floating hybrid units - their quarterly rate is fixed at $.546875. There's no maturity date, but there's a call date of 10/5/2022, after which HMLP's management can redeem the units if they so desire. There are 15 quarterly payouts remaining before then.

This table details the annualized yield to this call date, if they were to be redeemed on 10/5/22. Since they're currently priced $.13 above their $25 call value, the liquidation yield is 8.34%, slightly lower than the current 8.70% yield.

As usual with the preferred issues which we write about, the coverage for these units is much higher than that of the HMLP common units. So far in 2018, net income/preferred coverage has been 6.87X, while DCF/preferred coverage has also been solid, at 5.88X:

Earnings:

HMLP has had very strong earnings growth over the past four quarters, which is mainly attributable to its acquisition of the remaining 49% ownership interest of the Höegh Grace vessel in Q4 2017.

Q3 '18 revenue, EBITDA and DCF were the company's second-highest quarterly figures to date.

Over the past four quarters, DCF has grown 14.87%, while distributions/unit rose just 2.82%, and the unit count has been ~flat, which has resulted in a 20.6% improvement in HMLP's coverage ratio, to 1.17X:

Looking back further shows that HMLP's management has been able to grow the company's EBITDA substantially over the past several quarters - EBITDA has risen ~41% in the seven quarters since Q4 '16, from $25.85M to $36.44M in Q3 '18:

(Source: HMLP site)

New Developments:

HMLP's sponsor Höegh LNG has recently made an investment into Avenir LNG, a newly established provider of small scale energy services. Over time, this activity is expected to stimulate further demand for FSRU capacity.

HMLP's management offered more detail on this on the Q3 '18 earnings call, saying that Avenir's services also could support "both small scale local distribution, it could be small scale import terminals, and it could also be bunkering. And what we foresee is that the network we have of FSRUs could be used as gas station as hubs for local distribution where you then have a small scale LNG carriers offloading from FSRUs and then distributing to other demand points. And we believe that over time, this small scale activity will increase or could increase the throughput through existing fleets of Höegh LNG Partners and also contribute to increased demand for FSRUs over time."

HMLP's EGAS Gallant vessel contract early termination - This had been under negotiation between HLNG and EGAS, over terms for the termination of the Gallant vessel contract, in advance of its April 2020 maturity.

The contract has now been amended, and the unit will be employed as an LNG carrier through April 2020. "The amendment contract structure is a result of Egypt successfully bringing new gas discoveries into production and thereby reducing its need for importing LNG. As the owner of Höegh Gallant, the contribution to the Partnership under lease and maintenance agreement with Höegh LNG is not expected to be materially affected by the amended contract structure. I’m also pleased to announce that the Partnership has secured commitments to refinance Höegh Gallant and Höegh Grace. The new seven-year facility is for an amount up to $385 million and includes the tranche of $65 million that can be used for general Partnership purposes." (Source: Q3 '18 call)

FSRU Market Conditions:

HMLP's parent, Höegh LNG, "Considers itself to be well positioned for potential FSRU projects in China, as well as in Australia and it’s pursuing opportunity also in South East Asia, Middle East, Africa and Latin America. While the FSRU market remains competitive, it’s worth mentioning that’s the value of our FSRUs has enhanced by the strong recovery in the LNG carrier markets where our customers could put the units into alternative use in periods of lower decent regasification demand." (Source: Q3 call)

(Source: HMLP site)

Risks:

Boil-Off issue - As we've reported previously, HMLP has a "boil-off" problem. The charterer of the Neptune and Suez Cape Ann vessels filed a $58M claim vs. these vessels, for excessive, past "boil-off."

The vessels are allowed a certain amount of LNG boil-off (it’s related to gas which is ultimately being lost during a passage - in this case, it was when the vessels were being used for LNG transport years ago, before they were converted to FSRUs), but the charterer claims that they didn't meet the performance standards for their contracts.

HMLP's 50% share of the accrual was approximately $11.9 million as of June 30, 2018. However, HMLP is being indemnified by its parent company HLNG. $1 million will be refunded by HMLP back to Höegh LNG in Q4 '18, relating to previously paid indemnity in relation to the expenses from prior periods that ultimately was reimbursed by the charterer and record as income in this quarter.

Valuations:

The only low valuation showing for HMLP is its EV/EBITDA of 7.27 vs. the 9.35 LNG vessel peer group average. The group has a wide range of distribution coverage, running from just .62X to over 3X, with a median of 1.10X, which is similar to HNLP's coverage figure. Its price/DCF is roughly in line with the group average, while its price/book and price/sales are higher than average.

Analysts' Price Targets:

Price wise though, HMLP is cheaper than analysts' price targets by a spread of 10.5% below the lowest $19.00 price target and the $20.00 consensus target.

Financials:

HMLP's management has improved its ROA, ROE and operating margin substantially in 2018, to much higher than levels than its peer group averages, and also has significantly decreased its debt leverage ratios, which are much lower than group averages.

Debt and Liquidity:

Management now has a commitment for a debt refinancing deal, which is expected to close in January 2019. This refinancing pushes its maturity out to 2026:

"The Partnership has secured commitments for the refinancing of Höegh Gallant and Höegh Grace where part of existing credit facilities are maturing in November 2019. The facility of $385 million comprised of a senior secured term loan of $320 million, which will be used to refinance existing debt and a revolving credit tranche of $65 million that can be used for general Partnership purposes. The revolving credit facility will be used to repay amounts owed Höegh LNG, and we have reduced the Partnership reliance on funding from its sponsors. The facility has tenure of seven years, which means that the debt will mature first in 2026."

"The reduction in revolving credit facility due to owners and affiliates from $62 million to $39 million is also notable and this will be reduced to zero and the closing of the refinancing of Höegh Grace and Höegh Gallant." (Source: Q3 '18 call)

Management expects to utilize this new credit facility, instead of drawing under the revolving provided by the parent.

HMLP had $24M in cash and an undrawn portion of its $85 million revolving credit facility of $45.7 million. Long-term debt has decreased by 7.7% since 12/31/17.

(Source: HMLP site)

Options:

HMLP doesn't have options, but you can see over 25 to 30 other trades daily in our public Covered Calls Table and Cash Secured Puts Table.

Summary:

We continue to rate HMLP a buy, based upon its attractive, well-covered yield, industry positioning, and conservative debt management.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.

Analyst’s Disclosure: I am/we are long HMLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.