Hoegh LNG Partners LP: 11% Yield, 1.2X Coverage, No K-1

Summary

• HMLP common yields 11.5% - 2020 distribution coverage was 1.22X.
• There's also an 8% yielding preferred unit.
• HMLP issues a 1099 at tax time - no K-1.
• I do much more than just articles at Hidden Dividend Stocks Plus: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Photo by CHUNYIP WONG/E+ via Getty Images

Hoegh LNG Partners (NYSE:HMLP) offers investors high-yield exposure to the LNG shipping industry. HMLP's profile is a bit different than its competitors, though, as it's a pure play on FSRUs.

FSRU stands for "Floating Storage & Regasification Unit." FSRUs have been a rapidly growing presence in the LNG shipping industry in the last few years. 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 more than eight years, and full contract coverage through the first half of 2025:

(HMLP site)

HMLP has three fully-owned vessels, and 2 50%-owned ones in its fleet, with ages running between five to 12 years. PGN Lampung, in Indonesia, is its largest charterer, followed by France's Total (TOT):

(HMLP site)

Its main two regions are Asia and Europe, with additional exposure in South America:

(HMLP site)

Earnings:

Like some of the other high dividend stocks we cover in our articles, HMLP's long-term contract business model provides steady income. This can sometimes be impacted a bit by planned maintenance and drydockings, and/or unrealized losses on derivative instruments impacting the equity in earnings (losses) of its joint ventures. This was the case in Q1 2020 when operating income decreased by $9.3 million, due to non-cash, unrealized derivatives losses.

HMLP's 100% owned FSRUs comprised 77% of segment EBITDA in 2020, contributing $115.63M, with the JVs contributing the balance of $34M:

(HMLP 2020 20-F)

Looking at these 2020 vs. 2019 figures, you wouldn't surmise that there had been pandemic lockdowns in effect for most of the year, which speaks to the strength of HMLP's long-term contract business model. DCF grew by 10%, which improved common distribution coverage by a similar amount, Ltd. Partners income rose 8%:

Other than a dip in Q2 '19, DCF has been pretty steady since Q4 '18 - it ran at $18M-plus in each quarter of 2020:

(HMLP site)

LNG Industry Update:

Global LNG trade was up 1.5% in 2020, with Asia continuing its demand growth - China's LNG imports rose 11%. Forecasts are calling for 50% growth in demand from 2020-2030, which should boost demand for the FSRU's that HMLP specializes in.

(HMLP site)

HMLP's parent company, HLNG, has four potential dropdowns, all relatively new units, with varying degrees of contracted chartering, which gives HMLP a good potential pipeline for future growth:

(HMLP site)

Profitability and Leverage:

Other than its current ratio, HMLP's profitability metrics and its leverage figures all look superior to LNG industry averages.

Debt:

HMLP has $123.5M in debt maturing in Q4 2021 - the commercial tranche of FSRU, PGN, and Lampung's debt facility, in addition to one of the debt facilities in the JV's matures the same quarter.

(HMLP 2020 20-F)

Management has commenced these refinancing processes and is in detailed discussions with its banks on the Lampung facility, and the joint venture refinancing process is in the planning stage.

(HMLP 2020 20-F)

Valuations:

Although its yield is much higher, HMLP is getting mostly premium valuations from the market, vs. LNG shipping industry averages, which isn't surprising, given the fallout in this industry over the past two years, with several companies cutting their common distributions drastically, while others have pursued buyouts/mergers. HMLP is one of the steadiest players in the field.

Analysts' Price Targets:

At its 4/15/20 closing price of $15.30, HMLP was 9% below analysts' average price of $16.83, and 23.5% below the $20.00 highest price target.

HMLP bounced 1-7% over the past year - it hit a low of below $5.00 in the Q1-Q2 '20 COVID crash. It has lagged the market in 2021 so far, in spite of the Energy sector's resurgence:

Common Distributions:

At $15.30, HMLP yields 11.50%, and should go ex-dividend next on ~5/7/21. Although it has a 5.71% five-year average dividend growth rate, most of that growth came in 2016 - management has kept the quarterly payout at $.44 since Q2 2018.

This makes sense - the price/unit hasn't really reflected the steady distributions, and attractive yield over the past few years. As mentioned above, coverage improved by 10% in 2020, to 1.22X.

Taxes:

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)." And "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)

2020 common distributions were treated as 41.40% qualified, with 58.60% characterized as non-dividend distributions.

Preferred Distributions:

HMLP also has a preferred series, its Hoegh LNG Partners LP, 8.75% Series A Cumulative Redeemable Preferred Units (HMLP.PA), which are currently yielding 8.15%.

However, they're trading at $26.83, well above their $25.00 call price, with only six payouts left before their 10/5/2022 call date. That high price isn't surprising, given the thirst for yield among income investors - most fixed rate preferreds are trading at or above their call values.

If you were to buy these shares, and they get called in October 2022, the price loss would wipe out more than half of the distribution income, leaving a small $1.45 net profit.

We found no mention by HMLP's management of an intention to redeem these units, which would cost a bit north of $100M, although it might be possible that they increase their refinancing amount in Q4 2020, and use that potentially much lower interest rate to call in these 8.75% coupon units, and save some money.

Preferred coverage was a strong 4X in 2020:

Parting Thoughts:

If you want exposure to the LNG shipping sub-industry, HMLP remains one of the more solid plays, given its long-term contracts and its strong parent company. You just have to be prepared for a potentially bumpy ride, due to the volatility of the Energy sector.

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

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HMLP over the next 72 hours. 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.